Mtu Aero Engines Hldgs Ag

Welcome to the conference call on MTU Aeroengine's first quarter results 2023. 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. Lars Wagner, Chief Executive Officer, and Mr. Peter Kammerich, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.

Yes, thank you. Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q1 2023 results. We will start with a review and some key messages presented by Lars. Peter will start with the financial overview and a more detailed look into our OEM and MRO segment. After that, Lars will share our view on the current challenges and opportunities in light of our 2023 guidance. After that, we will open the call for questions. Let me now hand over to Lars for the review.

Thank you, Thomas, and also welcome from my side. Good to have you guys with us. Let me start with the market environment. Passenger traffic is further improving strongly, supported by travel policy relaxation, mainly also in China. In February 23, global passenger traffic reached 85% of 2019 levels. Domestic traffic was almost back on 2019 levels and international traffic has recovered to roughly 80%, 78% in general. and cargo traffic remains roughly 3% above pre-COVID levels, showing a slight slowdown to recent tailwinds. This development supports the strong demand environment we are currently in, while additional MRO shop visits are still limited by supply chain and labor shortages. Industry-wide supply chain pressure is expected to ease later this year, which will support increased output of new and overhauled engines. While there are signs of improvements with some key suppliers, we see new difficulties rising. As one example, one of our key suppliers had a fire in one of its facilities with the potential to further tighten the availability of certain parts. Good progress on our new military engine program, the next European fighter engine. In March, just recently, we formally kicked off the program within MTU and have already allocated more than 100 engineers working on this game-changing platform. We continue to hire people for the program and are targeting a speedy progress on the technology for this engine. Regarding our capacity expansion, good news from two international sites in the MRO segment. MTS Serbia, our new parts repair shop with a planned maximum capacity of 400,000 repair hours annually, has started its operations at year end 2022. In the meantime, it has already received more than 54 repair process certifications. And in the coming years, we will increase the workforce to 400 at this site. Additionally, we achieved a major milestone with our capacity expansion in China. The new test cell is ready to start operations with an initial certification for test runs for the PW1100. These investments in our capacity are important pillars to further strengthen the flexibility within our MRO network and MTU's global competitiveness. On another topic, we are further preparing ourselves to expand our technological expertise to different fields. Last week, MTU announced the acquisition of eMoses GmbH, a high-tech company for electric motors. The company, with around 30 employees, is specialized in innovative electric drives. This technology is part of our strategy and R&D efforts on our flying fuel cell. And lastly, a few words on the Guidance 23. The encouraging market environment that I just mentioned and our strong results in the first quarter 2023, which Peter will present to you in a few minutes, make us very confident that we are on the expected growth track. But Despite all the good signs, we remain cautious and stick to our full year outlook for today. I'll share our view on that in a few minutes. Before we go into the financial details, let me take the opportunity to comment on recent news about the GTF. The engine entered service in 2016 and the engine was able to deliver the best in class efficiency from day one onwards. We are very confident that the architecture itself forms the future of aircraft propulsion. Nonetheless, we faced and we have overcome technological challenges in the early years of the program. While the engine performance and reliability of GTF engines have significantly improved since the entry into service in 2016, not all engines in the field are on the latest standards and the development of improvement is not over. The next step Next big step will be the introduction of the GTF advantage. Amid struggles in the global supply chain and labor shortages in conjunction with an overwhelming demand, the ability to maintain and upgrade the GTF fleet remains below our targets. In certain cases, this leads to aircraft on ground and resulting in disruptions at airlines. The entire GTF MRO network is doing its best in supporting the MRO customers in every way they can in the current situation. And as previously mentioned, further technological upgrades, technical upgrades and improvements are on their way to improve the on-wing time in the near future. Now let me hand over to Peter for some financials.

