Mtu Aero Engines Hldgs Ag

Welcome to the conference call on MTU Aero Engines AG H1 2023 results. 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, and good morning, ladies and gentlemen. Welcome to our conference call for MTS Age 1-23 results. As usual, we start with a review and some key messages presented by Lars. Peter will start with a financial overview and a more detailed look into our OEM and MRO segment. After that, Lars will walk you through the recently updated 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.

Great. Thank you, Thomas. Also welcome from my side, everyone. Let's start with taking a look at the latest trends in our market environment. According to the IATA, total passenger traffic reached almost 96% of pre-pandemic levels in May 23. For the second month actually in a row, domestic air traffic outperformed 2019 pre-pandemic levels, being up 5.3%. Recovery in international traffic is accelerating. reaching 90.8% of pre-COVID levels in May. In its June forecast, IATA even expects the total passenger traffic to reach 88% of 2019 levels in 2023 and a full recovery back in 2024. This is supported by a constant strong demand despite economic challenges and supply chain constraints. We always talk about freighter. Dedicated freighter flights also remain strong, with 26% above 2019 levels, despite weakening cargo demand and recovery of available belly freight capacity. In June, the Paris Airshow has returned after a four-year-long break. Airbus and Boeing concluded the show with record orders of over 1,000 passenger aircraft, the majority of them for narrowbodies. And MTU also benefited from the positive sentiment and received orders worth more than US$1 billion. With more than 400 engine orders placed, the GTF accounted for the lion's share of the Paris Airshow orders. The enormous demand in our industry for modern aircraft with better fuel efficiency is also reflected in orders for the Dreamliner's GE NX engine and for the GE 9X powering the B777X. At the Paris Airshow, we were also in a position to update our guidance for the current year. Revenues and growth rates were left broadly unchanged. The EBIT adjusted expectation was lifted to above 800 million euros, while free cash flow is expected to be at least above the amount achieved in 2022. I will come back to this in a few minutes. Further exciting news are also on the military side of our business. At the Paris Airshow, we signed a memorandum of understanding with Safran to create a 50-50 joint venture with the intention to develop a new engine for the European Next Generation Rotorcraft Technologies Project. This project does not only complement our already established partnership with Safran on the next European fighter engine, but will also further strengthen our position in the European military market over the long term. Before I hand over to Peter for the financials, I would like to provide you some key messages on the GTF durability, which were also part of discussions of the airshow. First of all, the GTF is the most fuel-efficient and sustainable engine for single-aid aircraft. The GTF time on wing is already on a higher level than the V2500 at this point in its service life, while the durability is subject to continuous improvements. Bretton Whitney, MTU, and the other RP partner have introduced several technical upgrades since entry into service, and currently 60% of the GTF engines are already equipped with the latest technical upgrades. We expect that 90% of all engines will receive these upgrades in the next two to three years, and the GTF Advantage will provide further improvements. Even while we see the program well prepared for the future, we currently see the fleet in a more difficult situation. In combination with industrial execution challenges and relevant upgrades to be put into the fleet, we see several GTF-powered planes to be out of service temporarily. On top of these known challenges, an additional HPT inspection program will put further pressure on airline fleets and our customers. Together with our partners we are working on this topic to limit the impact on our customers as far as possible. The mentioned program targets a specific population of engines in the field that has been produced from Q4 2015 until Q3 2021. By mid-September 2023, 200 engines from the fleet shall be inducted into the inspection process. Further engines partially already scheduled for maintenance in the coming months, will also be part of this inspection program. This is certainly not a situation we want to be in, but generally we are aware of the challenges and together with our partners we will ensure an efficient management of the situation. This inspection program will have an effect on our financial performance in the coming years. This will look differently between the impact on EBIT and cash. On the EBIT side, the cost for the inspection program will be part of our regular contract accounting and thus be spread over a longer period of time. This results in the comparably modest effect on our profit expectations in the coming years. On the cash side, the impact is more concentrated and will form a headwind for our free cash flow number over the time of the inspection program. The program and its detailed implications are still under evaluation, so there are no detailed numbers we can share with you at this point in time. The inspection program affects engines that have been delivered in the past. This is not a design issue and it's not affecting new engine or spare parts production. To make it clear, this will be a challenging period for the months to come and we certainly see headwind for our customers and us as a consortium. However, we strongly believe in the benefits of the GTF architecture and we continue to see the engine as a key revenue and profit driver in the future. Let me now hand over to Peter for the financials. Peter.

