MTU Aero Engines AG

XETRA:MTX

Earnings Call Analysis

Strong Q3 results and upgraded guidance signal robust performance.

In Q3 2024, MTU Aero Engines reported a 14% rise in adjusted group revenues to EUR 5.3 billion, driven by all business segments. EBIT increased by 25% to EUR 744 million, with a margin of 14%. The company raised its 2024 EBIT guidance to exceed EUR 1 billion, surpassing previous forecasts. Key growth was noted in military contracts and aftermarket services, with ongoing supply chain improvements supporting profitability. Expectations indicate Q4 revenues could reach EUR 2.1 billion, maintaining MRO margins around 8-9%. Overall, MTU is well-positioned to leverage market opportunities going forward.

Building Momentum with Strong Q3 Results

In Q3 2024, MTU Aero Engines reported adjusted group revenues of €5.3 billion, reflecting a 14% year-over-year growth. This robust performance is buoyed by contributions across all business segments, with EBIT adjusted increasing by 25% to €744 million. The EBIT margin reached an impressive 14%, with a net income of €541 million, up 23%. Free cash flow was reported at €213 million, although ongoing supply chain issues continued to strain working capital. This growth trend lays a solid foundation for confidence in the company’s trajectory.

Segment Insights: OEM and MRO Growth

MTU's Original Equipment Manufacturing (OEM) segment demonstrated resilience, with total revenues up 11% to €1.8 billion. Military revenues soared by 16%, driven by increased sales in the TP400 and EJ200 after-market, and development work for the Next Generation Fighter Engine. Meanwhile, the Commercial MRO segment saw revenues rise by 15% to approximately €3.6 billion, supported primarily by strong demand for engines like the GEnx and CF34. The combined strength in these segments highlights MTU's solid market positioning.

Guidance Upgrades Signal Future Potential

The company's guidance for adjusted EBIT in 2024 has been raised to slightly over €1 billion, surpassing previous estimates of €950 million to €980 million. Furthermore, MTU is on track to achieve its 2025 target of €1 billion EBIT a year ahead of schedule, demonstrating confidence in their operational efficiency and market demand. This strategic foresight indicates a robust growth trajectory and the ability to capitalize on favorable market conditions.

Navigating Supply Chain Challenges

MTU continues to face supply chain challenges but reports improvements, particularly in the availability of parts. Leadership noted that while some delays in parts have occurred, overall recovery has been quicker than anticipated. The company expects these improvements to foster a favorable environment for future growth, overcoming hurdles connected to delayed deliveries and increased working capital needs.

MRO Margins and Revenue Drivers

MRO margins are expected to stabilize around 9% for Q4, reflecting a strong performance from the leasing and asset management segments. Additionally, anticipated revenue growth will stem from ongoing robust demand for mature engine platforms. The leasing segment alone is projected to bring in approximately €500 million for the full year, representing a notable contribution to MTU's overall profits.

Risk and Market Dynamics

Despite strong results, concerns about market dynamics due to increased aircraft retirement ages and potential market saturation remain. Analysts highlighted the importance of keeping a close watch on competition, especially from companies like Fortress. Responses from MTU management indicate an awareness of these challenges, coupled with a commitment to maintaining market leadership.

Looking Ahead: Future Opportunities and Strategies

As MTU prepares for its Capital Markets Day, management has signaled that further insights into 2025 revenue drivers will be shared. Current growth trends indicate strong potential across the board, but investors are advised to remain cautious of fluctuating market conditions and supply chain dependencies. Overall, MTU is positioning itself well to leverage industry recovery, suggesting a future of sustained growth supported by strategic management.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the conference call on MTU Aero Engines 9 Months Results 2024. For your information, the management presentation, including the Q&A session, that will be audio-taped and streamed live or made available on demand on the Internet. By attending in the conference call, you grant permission for audio recordings intended for publication on the Internet to be taken.

The speakers of today's conference call are Mr. Lars Wagner, Chief Executive Officer; and Mr. Peter Kameritsch. Chief Financial Officer. First, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.

[Thomas Franz, executive]

Yes. Thank you, Sonia. Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q3 2024 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 the latest update on the 2024 guidance. 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]

All right. Thank you, Thomas, and also very warm welcome from my side. Let me start as usual, with a view on the market environment. Worldwide passenger traffic in August grew 8.6% year-on-year. Within that domestic travel, traffic rose 5.6%, while international traffic increased 10%. The Asia Pacific and Latin America regions experienced double-digit growth, while other regions grew between 4% and 10%.