Yes, thank you Lars and a warm welcome also from my side. For the first quarter 2023, total group revenues increased 31% to more than 1.5 billion euros based on very strong growth in our commercial OEM and our commercial MO businesses. We had some tailwind from ethics. So we had 107 in the first quarter, 27, 112 in the first quarter, 2022. So if you adjust for that, in US dollar terms, revenues were up 26%. EBIT adjusted increased 62% to 212 million euros with a margin of 13.7%. This strong performance was driven by a couple of effects. A very favorable business mix and lower general costs were pushing the results, while the agreed salary increases become effective not before the second half of 2023. Furthermore, we also had positive year-on-year ethics effects. Net income adjusted increased 70% to 157 million euros. Our free cash flow with 93 million euros is a good start into the year. Q1 2023 free cash flow is a bit below Q1 2022, mainly due to the 120 million euro working capital increase we saw this year, caused mainly by supply chain challenges in both segments, as Lars pointed out. For turning the page and jumping into our business segments, total OEM revenues increased 42% to 550 million euros. Military revenues are more or less stable, 103 million euros, still impacted by supply chain constraints also in this segment. Commercial business revenues rose 40 to 44, 446 million euros, and within that, Organic OE revenues were up in the 40% range in Q1 2023, mainly driven by higher GTF engine deliveries and slightly more IGT sales. Easier comps from 2022 and a higher volume of spare engines and IGTs with a richer revenue contribution led to this exceptional performance. Organic spare part sales in US dollar were up around 35%, driven by growth in all platforms. in particular old white bodies and IGTs. Whereas this is also a strong increase that comes from Q1 help also in this area. The favorable business mix combined with lower general cost at our German sites and a positive FX impact resulted in an EBIT adjusted of 141 million euros and a margin improvement to 25.8%. Let's move on to the commercial MRO segment. Reported MRO revenues increased 25% to more than 1 billion euros, while U.S. dollar revenues were up 19%. The strong growth came predominantly from white-body and freight engines, the CF34 and IGT business. Further, the GTF MRO ramp-up at EME in Poland and our Shuhai plant provided growth on GTF MRO. Within the revenues, the GTF MRO share was roughly 32%. EBIT adjusted increased by 32% to 70 million euros resulting in a margin of 6.8%. The higher EBIT adjusted margin was a result of a favorable business mix on the one hand side with a lower share of GTF maintenance compared to full year expectations and further tailwind we saw also here from a more favorable ethics environment. At this point, I would like to hand back to Lars for some words on our guidance 2023.

Yeah, thank you, Peter. Sounds good. As mentioned earlier, our end markets are performing very well with demands even surpassing our expectations. This dynamic meets an already stretched MRO capacity and supply chain. The level of uncertainty on this side prevents us from setting the bar higher, even though the strong Q1 2023 results are a very promising start. For the time being, we will keep our full year guidance unchanged. Nonetheless, we are constantly monitoring all factors and will review the outlook regularly. Therefore, group revenues are expected between 6.1 and 6.3 billion euros based on a USFX assumption of 1.10 US dollars per euro. Within that, military revenues are expected to be up 10% driven mainly by FCAS demonstrator work and some spillover effects from 2022. Commercial OE will be up 30% driven by growth of the GTF volume, moderate increase of the GenX production and strong growth in business jet engines. Commercial spares are expected to grow in the high teens to low 20s and commercial MRO is expected to increase in the high teens. Drivers for both businesses will be narrow bodies, ongoing strong demand for cargo engines, and the growing demand for wide-body engines. On free cash flow, we are not putting an official guidance into the market, while the situation remains as volatile as it is. Regardless, it is our target to reach last year's level of free cash flow. This closes our presentation. Thank you for your attention, and we are now happy to answer your questions.

Thank you very much. We will now begin the question and answer session. If you would like to ask a question, please press star 1 1 on your touch tone telephone. The operator will announce your name when it's your turn to ask a question. In case you wish to cancel your question, please press star 1 1 again. Please stand by. Our first question comes from the line of Kesenilia Maslova from UBS. Please go ahead.

Hi. Morning, everyone. Just two questions on my end, please. So first one on your SPIRS performance in 1Q. So you mentioned cargo platforms have been driving some of the outperformance there. Could you just please provide a bit more color given flying hours have started to normalize? And also, if you could comment additionally on performance narrow body platform performance in one queue. And my second question is on your full year outlook. So with your guidance numbers unchanged and thinking about their spare parts performance, should we assume 2023 should be more front-end loaded for your aftermarket? And why is that? And to what extent this is function of supply chain, please? Thank you.

Well, maybe on the second one to start with, this is Lars. We do not really believe it's front-end loaded. We just see what we've mentioned several times. Our MRO capacities are fully loaded. Clearly, the demand is higher than the capacity, so that's why we are cautious to really improve our view on the year-end performance while we still have these supply chain issues. We would like to deliver way more engines and spare parts than we are currently enabled to. So we review, like I said, we review that in the second quarter and then come to a new guidance eventually in our forecast too in the middle of this year.