Yes, thank you Lars and a warm welcome also from my side. In the first half year 2023, total group revenues increased 25% to 3.1 billion euros based on growth in all business segments. In US dollar terms, revenues were up 24%. EBIT adjusted increased 40% to 405 million euros, resulting in an EBIT margin of 13.1%. This high profitability was supported by an ongoing favorable business mix and cost benefits that prevailed longer than initially anticipated. Net income adjusted was up 45% to 300 million euros. Free cash flow at 135 million euros, Working capital headwinds prevailed in Q2, while delayed deliveries of certain engines reduced the cash collection ability. So turning the page and jumping into our business segments. Total OEM revenues increased 31% to roughly 1.1 billion euros. Military revenues were up by 7% to 229 million euros. Commercial business revenues in euro rose by 40% to 832 million, and within that, Organic OE revenues were up in the 30% range, which is in line with our full-year expectations. Revenues were driven by higher GTF, GNX, and business jet engine deliveries. Further, a slightly increased IGT output was also supportive. The overall share of spare engines remained on an elevated level. On a quarterly basis, OE sales were up 20%. Organic spare part sales in dollars were up in the low 20% range, driven by growth in all platforms, in particular, white bodies, CF6, GenX, also GP7000, and also IGTs. On a quarterly basis, spare part sales were up 10%. The very favorable business mix combined with lower general costs at our German sites and a positive FX impact resulted in EBIT adjusted of 262 million euros with a margin improvement to almost 25%. So let's move to the commercial MRO segment on the next page. Reported MRO revenues increased 22% to roughly 2.1 billion euros, while dollar revenues were up 20%. The strong growth came predominantly from GTF MRO, white bodies and freight engines, IGT and MLS lease engine business. GTF MRO growth was driven by a further ramp at MTU Shuhai and EME Aero. With the revenues, the GTF MRO share was roughly 35%. EBIT adjusted increased by 40% to 141 million euros, resulting in a margin of almost 7%. The lower EBIT margin in H1 2023 is a result of a higher share of GTF maintenance compared to last year, where it was at roughly 30%, And furthermore, the margin in 2022 benefited from FX tailwinds. At this point, I would like to hand back to Lars for some words on our guidance 2023. All right, Peter, thank you.

So even recognizing current news, we reconfirm our latest 2023 guidance, which we published at the Paris Airshow with an adjusted EBIT of more than 800 million euros. and a free cash flow to be above the previous year level of 326 million euros. The outlook on revenue remained unchanged as well at 6.1 to 6.3 billion euros, with growth expectations for the segments largely unchanged with the exception of the military revenue outlook, which was increased from 10 to 15 percent. Let me put this, before I finish up, a little bit in perspective. The GTF quality issue came as a surprise, but we're in excellent collaboration with Pratt & Whitney, and we will know more about it in the coming weeks. I'm very positive we will manage and overcome this, and I'm also confident about the architecture and the concept of the GTF, and in the future it will contribute largely to the profitability and growth for MTU. Thank you very much for now for your attention, and we're now ready 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 11 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 11 again. Our first question comes from the line of Robert Stallard from Vertical Research. Please go ahead.

Thanks so much. Good morning.

Morning. Good morning.