As in previous months, strong ticket sales and consistently high load factors reflect sustained high demand for air travel. Cargo flights remains at elevated levels as it continues to benefit from rising e-commerce demand, particularly from consumers in the U.S. and Europe, as well as ongoing capacity limitations in maritime transport. This strong growth reflects the favorable demand environment for air traffic.

The demand needs an constrained level of new aircraft deliveries still suffering from supply chain challenges. As a result, older aircraft are kept in service longer than previously expected, resulting in lower retirement rates and a very solid demand for aftermarket services for these platforms. Limited MRO capacity and parts availability provides a solid base for price increases for future MRO services, spare parts as well as aircraft and engine leases.

So what are the effects on MTU? Lower delivery numbers of new aircraft are resulting in a reduction of new engine shipments to air framers. This allow an increased delivery share of spare and lease engines to customers. We have seen this already in the first half of the year, and this trend continued in Q3, resulting in an ongoing favorable mix effect on our EBIT line. MRO demand remains robust for mature engine platforms like the V2500, GEnx, GE90 and CF34. Additionally, MTU's lease and asset business benefits from high lease rates, boosting MRO EBIT.

The spare parts business performed strongly in Q3, particularly for narrowbody and mature wide-body platforms, reinforcing confidence in meeting our full year targets. Regarding the GTF fleet management plan, we are continuing the execution of the program in alignment with our program partners and are progressing in line with expectations. The output in new parts production as well as MRO output is improving. RTX further reported on the progress in customer settlements. Now 28 agreements covering 75% of the fleet are signed.

Key factors to watch remained improvements in turnaround times, growth in MRO capacity and the availability of exchange parts. [indiscernible] is continuing to ramp up the production of these parts and we anticipate additional improvements through the coming quarters.

And finally, last week, as you've seen, we published an ad hoc statement with our strong Q3 key figures and were able to raise our earnings forecast for 2024. Our EBIT is expected to exceed EUR 1 billion already in '24, reaching our 2025 target a year ahead of our previously communicated outlook. I will provide further details in a few minutes.

Let me now hand over to Peter for the financials.

[Peter Kameritsch, executive]

Yes. Thanks, Lars, and a warm welcome also from my side. In the first 9 months of 2024, we achieved adjusted group revenues of EUR 5.3 billion, up 14% from last year. This growth was supported from all business segments. In U.S. dollar terms, revenues were also up 14%. EBIT adjusted increased by 25% to EUR 744 million, driven by a strong contribution from our MRO segment and a favorable business mix effect in the OEM segment. EBIT margin stood at 14%. Net income adjusted was up 23% to EUR 541 million. And free cash flow ended at EUR 213 million. Ongoing supply chain issues continue to put pressure on working capital also in Q3.

Let's have a look into the business details, and let me start with the OEM segment on the next page. Total OEM revenues increased by 11% to roughly EUR 1.8 billion. Military revenues were up 16% to EUR 426 million. TP400 and EJ200 aftermarket and funded development work for the Next Generation Fighter Engine were the growth drivers in that segment. Commercial business revenues in Euro rose 9% to almost EUR 1.4 billion. Organic OE revenues in dollars were up in the low 20% range, mainly driven by higher GTF and IGT deliveries. As in previous quarters, we saw a healthy volume of spare and lease engines supporting profitability.

Organic spare part sales in U.S. dollars were up high single digit. Main growth drivers were the P25 wide-body platforms and PW2000 and the GEnx as well as business jet engines. EBIT adjusted in absolute numbers increased 19% to EUR 444 million, resulting in a margin increase to almost 25%. The EBIT benefited from the strong growth in Military revenues, a more favorable business mix in the new engine sales and an increased volume of spare parts sales.

Now let's turn the page and move on to the Commercial MRO segment. Reported MRO revenues increased by 15% to roughly EUR 3.6 billion. U.S. dollar revenues were up in line also with 15%. Main revenue drivers here were G90, the V25, GEnx and CF34, and our engines lease business. The GTF share was at 31%, which remains slightly below our full year expectation of 35%. EBIT adjusted increased 35% to EUR 300 million, resulting in a margin of 8.4%. The higher margin was the result of a better contract mix in independent business and a lower share and material intensity of GT FMO. Furthermore, the strong results from our engine lease and asset management business continue to be very supportive on EBIT.