And not to add to that, I mean, the comparison base, obviously Q1 2022 is the lowest in absolute terms. So the growth rate might come down sequentially when the comparison base gets higher, especially in the second half. of 2022 spare parts revenues were higher. So still stick to the roughly 20% spare parts guidance, but as Lars said, we're gonna review that in the middle of the year. Regarding the engine platform, your question, I mean, the major source of growth Q123 versus Q122 came from the older white body platforms, which are used for freighter aircraft as the 767 freighter, also the 757 freighter, so CF680, PW2000, but also obviously from commercial airlines. So these were two sources of growth. Also IGTs or the LM6000, which is basically a CF680C used as an industrial gas turbine. So these were the sources of spare parts growth. Narrowbody spare parts grew a little bit under proportionally. So for I would say for supply chain reasons, Lars mentioned the fire we saw in the facility of one supplier, which impacts the V2500 spare parts business. And on the PW1100, we have the situation that obviously spare parts and new engines tap the same raw material source, so that limits a little bit the spare part sales in the PW1100. As supply chain pressures ease, we're going to see a pickup of growth sequentially throughout the year.

So that's the picture we have in mind. Let me add on this that when we talk about freighter engines, obviously we should not forget that military is using the same engines. So we still see a very high demand in military aircraft usage. And this supports the spare parts sales of our freighter engine programs.

Okay, understood. Thank you very much. Can I just follow up very quickly on our cargo engines comment? So when I'm looking at our flying hours data, it still points to quite considered normalization in one queue. How does it necessarily reconcile with growing demand from these platforms? Or should we take it as more forward-looking numbers?

Yeah, I mean, we have our freighter engines that are the CF680 and the PW2000. So... And you saw, you see a pickup in demand for these two engine programs, but obviously it's difficult to distinguish what demand comes from freighter and customers and from commercial airlines. We see, as Lars said, on the PW2000 strong demand for PW2000 coming also from the C-17 fleet, but for wide-body commercial airlines, obviously you see demand Limited, let's say, output for new engines or new equipment, and that also drives growth for older wide-body platforms, so for 767 passenger aircraft, but also for the two big U.S. carriers using the PW2000 on the 757. They also invest still in a lot of shop visits on these platforms. And as a whole, these two platforms grow, the PW2000 and the CF618.

Okay, thank you very much. Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Robert Stallard from Vertical Research. Please go ahead. Your line is open.

Thanks so much. Good morning. Morning. Good morning, Robert. A couple of questions from me. First of all, on the supply chain, RTX had some fairly encouraging things to say about the GTF supply chain yesterday. And I was wondering if you'd seen similar things in your business, particularly on castings. And then separately on free cash flow in the quarter, you mentioned the working capital bill. Do you expect this to reverse as we move through the year? Thank you.

Let me comment on the castings, Robert. And yes, of course, everyone is going to the same two suppliers. So when Rayson and Pret are saying this is improving, we can see that obviously as well. We always said it will massively improve over the year of 23. The labor seems to be higher now strongly. And then we add some qualification time. But in a nutshell, we see the parts coming in way better than previously. So, yes, I support that.

I mean, regarding working capital, yes, we expect to ease some easing in the course of 2023. I mean, the source of the working capital increase is, I mean, limited part supply for new parts on the one hand side, but also for repaired parts, especially in our MRO division. So, you have unusually long turnaround times in all of our MRO divisions due to the fact that in some cases new parts are missing or also repaired parts where we use outside vendors for third-party repairs and there also turnaround times are quite long. In some cases you can counter that longer turnaround times with a higher, let's say, new material buffer in our MRO facilities, but there's also finally in the first step to a higher level of working capital. But as supply chain pressures ease throughout the year, we expect working capital to come down. That's great.

Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Chloe Lemarie from Jefferies. Please go ahead.

Yes. Good morning. I have a couple as well. The first one is on the DTF. Could you actually provide a bit more color on the time and waiting performance improvement that you've already achieved with the fixes that are currently being rolled out? What would the advantage provide on top of this, and roughly how long will the retrofit program last? And the second one is on the OEM. Obviously, margin is quite solid, the margin improvements. So I wanted to check how much the mix in new engine probably helped versus what you had with spare engines in Q1 last year. And in terms of the cost being under-proportional, if you could help us understand how much of a boost it was in Q1, that would be very helpful.