I have a couple of questions for you on the GTF issues. First of all, on the high pressure turbine recall, what exactly happened in the last 10 days or so that prompted the recall? And then secondly, perhaps for Peter, perhaps you could walk through the financial structure of how this would flow through to you. I understand you don't have a final number yet, but just theoretically, how would the additional costs of these overhauls flow through to MTU? Thank you.

Well, Robert, let me start with what happened. This is not a thing that occurred over the last 10 days. Greg and Chris pointed out yesterday that we started to see an issue on the V25 years ago. We had a view on the topic as well at the end of 22, and this is just a regular safety process that we update our calculation models. We were able to contain the population, but we are seeing now with every shot with it and these disks are coming in, we see a picture of that situation. And these contamination, these anomalies that we are talking about, they were inspected and they will be fed into our calculation model, safety risk analysis. And so this was a finding we had over the last couple of days and maybe weeks, and that caused this inspection program that we launched yesterday.

I mean, regarding the mechanics of the cost, I mean, we are an RSP partner in the PW1100 program, so theoretically we would share 18% of the cost for that extra inspection program. So what we do, what we did now in H1, I mean, we did a rough estimate of the extra cost coming from that additional HPT inspection program, and you know we do contract accounting, so we put that extra cost into the cost sheets of our different aftermarket contracts and booked in already in H1. I mean that extra cost obviously reduces the margin of these contracts slightly. And we did already in H1 book with the slightly reduced margin. So that extra costs reduces aftermarket profitability. And from there on, we calculate with that profitability. But obviously, as Lars mentioned in his statement, so the cash flow impact will be there when the cost occurs. I mean, we did a robust estimate. Obviously, at that point of time, it's difficult to estimate what the cost exactly will be. We based it on the B2-5 inspection program three years ago, as Lars mentioned. But there is some volatility, obviously, in that estimate. I think we will know more in some weeks when we know what the work scope will be, what the turnaround will be for that inspection program. And not forget, I mean, there's a lot of intersection with already planned shop visits in 2024. So now Prada Whitney and we contribute also our share. That's already the planning how the shop visits will happen throughout 2024. But currently we do not know that yet.

Okay. And just to follow up, Peter, I mean, yesterday RTX said a $500 million impact negative on the cash flow in 2023. Is that in any way useful to us when we're trying to calculate the impact on MTU or is it still too early to know what your slice of that could be?

That is definitely too early. So I don't know how they come up with 500 million euros. So that's another question I can answer. We did our own estimate. I mean, we As you can read, we confirmed our free cash flow guidance for 2023 being above at least on the level of 2022 or even maybe above. But how RTX estimates their cash flow impact, that's not a question I can answer.

Okay. Thank you very much.

Thank you. We'll now move on to our next question. Ksenia Maslova from UBS. Please go ahead with your question.

Hi, thanks for taking my question. So just doing my answer, can you please update us on supply chain situation and lead times in your shops? Given the incremental GTF shop reasons expected, what's your expectations on the parked fleet situation? And then secondly, on spare engines, it seems like the share remain elevated into Q. And again, given the GTF situation, what are expectations into second half of the year. I think originally we were expecting to see some normalization there. Thank you.

Well, maybe first of all on the supply chain situation, we've been commenting that for a while that the situation is improving. It's probably worthwhile to mention that because of this HPT inspection program, we don't see an impact on the supply chain because as also RTX mentioned yesterday, the fallout rate after inspection is seen to be very, very low, about 1%. So that for sure gives not an additional supply chain constraint. On all the other factors, we see an improving situation with regards to parts availability, which at the end is also improving of our throughput and turnaround times in our shops. So the picture is slightly improving, but nonetheless, this adds an additional burden and this capacity needs to be created and found And both shop visits programs, inspection programs are running at the highest priority in our company as well with Pratt & Whitney. And spare engines, yet I have no visibility on this one. There has been no information on this one that needs to be seen and discussed while we speak in this week. Sorry for that.

Thank you. Thanks. Thank you. We'll now move on to our next question. David Perry from JP Morgan. Please go ahead with your question.