At this point, I would like to hand back to Lars for some words on the update with guidance 2024.

[Lars Wagner, executive]

All right. Thanks, Peter. And guys, as announced on October 15, we updated our guidance for the year 2024. While the organic growth outlook as well as the free cash flow guidance are unchanged, we raised our earnings guidance for the financial year 2024. Adjusted EBIT is now guided to slightly over EUR 1 billion. Our previous guidance implied an EBIT adjusted between EUR 950 million and EUR 980 million. This upgrade was based on the strong development we presented in the Q3 results as well as the outlook for the remainder of the year.

At our Capital Markets Day in 2022, we issued our ambition for 2025 with EUR 8 billion of revenues and EUR 1 billion of EBIT adjusted, [ 8 1 25 ]. These challenging targets were well received by the market and being able to cross the finish line on EBIT adjusted 1 year earlier greatly demonstrates the potential of MTU, our teams and the market we are in. And to put this into the right light, we achieved our absolute profit goal 1 year ahead of time.

While some of the results are supported by trends that became more pronounced than expected, we are very pleased by this development. And to sum it up, MTU has taken advantage of all the opportunities the market offered and will continue to do so in the future. With the current tailwinds, we are heading into the future and will continue to benefit from the significant growth opportunities in our industry.

Thank you very much so far for your attention, and we are ready to answer questions.

[Operator]

[Operator Instructions] We will now take our first question. Mr. Robert Stallard from Vertical Research.

[Robert Stallard, analyst]

I have two for you. First of all, on the timing of GTF fleet management plan compensation. Do you see these payments moving to the right, but the overall total remaining about same? And then secondly, on the spare engine mix, very strong year-to-date. But when do you expect that mix to revert to something more normal?

[Peter Kameritsch, executive]

Peter here, Rob. So I mean regarding the payment schedule of the fleet management plan, I mean you heard probably the RTX call. So they expect EUR 1 billion of payment for the full year, and we see it in a similar way. I think it moves a little bit to the right. If you look only into 2024, and 2025 and 2026, that has to be seen how the exact allocation to the 2 years will be. But [indiscernible] said, I mean, 2025, 2026, the payments will be probably be done for the full provisioned amount.

[Lars Wagner, executive]

And then the mix on the spare engine, we would see -- what you see the mix in the market, how fast obviously was this able to ramp up its production. We are also laser-focused on supporting their delivery stream. And whenever there's a potential opportunity, we go into the sales and leading market.

[Operator]

We will now take our next question. Mr. Ian Douglas Pendant from UBS.

[Unknown Analyst]

Firstly, on the spare part sales, could you comment to what extent has improvements in the supply chain allowed for this result that we've seen here versus your expectations at the beginning of the year and the challenges that we saw? Has that eased up maybe quicker than you thought? And secondly, on the MRO side, can I just confirm that your contract terms have not changed in any way that allows this increase in profitability on the core maintenance work?

[Peter Kameritsch, executive]

I wouldn't attribute it to different conditions. So as we said in our presentation, I think the strong leasing business, strong asset and leasing management in our Netherlands facility that was, I would say, the main driver. And the contract mix and engine mix, that is also a small tailwind, but the major tailwind came from that part of our business. The equity contribution from sure was more or less flat year-on-year. So we reduced the losses from EME in the quarter slightly. So that is the effect we see on the equity contribution. These are the two elements, I would say.

[Lars Wagner, executive]

And regarding supply chain, I mean, I'm okay with the status of the supply chain. Am I happy? Not yet. But some of the parts have improved and recovered way earlier than we expected, and some of them will do so in the remainder of the year or even next year. The powder metal itself is ramping up very quickly. Is it enough? Not yet. But I see a good trend here as well. So in general, supply chain is improving to the better side.

[Operator]

We will now go to our next question. Ms. Chloe Lemarie from Jefferies.

[Chloe Lemarie, analyst]

I have two, if I may. The first one would be actually on the leasing business in MRO. Could you maybe share a little bit more color on this? So how much it represents in the total now? And maybe help us understand the scale of the year-on-year contribution to EBIT from the leasing business. The second one was actually on the free cash flow guide. So at this point, you're obviously not refining the guide. So I was wondering whether you still have some high level of uncertainty on the compensation payment amount for Q4 or if it's got to do more with inventory and other line items?