Let me start with the time on Wink. Obviously, this is a story, Chloe. The story is starting in 2016 when we put the engine into service. And since then, we had several upgrades already. So I don't want to compare 2016 with 2023, but we are at Block D. So we had A, B, C, and D. So several improvements were slotted in. And obviously, the new engine that we are delivering uh have incorporated all these all these upgrades what we are now trying to speed up is to retrofit the older engines with the newer configuration and here we still are faced with the supply chain issues that comes over time and then we have all the let's say old engines retrofitted to the new standards the uh the advantage is a complete new uh new design and a new engine so this won't be retrofitted to the old engine as it is a new program per se. The latest standard, if I'm correct, is a Block D that will be retrofitted to all the older engines starting in 24, beginning of 24, we will deliver the advantage and only the advantage. That should bring significant improvement with everything we know since end-to-end service is incorporated into the new engine. another 1% of fuel savings, and we let it run cooler, the hot section, that should improve furthermore on the timeline wing.

And sorry, just the retrofit to the Block D standard, when will that be completed, do you expect?

I cannot estimate. It takes a couple of years because we have thousands of engines out there. Take it a couple of years. I don't have a concrete figure in mind. Okay.

I mean, regarding cost, what we saw is that we had very low, let's say, general costs, especially in our German side, for things like machine maintenance, IT, project costs, so these kind of things. But these typically don't run in a linear way throughout the year, but Q1 2023 was comparably low, maybe 10%. let's say 15, 50 million or so. We had some, um, some ethics, uh, tailwind also, also in the, let's say low to mid teens or so in absolute terms. And the rest is business mix now. So strong, uh, strong step up growth. And then on the, on the one hand side, I mean, we have 40% growth in a new engine business. Uh, so stronger compared to the spare parts and in, um, in the, uh, in, in the, with the new engines, we had, uh, unusual high level of spare engines. So we won't see that in the same way in the next three quarters. So we will see some kind of reversion, but for the full year, we are still quite optimistic.

Very clear. Thank you. Thank you. We'll now move on to our next question. Our next question comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.

Hi. Good morning, everyone. The first question on MRO, do you still expect 100 basis points of margin contraction for the year given a strong Q1 as you think about the GTF share normalizing over the remainder of the year? And second question on the spares, you know, for the 35% spares growth this quarter, How do you think about the attribution from volume, price versus work scope? Is there more room for work scope to grow from here?

Margin compression, I would say the picture hasn't changed that much. We had a lot of support last year from, let's say, unusual low share of GTF work. And as you pointed out in some calls, we had tailwind from FX. So because of the development of the US dollar versus the Euro throughout the year, purchasing material rather cheap and billing it to the customer with a more favorable FX rate. So we don't expect that to happen again to that extent in 2023. So yes, we still Expect a lower margin in 2023 versus 2022.

On the first one, probably the strong growth in Q1. Yes, obviously, we had some catalog list price increase late last year. That certainly helped a little bit, especially on older programs and white-body programs. The GDF, don't forget, it's a long-term agreement most of the time, so the impact of the price increase is not that high. And on the shop visit, it's difficult to forecast smaller shop visit work scope or bigger ones. Some of the retrofits we talked earlier on the blocks, that's certainly a major shop visit. But some of them, we see some customers bringing in engines with a small work scope as well. So it's difficult to forecast throughout the year.

And how much would you say the GTS is as a portion of the commercial spares portfolio now?

No, we don't give the shares of the programs in the commercial spares portfolio.

As we think about the margin progression and implications from there, how significant is it versus your other major programs?

It's still, I mean, it's growing, obviously. The PW1100 spare parts, but don't forget, I mean, the PW1100 profitability also in the spare parts is not at the level where we have it on the V25. I mean, we commented that quite often. But I mean, the V2500 had 20 years' time to mature, to bring production costs down and so on. And so the profitability of the PW1100 spare parts is still currently below the V2500. I mean, that's fair to say, but it's also no news.

All right. Thanks.

Thank you. We'll now move on to our next question. Our next question comes from the line of Sash Tusa from Agency Partners. Please go ahead with your question.

Thank you very much indeed. Good morning. I've just got a question. I've just got a question about the military business. You highlighted that one of the reasons for the slightly slow start to the year was specific supplier problems, which didn't seem to come through in the same way to the commercial OE business. And I just wondered whether you could sort of Just a bit of a gospel of light on why it is that the military business had supply problems that really did affect Q1, but commercial didn't. Is this actually a problem with one of your partners on EJ200, presumably Rolls, Avio, or so forth? So actually, it's a partner problem rather than a supplier problem.