Yeah. Hi, Jen. Hi, David. I was actually at the office much yesterday and I feel a bit one step behind. So if I ask a question that's a bit annoying to everyone else. I apologize. But can I just ask, how many disks will need to be made to replace? I think I've read that 1,200 engines are being inspected.

I'm just trying to understand. It's not correct. I just mentioned this is an inspection program. So we anticipate that 99% of the disks that we inspect are good to go. So that's why I said no supply chain issue on this one because the 1% fallout rate can be replaced easily. So it's inspection and not an exchange program.

Okay. So maybe this is an unfair question to you because you're not the analyst. We're the analysts, but haven't been at the office mostly yesterday and I still see Raytheon's market cap is down $15 billion. Yours is down 850 million euros. That's, there seems a disconnect between maybe what the financial market is worrying about and maybe what you're suggesting. And it's a very hard question for you, but can you, what is it you think the market is extrapolating here that we might be misunderstanding? Um, as you see it. I mean, is there a potential financial cost here that could be significant? Because that's what the financial market's assuming.

As you say, you guys are the analysts, but let's state maybe I was also surprised about the big hit yesterday on race and MTU, especially while seeing that not everything has been clarified and the financial impact is not yet calculated. We need a couple of days and weeks maybe, but I was surprised that both of us, we were hit that badly. Like I said, I'm still very positive that GTF is the architecture of the future. It will generate profit and growth. We just have to bridge this time now for the duration of the inspection program.

Okay, and then just the last one, maybe it's more for For Peter, you have some provisions on your balance sheet, warranty provisions. They've come down quite a bit in the last few years as you've used them. I think it's about 200 million now. Do you think you have enough provisions for what this problem may be? And would that include any potential compensation to airlines?

I wouldn't strip down the cost for that inspection program in, let's say, in shares or something like that. I mean, we have taken a view on the cost for that inspection program, and we have put them into our cost estimates. As I said, we have reduced the margin we book for the PW1100 spare parts. That's what we technically do with every spare parts we deliver into the consortium. We book a provision for the future, let's say, shop visit cost. We also share according to our program share. So that's the mechanics, how it works, and we continue to do so with updated estimates now coming from the fleet inspection program.

And airline compensation, is that over and above the margin assumptions, or is that part of it?

It is part of it. It's part of it. It's part of the total cost estimate we envision for that fleet inspection program. But I won't give you a number right now, David.

Well, let me try one more, if I may, and then I'll let someone else have a go. I mean, you've been quite bullish in the last, up until yesterday, in recent communications. It's mostly been good news in terms of your guidance, and you've talked about the OEM division being well set for a 25% margin. Do you think that is still possible given the latest news, or is there a change in that view?

No, I think reaching the 25% margin is still doable. I mean, as I said, at age one, and we have already used the reduced PW1100 margin, as I said, we have the 25% in our OEM segment.

But over the next few years, you would still believe that is what you're aspiring to and could realistically do?

That is still our target and we will reach that.

Thank you. Appreciate it.

Thank you. We'll now move on to our next question. Ben Helin from Bank of America, may we have your question?

yeah morning uh thank you for taking the question i have a few more um to follow up uh i think on rob's questions on on gtf so first of all it doesn't sound like you expect this to impact uh your deliveries of gts to airbus but just wondering if you can confirm that i'm just worried that are there going to be more engines that need to go into the spare engine pool to help manage the disruption of the fleets if you could confirm that um Peter, you said that you have made an assumption in terms of what this is going to cost. Can you actually tell us what that assumption is? I think I've tried to work it out in the back. I think it's in your refund liabilities maybe is how you think about it. But if you could just tell us what you're assuming that's going to cost, that that would be helpful. And then in terms of airline compensation, so it does sound as though you do anticipate that airline compensation is going to be a part of this. Is there any context you can give in terms of maybe prior issues that you've had with the GTF so we can try and size what that compensation angle can be? Because obviously the fleet is going through a lot of issues prior to this anyway, so this is going to put a huge amount of strain on the airline, so I'm assuming the compensation cost could be quite large. So just any help around that would be helpful. Thank you.