[Peter Kameritsch, executive]

I mean the latter. I mean we have two moving parts -- two big moving parts, obviously. So the situation in the working capital. So depending a little bit on parts supply across all programs in the MRO, not only GTF, obviously, also all other programs suffer on not very extremely stable supply chain. That's the one element of volatility, and the other is the exact timing of payments to airlines. And so that is why we don't refine the guidance. It's still -- the outcome can still be in a broad range, yes. So that is special to that year, I would say.

Leasing business, I mean, for the full year, we expect something in the magnitude of EUR 500 million for that unit. So for the 9 months, it was in the magnitude EUR 350 million or so. And that is -- we don't strip locations out EBIT-wise, and also -- but it is significantly above average margins compared to the average MRO margin. So we -- I mean, what we do there is we buy basically used engines, lease these engines out to airline customers, our MRO customers. And at the end of the lifetime, we typically tear it down, extract the used material, use the used material in our on shop or sell the used material to other shops or we do also to engine trade. So buying the engine, selling the engine directly.

So there are all kinds of, let's say, asset management operations, which you find there and that's under the roof in Amsterdam.

[Lars Wagner, executive]

And it's a very good business, and we see that as a continuing very good business. So we are we're actually focusing how to grow this business in the future. And you can see now this year, it's a significant benefit and impact on our EBIT line.

[Operator]

We will now take our next question Mr. George Zhao from Bernstein.

[George Zhao, analyst]

I wanted to ask for some clarification on the OEM numbers. Year-to-date organic growth for the commercial OEM was plus 9%. In H1, that was plus 16%. Do you have the Q3 organic number? In either case, it seems like there was a huge gap between the Q3 organic and the 18% reported growth for commercial OEM. So what is driving that gap?

[Thomas Franz, executive]

George, I think we have -- this is Thomas speaking. I think we have a slightly different baseline there from the growth numbers. I think that's something that we can clear up on the -- between the IRs from our side with you, if you want.

[George Zhao, analyst]

Okay. But what's the Q3 organic growth for the OEM business?

[Thomas Franz, executive]

So at the end, the organic growth, year-to-date is what Peter has illustrated, so low 20% range for the OE revenues and high single digit for the spare parts. And how that comes up to the overall number, that's I think a detail we should clarify between ourselves.

[Peter Kameritsch, executive]

Small elements in revenues play a role there. So it's a very detailed question, actually.

[George Zhao, analyst]

Okay. We can follow up on that later.

[Peter Kameritsch, executive]

Yes, yes.

[George Zhao, analyst]

Separately, on the increased EBIT guide, could you talk about kind of how you're thinking about margins in terms of the division? I mean clearly, MRO last quarter, you said 8% for H2, you're above that. How do you see that sustaining the currently elevated levels for Q4 and potentially into next year?

[Peter Kameritsch, executive]

In Q4, it will be more or less in the same ballpark, a little bit below, I would say a little -- maybe a little bit below 14%. I mean if you do the math, I mean, we're going to have in Q4 in the magnitude of EUR 2.1 billion of revenue. So we're going to see a pickup in even more MRO volumes. We're going to see also spare parts growth. We're going to see a strong Military quarter. So a very strong revenue quarter, 2.1%. If you take the midpoint of our guidance, 7.4% versus the 5.3% after 9 months. And if you do the math, I mean, we expect something like EUR 180 million, EUR 190 million of EBIT. So we are a little bit above the EUR 1 billion, and that translates into a margin of, let's say, high 13%, 13.8%, 13.9%. But we have to see how, let's say, the spot rate at the 31st December plays out and so on, that all plays a role how revenues come in. So that's the picture more or less for the fourth quarter.

And then going forward, I mean, for 2025, I think you should wait for the Capital Markets Day that we're going to speak about 2025 revenue drivers, so how the delivery [ skyline ] will be roughly from our point of view and so on. So there's nothing I think we should talk about on the 9-months call.

[George Zhao, analyst]

Sure. For us, thinking more about by segment, that's the Q3 strong MRO margins, should that be sustainable through Q4?

[Peter Kameritsch, executive]

Yes, in that magnitude of 9%, I would say. Is it then 8.8% or 9.2%, let's see. It all depends, let's say, which [indiscernible] you build, is there a high material intensity or lower material intensity. So it's not completely exact revenue number will be. But in the range of 9% is a reasonable estimate, yes.