Exactly. It's a different supply chain, and it's a partner problem. And there's one company, they also had an issue with an industrial company site fire in one of the production plants. So it's limited to one partner in the military program, and that is not a partner on the civil.

That's very easy. And do you expect the impact of that fire to persist through Q2 and possibly into Q3, or are they now back on schedule?

We're getting very promising reports comments on recovery, I would say yes, probably in Q2 we are still impacted. After that, it should be sorted out.

Great. Thank you very much.

Thank you. We'll now move on to our next question. Our next question comes from the line of Christoph Menard from Deutsche Bank. Please go ahead with your question.

Yes, good morning. I had three quick ones. Good morning. The first one is on the spare parts. You mentioned all the wide-body spares up. What about a 380 and Boeing 787 simmer catch-up, or is it... Is it just like narrow body? So first question. Second question is on the GTF advantage. You mentioned that it cannot be retrofitted on an existing engine, but can or is your contract, according to your contract, can you be forced to actually swap an older engine for GTF advantage under some warranty programs, or if an airline wants the GTF advantage, can it adapt it on a new? And the last question is on HR. Is it still an issue to recruit people for maintenance, or is it essentially supply chain that is causing most of the delays and turnaround time delays? Thank you.

Christoph, let me start with the GTFA. That's a fairly easy answer. No, it's not swappable. And as far as I know, our contracts do not allow or enforce us to change GTFA with a GTF-based engine. Very clear answer on that. HR, for us, we don't see labor issues in our global facilities. It's mainly we're waiting for parts. We would have the capacity available, and I'm not aware that we have significant numbers of open positions in our worldwide maintenance facilities. And then the A380.

I mean, the growth rates of the GP7000 and the PW4000, they're huge, but the volume is low. I mean, last year we sold zero spare parts for the GP7000, zero spare parts for the PW4000, for the old 777. And now we see a pickup of their parts demand, so the growth rate is fantastic, but obviously the absolute impact is yet quite low, but we expect obviously also in that field a recovery due to the fact that a lot of new white-body platforms are postponed, so the ramp-up is flat, so airlines are missing new white-body equipment and they try to use the old platforms more. more intensive, and that finally leads to more shop visits on the GPS.

It's coming back in the air on almost every airline that has been used it. So a very, very significant reintroduction of this platform.

Thank you very much.

Thanks. Thank you. We'll now move on to our next question. Our next question comes from the line of Mylene Kerner from Barclays. Please go ahead.

Yes, good morning, Lars, Peter, and Thomas, and thank you for taking my question. I have three, please. First, Peter, can you tell us how big the positive impact was from the cost phasing at OEM in Q1 and how these costs are expected to increase throughout the year? And then I have two questions on the GTS. The first question on GTS is what is the portion of GTF delivery that are for normal spare engine as compared to additional spare engine to improve the engine availability for the in-service fleet? And then my second question on GTF is could you comment on the split of the GTF aftermarket between what is normal maintenance versus what is warranty and upgrade? Thank you.

I've been on the On the cost side, I would say, I mean, it's always difficult to say what is the baseline, because costs do fluctuate, but we have comparably low costs, as I pointed out before, for machine maintenance, IT costs, and project costs, I would say, so maybe we have an advantage of 15 or so, 15 million or so in our German sites now.

And on the GTF, Peter, it's I'm struggling to answer because obviously we don't disclose details on this PR engine mix. I guess it's fair to say that we are trying to allocate enough engines to the OE side of Airbus obviously while maintaining our customers, the fleet, keep them flying. on the MRO side. So it is a mix between OE and spare engines, but we don't usually disclose these numbers.

Thank you, Lars. Maybe can I ask it another way? Maybe can you comment on the trend in Q1 relative to what it was in the last two quarters?

Do you have more or less same... You know, we're increasing our output at the same time. So most likely, the trend is similar in similar regions, but in absolute numbers, more engines go to the final assembly line, more spare engines go to the flying fleet. And it's probably also fair to say it's slightly increasing because of the MRO issues and AOG issues we have out there.

I mean, the share of spare engines, the total output is a little bit higher in Q1. That supports, obviously, profitability in Q1 2023, yeah.

And then on the last, if you can comment at all on the aftermarket, like on the GTF, what is like normal maintenance spare parts versus what are like warranty and upgrades?

We're sitting here and nodding our heads that no, we don't do that.

I'm trying, I'm trying.