Let me start with the first question. This is Lars. As we pointed out earlier, this inspection program per se will not have an impact on OE deliveries to Airbus because it's an inspection program, and once these discs are inspected, reinserted, these engines go back into the market. No supply chain pressure on this one. The other discussions, probably behind the scenes between Pratt and Airbus on the OE deliveries, I cannot comment. This needs to be addressed and answered by Pratt & Whitney.

I mean, regarding costs, that doesn't make sense to put a number out there. I mean, the assumption is very dependent on what you assume, what is the turnaround time of that inspection. So if you only do, let's say, the inspections or the work scope, the work scope is still worked out. Brett and Whitney does it together with ourselves. So before... Before that is not clarified, it doesn't make a sense to put numbers out there. I mean, you have to give us some weeks until we've worked it out together with our partners. I mean, we have made a robust assumption, yes, but it's still, I mean, there's a bandwidth. What can be the actual outcome of that? So today I wouldn't give you a number on that one.

Okay. Okay. And then a quick follow-up. Obviously, you talked about 1,200 inspections over the next 12 months, or Pratt did yesterday. How are you going to find the capacity to do this? Because, you know, the narrative I think around MRO has already been the backlogs in these MRO shops are quite full. There have been labor constraints. It's been hard to find people. So are you realistically going to be able to do 1,200 shop visits on top of what is already quite a stretched situation around MRO?

Well, also, let me put that into perspective. So at least for MCU, we didn't talk about labor constraints in our worldwide mentioned shops. Then secondly, this 1,200 is not a net view on additional shop visits. We expect a big portion out of that number. It needs to be understood. A big portion out of that number will come into a shop visit anyway in the next 9 to 12 months. So the final logic and logistics behind that is still being worked out, but it's not per se and on top number. And then from what we know today and what we expect today, there is no testing needed afterwards. So we can have a look on free capacity worldwide and not necessarily being around the test set. So there might be some opportunities for us, but also for Brett, us as a consortium, to find industrial capacity for the shop visit. But then, obviously, the question is, where is the labor coming from? But you need to give us some time to work on that. The teams are working on that one floor down as we speak.

Okay. Okay. Super helpful. Thank you.

Thank you. We'll now move on to our next question. George Zhao from Bernstein, please go ahead with your question.

Yes, hi, good morning, everyone. Good morning. So on the free cash flow again, if you can't put a number on the GTF impact, how are you comfortable reiterating the free cash flow guide for this year? I'm assuming the guide takes into account some impact later this year, so any color on that. And second one, spares. So 10% growth in Q2, previously you called out some supplier challenges to the E2500 leading to software growth. Where do those challenges stand and could we see some catch up in H2 given that the flight cycles for the E2500 remain strong? Thanks.

I mean, regarding cash flow, I mean, cash flow is obviously a volatile number. There are a lot of elements in the cash flow which you can manage. I don't know exactly today what the working capital at the end of 2023 will be, obviously. So, There are a lot of head and tailwinds regarding free cash flow. But I mean, as I said, we have done our estimate regarding the cash impact in 2023. And we think we can manage the additional burden with other positive effects. So there are a lot of levers you can take. Reduce capex or cost, receivable collection, prepayment. So there are a lot of levers you have in hand. to cover the additional cash out for that inspection program. And as Lars said, I mean, it's not going to be a big working capital hit because the fallout rate is in the magnitude of 1%. So there is no, let's say, you have to provide extra working capital or so for that inspection program.

And if I understood correctly, the supply chain question on V2.5 that is dealing with one of our suppliers, that had a big fire in the first quarter of this year, and it's probably too early to assess a very positive tailwind, but we are certainly better than we expected on our recovery path. All the activities, different sources, but also the re-ramp-up of the facility is showing a better trend than we anticipated, and that hopefully will be beneficial for the V25 situation.