[Operator]

We will now take our next question. Mr. Carlos Iran Sopris from Bank of America.

[Unknown Analyst]

I actually have two. The first one, I just wonder if you could comment a little bit how should we think about the MRO split in GTF versus independent for 2025? And then any color you could share in terms of pricing dynamics on the independent MRO, that would be really appreciated, please.

[Peter Kameritsch, executive]

Revenue split in 2025, that's also something we will give on the Capital Markets Day. So it will be in the range of 35%, 40%. So in that ballpark. We're going to stay in the ballpark, I would say. Pricing environment in MRO is obviously a good one. We have a very high demand and limited capacity in that environment. Obviously, it's a very good environment for pricing. On the other side, I mean, we have obviously long-term contracts with our customers. So in a running contract, you have maybe escalation clauses, but it can directly increase prices. But some new contracts, obviously, and for contract intentions or so, you can renegotiate or can negotiate higher prices. Sure. And you're going to see -- that tailwind we're going to see for some years for sure, yes.

[Operator]

We will now take our next question. Mr. Phil Buller from Berenberg.

[Philip Buller, analyst]

I also have two, if I may, I'll go one at a time. Firstly, you've got some pretty favorable dynamics at the moment. You referenced the word elevated in the text, which makes sense. But do you believe that anything has changed or will change structurally in the minds of customers in terms of their planning for average retirement age is being structurally higher as they are temporarily? Or should we not expect that average age and the pricing dynamic to reverse at a similar pace as soon as the line of sight improves for Airbus and Boeing deliveries? I appreciate that might be a way off. But I was wondering if there's anything that you think maybe structurally change on that topic first, please.

[Lars Wagner, executive]

A little bit of crystal ball, honestly. So maybe on the other side of the Atlantic, you see what's going on there right now. On the other side, I know this continued focus on the rate increase. I would just say we benefit from that as long as we can. But I have no crystal ball to say how long is this ongoing. Plus, we are ramping up our production line in our MRO facilities. So we continue to serve the market. And this is our task to benefit from every possible upside that we can see. I have -- it's difficult to say yes on that question, yes.

[Philip Buller, analyst]

That's understood. And then in terms of the competition, I guess when markets are this attractive, normally other people want a piece of the action, I'm thinking about the likes of Fortress, which feels like it's a growing threat, maybe that's wrong. But do you have any thoughts on how the competitive environment is evolving? And is there anything you're doing differently to gain share or fend off potential new entrants, please?

[Lars Wagner, executive]

Well, obviously, in our industry, there are only a handful of players who can do what we need to do. And MTU is very well positioned and the #1 independent MRO provider. So we will benefit from that tailwind for sure. We have a look at what's happening at Fortress, and we're going to make up our own minds of how to react to that. And eventually giving some light in the Capital Market Day, but this is not a strategic call here. So we will investigate, we are investigating. But for now, we feel quite comfortable with our #1 position on the independent market.

[Operator]

We will now take our next question. Mr. Ross Law from Morgan Stanley.

[Ross Law, analyst]

So two for me as well. On the GTF share in MRO, so you've tracked at around 30% for the 9 months, but you've maintained the 35% expectation for the full year. That would imply a tick-up to around 50% in Q4. So is that the right interpretation? And what's driving that very large uptick in Q4? And then secondly, on spare parts sales growth in Q3. Could you give us a split between volumes and price, please? And lastly, if I can just squeeze one in, delay of the 777X, what's the impact on your business?

[Peter Kameritsch, executive]

Delayed 777X, I, mean we monitor the situation. It's -- compared to our expectation, it's a small delay. I mean ultimately, it will result in a slightly higher level of working capital as we, let's say, produce -- as we produce parts and modules and they don't find the very finally to the customer itself. So the delivery, the time for delivery is higher and the level of our consignment store is slightly higher. So ultimately, it will result in higher level of working capital and a slower -- let's say, are slower and later ramp-up of revenues and dilution of margin, because also that program at the beginning will be will be slightly negative.

Pricing, well, I mean, you know how spare parts price lists are increased. It's in the level of, let's say -- net, let's say, 6% on average, I would say, because that is -- the average, I would say, increase of spare parts prices, labor rates, maybe 2%, 3% upwards. And you can take the blend of both. So I would say, 4%, 5% tailwind from pricing and the rest is volumes. So GTF in Q4 will be above the 31% definitely, and it's both. So we're going to ship more engines, and that has to do with, let's say, the continued ramp-up we have in our Zhuhai facility and in the EME facility.