Yeah, because we do not look on our business in that way. So you have a shop visit and in each shop visit you have a different mix of what is pure warranty and what is proactive maintenance to keep the engine longer on wing and what is really wear and tear and what you would consider as a real MRO. And each shop visit is different, and we don't analyze that in that way. So I couldn't give you that figure, actually. So it's not that we don't want to tell it to you. We just don't have it on hand.

Thank you so much. Thanks. Thank you. We'll now move on to our next question. Our next question comes from the line of Ben Heelan from Bank of America. Please go ahead.

Yeah, morning and hope you guys are well. Thank you for the question. The first I want to talk on the margin because it implies quite a material drop off in margins in the second half of the year for you to be stable for the full year. I get the MRO comments, but in the commercial OEM business, I think it does imply quite a material drop off. I just wanted to understand that a little bit more. Obviously, you've got an FX benefit for the full year. Have you taken the vast majority of that FX benefit from hedging in Q1? Should we expect that FX benefit to continue in Q2, Q3, and Q4? And is there anything else that has been front-end loaded and thinking is it maybe operating leverage, phasing of cost, anything that can help us with that because it does imply quite a material drop-off in the last nine months of the year from a margin perspective. And then secondly, Just a bit of a clarification. I mean, you've got revenues in Euro terms in commercial OEM are up 60% and organic revenues in dollar terms were up only 37%. And obviously, the FX tax isn't 23 percentage points. So I'm wondering if you can help me, you know, kind of square the circle there in terms of what the difference is.

Yeah, I mean, the outlook for the next three quarters for the year, I mean, yes, I mean, the guidance is conservative. I mean, Lars mentioned that. I mean, what were the sources for the good margin in the OM segment? I mean, we have quite low cost in Q1. I mentioned that. So we're going to see a pickup throughout the year. We're going to have a salary increase that is agreed with the unions in Germany. So starting in... June, so 5% salary increase, so that will impact H2, obviously not so much Q2. And, I mean, we're going to see, obviously, in the higher output of installed engines in the next three quarters and lower spare engines. So that's more or less the story here. We said that the demand is really above what we saw when we issued our guidance. That's true. The market demand is there, but we have to execute on the market demand. The supply chain is currently the bottleneck, and we have to evaluate. We're going to do that in summer. What we really can do delivered then finally in 2023. I think in the summer we have more grip around that issue. Then on the growth in the commercial segment, yes, you see that commercial business was up 60%. So if you adjust for the average US dollar development, I pointed out, I mean, 2022 was 112 on average, 2023 was 107 on average. If you adjust for that, so the organic growth rate would be something in the low 50s, so 52%, 53% organically. And if you compare that with the, let's say, 35% spares, 40% OE revenues, maybe the blended growth would be something like 37%. And so the gap is indeed the impact of hedging, which runs through the revenue line. but also ethics evaluation of our balance sheet positions like receivables and also liabilities run through the revenue lines that is IFRS 15 predominantly. And so we had a negative, let's say effect out of ethics issues. So hedging combined and with mark to market valuation of balance sheet positions, negative effect in 2022 and a positive effect in 2023. And that's based on a quite low revenue basis. So the 278 in 2022 skews the growth rate in that way. So if you would compare the nine months, so the effect is far lower. So that's a story. Okay.

Okay. No, that's clear. And then, sorry, back on the margin, I mean, you said low cost in Q1. Outside of the salary increase starting in June, what are the costs that are going to be increasing in particular? And then on the FX, so from a hedging perspective, I think there was a benefit in Q1 to EBIT. Is there going to be a benefit Q2, Q3, or have you recognized a lot of that in the first quarter of the year? Thanks, Peter.

The latest. So we had an achieved rate of Q1 is always hedged by 100%, you can say. So the achieved rate is the hedge rate. And we had 111 in Q1, 23, 117 in 2022. So we had something like, if you do the math, we have something like a 20 million tailwind in earnings from the achieved US dollar rate. And we're going to see some benefit also in Q2, Q3, Q4, but it's going to be lower and lower and lower. So that goes away throughout the year. And I mean, what cost increases we're going to see? I mean, we're going to see a reversion of these effects I just mentioned. So we're going to spend for machine maintenance. We're going to see IT costs coming in. And also different projects we have back on planning level. Back on planning level, exactly.

So underestimated or underexposed in QM. Okay. And back to normal levels, to planned levels in the following quarters.

Okay. Okay, great. Thank you. Appreciate it.

Thank you. We'll now move on to our next question. Our next question comes from the line of Zafar Khan from Societe Generale. Please go ahead.

Thank you very much. Good morning, everyone. Good morning. I've got three questions, please, just looking for some help and clarification for modeling purposes. So the first one, just on commercial OE. Remember, pre-COVID, the OE theories versus spares, the split in commercial OE was around about 60% spares for the century. Can you just tell us where we are on that? Peter, you mentioned the blended sort of growth rate. So just can you help us with the split between spares revenue and OE revenue, where that was in 22 and where it might get to in 23? That's one question. And then You mentioned the spare engines that you've been delivering. Do you actually make a positive, meaningful margin for spare engines? And then the third question is just on gear turbofan. If I remember correctly, a lot of the contracts are flight hours contracts rather than time and material. So can you help us just understand how you're accounting for that at the moment and How much of the revenues are coming through that? What's the cash impact?

So I'm going to start with the mix. I mean, roughly, you can say two-thirds is spare parts, one-third is OE. So that's the rough, obviously, hovering around that baseline, so from quarter to quarter, right? Um, yes. And, um, we do, we do, uh, we do generate a meaningful profit, uh, by selling spare spare engines. I mean, on the one hand side of that, that that's for a reason because spare engines are not as utilized, obviously as a, as an, as an installed engine and with a spare engine, you have less aftermarket. And so, um, that's why, um, discounts on new engines are, uh, on spare engines are lower than compared to discounts on, um, installed engines. And on the accounting of the flight hour agreements around the GTF, I mean, we have pointed it out in several capital markets, on several capital markets. So finally, I mean, the profitability of the flight hour agreements at OEM levels, so on IAE LLC levels, determine the margin which we book together with the P1100 spare parts. So when we sell PW1100 spare parts, the margin we realize is depending on the profitability of the basket of light hour agreements on IAE level. So that's in a nutshell how we account for that. And we get obviously our share of prepayments out of IAE. We get 18% of all prepayments the program generates. And, I mean, obviously IAE is an, let's say, management company, so IAE does not have own shops, so the shop visits for these contracts are done in the GTF MRO network, and our shops, so Shuhai, EME in Poland, and Hannover, they perform GTF MRO work and build that back to IAE within, let's say, with a framework of pricing which allows only a limited margin. So these are, I think, the different aspects of the GTF aftermarket.

Peter, we mentioned several times as well that the whole organization is working on the profitability issue, obviously, by designing, first of all, upgrades that help to improve the time on wing. with the development of repairs. Every repaired part is a very good part because you don't need a new part, obviously. Limit extension is another thing we are progressing in to extend the limits on certain parts. So all these faster shop visits, reduced turnaround times, so all these are helping to improve the profitability on these fly-by-hour contracts.

Could I just summarize what you've said, Peter, so that I fully understand this? So essentially, the entity that's supplying the services is the risk and revenue sharing partnership that's done that sort of level. So MTU supplying into that will make profit on that spare part which is supplied. And that entity is doing the flights buy hours and you take your share of that. Is that how it's doing? So there's a kind of an arm's length between the supply and where the risk and revenue and profits are taken? Or maybe you could just point me.

No, no, it's right. The contract holder with the airlines is IAE. So IAE is the management, the sales company in phase two. They do all the business with the direct business with the airlines and And we supply our parts, our modules into IAE and we do the work or we do a share of the aftermarket work via our MO network for IAE. And for all these transactions, there are, let's say, there are prices between the two companies and especially regarding spare parts. And that's what is specifically asked, the profit we book when we sell a spare part to IAE. is depending on the profitability of the final flat hour agreement. That's the logic behind that.

Okay. Maybe I'll take this offline with the IR team. Thank you for that. You're welcome.

Thank you. We'll now move on to our next question. Our next question comes from the line of Tristan Sanson from BNP Paribas Exxon. Please go ahead.