So that ramps up throughout the year. And also we're going to build more engines with, let's say, a higher material content. So that will drive revenues upwards in Q4. Is it that exactly 35%? Let's see. It could also be 33% or 34%, but it will be higher compared to the 9 months.

[Operator]

We will now take our next question Ms. Milene Kerner from Barclays.

[Milene Kerner, analyst]

So I also have two questions. The first one is on your R&D, the expense material buys in Q3. What do you expect for the full year? You had EUR 178 million expense last year, and you have already spent EUR 148 million at the 9-month stage. And then my second question regards the GTF. Could you help us with some context on how much powder metal production needs to increase from the current level to satisfy all the demand you have from the airframer, but also in service, without the need to balance on the MRO side?

[Lars Wagner, executive]

Milene, that's a tough one to answer. As you know, right now, every new engine is fully equipped with unlimited disk and powder metal, the MRO still needs to increase. And that ramp will continue over the next years as we're getting in more engines over the years to come. So powder metal, we said at the beginning, is an issue that travels through '24 until '26, most likely a little bit into '27. Then the replacement powder metal should be done. And there is a double-digit increase necessary, mid-double-digit probably year-over-year until this year. And then it falls back into the pure OE lines. So it is an uptick that we need for 3 more years, and then it goes to a normal level that is in line with our delivery rates. There's no powder metal issue afterwards.

[Milene Kerner, analyst]

Very helpful.

[Peter Kameritsch, executive]

Regarding R&D. So after the 9 months, we had EUR 172 million company-expensed R&D, and we expect something like million, EUR 50 million, EUR 60 million for the fourth quarter. So in total, let's say, EUR 220 million or something in that ballpark. It depends a little bit on the timing also of the payments we do here in that respect.

[Operator]

We will now go to our next question. Mr. David Perry from JPMorgan.

[David Perry, analyst]

Lars and Peter, congrats on the numbers. Two questions, a little bit technical, maybe for Peter. One, just a clarification on the comment Raytheon made a couple of days ago when they talked about the EUR 1 billion of compensation. Is that just their share? Or is that the total compensation for all the consortium? So if it's EUR 1 billion, you would have 18% of that, just wanted to...

[Peter Kameritsch, executive]

Right. I mean that is our understanding. The EUR 1 billion is the 100% share, and they obviously have a 51% program share and we 18%. So -- and the EUR 1 billion is the 100% share. And initially, I think they gave a guidance of EUR 1.5 billion, and that is the indication that it moves a little bit for the -- to the right if you only look on 2024.

[David Perry, analyst]

Okay. That's helpful. And the next one, sort of conceptual, I guess. But if you look at what your comments a few minutes ago on MRO margins could be 9% in the quarter gets you to about 8.5% for the full year. You're sort of getting back to levels you were at pre-COVID. I know it was better 2018. But you were around the kind of 8.5%, 9.5%. So you're back at those levels. But you're carrying EUR 1.8 billion of sales basically close to zero margin, I think. So I'm just trying to understand what is it that's made the underlying sort of traditional MRO work much more profitable, if the question makes sense? And is there something temporary? Or is this the kind of new normal for core MRO?

[Peter Kameritsch, executive]

A tricky question. I mean we're going to talk about that on our Capital Markets Day. I mean why we are -- why the margins are so strong. I mean we have that market situation. So much more, let's say, demand compared to supply. So you have a favorable, let's say, pricing environment in the current year. I would say the current, let's say, 12 months, the last 12 months. We have a very strong -- really very strong contribution from asset management and lease business. And we have also -- I mean, that's a technical answer, also a strong equity contribution from a very profitable location.

And equity contribution grew. And you know we have only the PW1100 portion of the revenues in our, let's say, MRO revenue line. And the EBIT we take just 50% of the net income into the EBIT line. So that also, let's say, gives a certain tailwind to margin. So on the long term, I think we have head and tailwinds, but we're going to talk about that in our Capital Markets Day.

[David Perry, analyst]

Yes. Okay. So if I could just try one more. I know you don't want to give too much away ahead of the CMD, but is that any -- sort of the same question as Phil about -- are there any exceptional benefits right now. Is there a risk that you're going to tell that MRO margins would peak in '24 and then come down? Or can we assume that they can at least stay at this level, maybe get better, if I'm allowed to ask that ahead of the CMD?

[Peter Kameritsch, executive]

At least it's not our intention, that not our target that 2024 is the peak level.

[David Perry, analyst]

For MRO.

[Lars Wagner, executive]

For MO. As in any other business, David, we have an ambitious target, and that goes up and not down.

[Operator]

We will now go to our next question Mr. Aymeric Poulain from Kepler Cheuvreux.

[Aymeric Poulain, analyst]

I've got some follow-up question to David's questions on the MRO. What is the turnaround time today at this MRO, if I may ask? And then on the associates, you mentioned Zhuhai as the driver of growth. But if you look at the EBIT contribution from the associates, it's growing at a lower pace year-on-year than the MRO top line. So what's driving the drag on the EBIT line there?

And then on the OE side, you said V2500 organic growth was negative in the first quarter. It was coming back up in the second quarter. What was it in the third quarter, if I may ask as well? And then looking at the decision to cut the dividend in the first half, given the very strong progress you've had so far and the ambitious target you have, is there a reason to assume that you may actually resume the 40% payout sooner than later?

[Peter Kameritsch, executive]

No, there hasn't been a decision made regarding -- I mean, we have finally canceled dividend policy for 2024 until 2026. So the time when we expect the payout for the fleet management program. And I would say we're going to revisit our dividend -- or reinstatement of our dividend policy after we are above that, I would say. So more or less at the end of the fleet management program. So we have the [indiscernible] share of the airline payments behind us. And so we have a very good picture going forward regarding cash flow.

Regarding equity contribution, I mean, in the P&L, if you look on the P&L of companies accounted equity, it's an increase from 66% to 74%. So it's basically an increase. And MLS is not in equity, so MLS is in the -- it's fully consolidated by 100%. It's not in the equity line. In the equity line, you find Zhuhai, you find the lease coal from the GTF and you find the EME joint venture with Lufthansa in Poland.

[Thomas Franz, executive]

Yes, the third question?

[Lars Wagner, executive]

It was about the turnaround time at MRO, but you need to specify. Because we have plenty of engine programs, is it in general or is it one program in specific?

[Aymeric Poulain, analyst]

In general, and how it's evolved throughout the year.

[Lars Wagner, executive]

Well, I'd say this is -- we have, I don't know, 20 programs in our facilities. I'd say overall, and this is in line with what we said all the time, supply chain was dampening a little bit the turnaround times, but we're improving on every program. So the average time I would probably say it's 3 digit. And it needs to go down to ideally double digit, high double digits in overall across programs. And then more specifically on other programs, you can touch base with our IR if you're more interested, but the trend is decreasing in turnaround times generally for all our shops.

[Operator]

We will now take our next question. Mr. Jorge González Sadornil from Hauck Aufhäuser Investment Banking.

[Jorge González Sadornil, analyst]

Two, if I may. First one on the on the spare parts and the spare parts increase in prices. Can you confirm from which month these price increases were started? That would be my first question. And second one, and again, on the growth of the OE segment. I am wondering if you can give us more or less the growth in output in general of engines in the period in units, if possible? Just to understand this growth, taking into account that normally the spare parts was understood to be like 2/3 of the revenue. Now at the base, it went up in the 9 months, it looks like you are selling more engines at full price. Could you give us some color here why the OE revenues are going up at this pace, taking into account the spare part business in the 9 months were not as high as what you are expecting for the end of the year?

[Peter Kameritsch, executive]

The pricing is effective October 1. I mean typically, we have something like a split 2/3 spare parts, 1/3 OE. So that's a rule of thumb. And then that can obviously fluctuate. So as engine mix, obviously, small engines, large engines, and that's why it does not make sense to add up deliveries. That gives you no information. If you have a quarter where you sell a lot of business jet engines, so the revenue impact is lower. If you have larger engines, then the revenue is larger and so on. So to add up deliveries doesn't really make sense. And yes, I mean the growth is supported by -- I mean, spare engines are come at lower discounts, so the revenue impact is higher. So that one spare engine delivered has more revenue impact than one spare -- one engine installed. That's true. But for -- as a baseline, you can always say 2/3, 1/3.