Good morning, everyone, and thank you for taking my questions. I have three as well. The first one is I wanted to come back briefly on reclassification of a provision into liability to Pratt that was done in Q4 by €219 million. If you... quickly explain again what happened at that time. And for this quarter, I'm most interested in the feeling of the related cash out. Understand it's spread over five or six years, but is it happening every quarter or is there one quarter that we'll see the cash out? And especially, did we have an impact in the free cash flow of Q1 coming from this, the first question. The second is on the performance and service of the PW1000 engine who are familiar with the issues of performance of the engine in harsh environments, so India, Middle East, and I suspect China as well. But we also had complaints from a number of operators on the A220 operating in normal environments. Can you explain to me what is the actual issue related to the timing of these engines operating in normal environments? And the last question is on the €120 million of inventory increase that you reported in 2021, or working capital headwind. Is it fair to assume that it's mostly work that is being performed in the MRO division and that you cannot book in revenues because you're missing a few parts and so you have extended the turnaround times? I would be curious to see what is the assumption for this, that you are for the full year, underpinning your guidance of at least stability in free cash flow. Many thanks for your answers.

I'll start with your last question, the working capital question. I said that before. The major source of the working capital increase is unfinished work sitting in our MO division. That's accounted not in inventories, it's rather a so-called POC receivable as we account that work as a percentage of completion. So, and yes, I mean, the major, so the basic, the basic source of that working capital increase is, so difficult parts supply, so difficult, difficult supply chains or two or three parts are missing and you cannot finalize the engine, put it on the test cell and send it to the customer, bill it finally to the customer. So it's sitting there and waiting for the final parts. And the same is true also, not only for new parts, but also for outside vendors. So where we use the TAP outside sources for certain repair technologies, we don't, have in-house. So these two are the problematic fields and leads finally to a working capital increase. And as I said before, we expect a certain level of reversion throughout the next three quarters.

So on the... Put it another way, it means that if you had all the parts you wanted, you could have done like 10% more revenues in MRO and Q1?

At least, I mean, we could have... As I said, when we have the engine in the shop, we book a POC receivable, which means also you have the corresponding POC revenue. It is already revenue, although it's unfinished, but you recognize only a limited margin on the POC revenue. The major part of the profit you book when you send the engine finally to the customer. And what's the second effect? When the shops are full, obviously, because the engines are standing there and waiting for the final parts, you don't obviously induct new engines. So it also limits your capacity to induct more shop visits. So that limits your MO growth.

So the jobs are congested. And maybe on the second one on performance, I mean, I'm not that astonished as you might be because it's a similar design. The 1500 and the 1100 is a similar design. You are mentioning quite rightly that the durability and the time on wing in especially harsh environment is not what we wanted to have on the normal environment. It's also not as good as we forecasted, but it's not significantly lower, and especially not on the 1500 compared to the 1100, as we have the same design. So I'm not that surprised that we have similar issues on the 1500 than we have on the 1100, in normal environment as well.

Regarding the... I'm sorry to dig on that, but can you pinpoint actually how you're talking about corrosion issues or accelerated wear and tear of specific parts of the engines in normal environments?

The latter one, accelerated wear and tear.

Regarding the reclassification of the liability, in 2022, we reached an agreement to settle that is made more or less a production-related compensation payments, which we accumulated from the start of the program until end of 2021, which was always accrued for, I mean, since then, so there's no earning impact. And that's, I mean, we mentioned that, we quantified that also, it was something like $250 million. and we reached an agreement to pay it over six years, and the first installment will be paid next year. So we haven't seen any... Okay, first one in 2023?

And it's going to be like a bit every quarter, or it's like a one-month payment? No quarter is the volatility for this.

Exactly. That's because it's a long-term payment, and it's for the payment, payment plan starts in the future, more than 12 months. So under IFRS, you are obliged to classify that as a financial debt. And so it went out of working capital and moved into financial debt.

That's very clear and helpful. Thank you so much, guys.

Thank you. We'll now move on to our last question. Our final question comes from the line of Charles Armitage from Citi. Please go ahead. Your line is open.

Good morning and thank you. So the overwhelming theme through the queue seems to be great demand held back by supply chain bottlenecks. Are any of these supply chain bottlenecks likely to be worse in the remaining quarters versus Q1?

No, clearly no. I think I mentioned earlier, labor is improving. The recruitment of labor is improving on all the sites that we are observing. Qualification is as forecasted. Industrial capacity has always been there. So I'm a full optimist that we are getting better every quarter.

Thank you.

Thank you. There are no further questions at this time, so I'll hand the conference back to you for closing remarks.

Great. So we are perfectly in time. Thank you very much for participating. Thank you, Lars. Thank you, Peter, for answering these questions. And yeah, to everybody, enjoy the rest of your day. Bye-bye.

We want to thank Mr. Lars Wagner, Mr. Peter Kammerich, Mr. Thomas Franz, and all the participants of this conference. Goodbye.