[Jorge González Sadornil, analyst]

Okay. But then let me follow up on this. So for the commercial engine -- sorry, for the organic commercial spare parts, are you here including also the expert engines who our selling at full price or only the parts itself?

[Peter Kameritsch, executive]

No only the -- spare parts are spare parts, no engine. So the spare engine go into the commercial OE.

[Jorge González Sadornil, analyst]

Okay. But then we can say that you are selling more engines at full price and not a discount?

[Peter Kameritsch, executive]

At a higher price, yes. Yes, sure.

[Jorge González Sadornil, analyst]

Okay. But this is...

[Peter Kameritsch, executive]

I mean, we mentioned that two or three times on the call that currently the share of spare and lease engines is higher than, let's say, a typical quarter. And that...

[Jorge González Sadornil, analyst]

Okay. But maybe I have not -- the question was not clear. So is there any trend on lower discounts in general for OEs or that remains more or less the same? And is it just a mix of this quarter and maybe the year?

[Peter Kameritsch, executive]

Yes, it's the latter.

[Operator]

[Operator Instructions] We will now take the next question. Mr. Olivier Brochet from Redburn Atlantic.

[Olivier Brochet, analyst]

Yes. I would have a couple on leasing and on the portfolio. What is the asset value broadly that you have on your books for the year, leasing assets? And what's the average duration of the lease on the portfolio? That's the first question. The second one is, could you give us an update on the timeline for the advantage, please?

[Peter Kameritsch, executive]

I mean, Olivier, so we don't disclose the asset value. But we have, let's say, a little bit more than 100 engines in our portfolio, covering, let's say -- especially the engines we have in our MRO portfolio. Because that is a typical exit after you -- when you purchase a used engines, you use the green time on the engine. And when you have flown down the green time, you inducted for tear-down and use the used materials. So you have a naturally exit via used material.

The typical duration for -- typically, as I said, used green time engines, you typically have, let's say, 3, 4 years on average green time on the engine. So we have it, typically, 3, 4 years in our portfolio and then you tear it apart for the lease engines. As I said, we have two -- also asset management, so that can also mean you buy an engine and sell an engine directly, yes.

[Lars Wagner, executive]

And the advantage, Olivier, is I would say we are in a final approach towards certification. And what we said throughout the last months is that entry into service will happen in the year '25. Don't point me on the month, but it will happen in '25. Certification first, obviously, and then some months' time until the entry to service.

[Olivier Brochet, analyst]

And not a month, but quarter or half? Trying my luck.

[Lars Wagner, executive]

No, there are some variables also from the bureaucracy and from the authorities. I wouldn't -- it's not at Q1.

[Operator]

As there are no further questions, I would like to hand back to Mr. Thomas Franz, Vice President, Investor Relations, for closing remarks.

[Thomas Franz, executive]

Yes. So I'm just seeing that we just arrived with another question, so we can digest just one more, and then we close the call.

[Operator]

We will take the last question. And the question comes from Victor Allard from Goldman Sachs.

[Victor Allard, analyst]

Just a question on FX. Looking at the evolution of the hedge book versus 2Q, we can see that rates for '25 and beyond are, in most cases, seeing a deterioration of EUR 0.01 or EUR 0.02, which seems that in terms of the incrementalities in Q3 that you've seen coming at significantly lower rates. I'm talking like in comparison with what we've seen in terms of evolution of forward and spot rates. So I'm just wondering if there's been a change in your approach recently or should we just look through this 3Q evolution?

[Peter Kameritsch, executive]

The latter. I mean you have to look to -- I mean, actually, we have a step-hedging model. So we have a range -- let's say, a range of hedge quarters for each quarter, so translating into obviously hedge covers for the year. And we roll that model forward and executed and tried to be not at the very low end. So we roll it forward, and we had a period of time when we had, let's say, a spot of 1 11 or so, a little bit above the 1 10. And if you add the forward premium, then you increase, let's say, the hedge book with these rates. Obviously, a little bit above 1 10, 1 13, 1 14, and that increases than the average hedge rate for the specific year, especially obviously, when the total volume of hedges is lower like in 2026, for example. So -- but there's nothing specific to that.

[Thomas Franz, executive]

All right. Thank you all participants. Thank you, Lars. Thank you, Peter. Thank you for your questions. And if anything remains, get in contact with the IR team. Thank you very much, and have a good day.

[Operator]

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