Thank you. We'll now move on to our next question. Chloe Lemery from Jefferies, please go ahead with your question. Yes, good morning. Good morning.

Thank you for taking my questions. I just have two, if I may. Shifting gears a little bit and going about the spare parts. you obviously had a slowdown in Q3. So I was wondering if you could share a little bit your level of confidence in terms of the acceleration you're expecting for Q3 and Q4 and which programs will be driving this. And the second question is on the comment you made on CapEx, potentially slightly lower CapEx to offset some of the DTF headwind to free cash flow. My understanding was that Raytheon was facing actually some slightly higher capex on the back of this, so MRO tooling and potentially investment in spare engine tools. So could you share with us maybe a little bit more on what you're seeing on the capex side for the GTF on your end? Thank you.

Regarding spare parts, I mean, spare parts growth rates are always a bit volatile and it's more due to the fact that the comparison base in Q2 2022 was higher. So it's not that, let's say, the absolute number of spare parts goes down. So now in H1, we are in the magnitude 20% growth rate, and we envision, I mean, the full year expectation is a 20% growth rate for spare parts, and we envision more or less the same level of growth in the second half year. So there's no disruption in spare part sales or something like that. I mean, regarding CAPEX, I mean, we're going to look on CAPEX, not necessarily only for that inspection program. I mean, let's see how the work scope is and what we need on extra tooling or extra, but it's not, I mean, the CAPEX for the inspection program will be a limited number. So that is definitely managed. I mean, we have a CAPEX budget in the magnitude of 400 million annually. So that is, in comparison to that, that's a tiny number. That is, you're gonna look on other CAPEX spendings. Obviously, if we agree with President Whitney that we do X, Y percent of that inspection program, We have to invest into CAPEX, sure, but on the one hand, that will be compensated somehow. On the other side, as I said, compared to the total budget, it's a tiny number.

Maybe just a follow-up. On the total CAPEX that you're spending this year, maybe could you share how much goes to the MRO network?

Yeah. to the MRO network, that's roughly 25%. So in that range, in the 100, 150 million euro range, that is the MRO CAPEX. But that is CAPEX for MRO facilities, not building up new MRO sites or so.

Understood. Thank you very much.

Thank you. We'll now move on to our next question. Phil Buller from Berenberg. May we have your question?

Sure. Hi. Thanks. Good morning. Sorry to labour the point, but obviously a question on the GTF. I guess given that you and Pratt have known about this risk for years now, I don't understand why we're surprised by Pratt being able to share a figure yesterday or why we don't have a very clear view of of what the cost of these inspections and the fix would be in the event that this known risk was realized. So why is that not the case, please? Or is the big unknown here purely in terms of the customer compensation and scaling that? And that's a figure which I understand you couldn't share just yet. So I'm asking really because the market reaction in share prices feels like a lot of the concern is around there being a control or a management issue if we can't put a clear number on this known risk as opposed to it just being a historic quality escape issue. Thanks.

Well, it's difficult to answer because I wouldn't agree to say we've known that risk for years. Again, I think I mentioned that several times today. We've known that the issue exists, but we've not seen, you know, deterministic approach to analyze the life, the possible life of these disks. So that really came in with new calculation methods, updated calculation methods in the last couple of days, maybe 10 days, maybe two weeks. So clearly no issue known in that magnitude for years. So I would disagree. And now we are working on the work scope The work scope will define the AOG situation and the impact on the customers, and we don't have a figure yet. This needs to be tried out, and we need a couple of days. So I'm fully in line with the PrEP message that we cannot give detailed figures, and it doesn't make sense to give a rough order of magnitude and then to call it back in a couple of days. So that's all I can say.

Okay. Thank you.

Thank you. We'll now move on to our next question. Zafar Khan from Societe Generale. Please go ahead with your question.

Thank you very much and good morning, everyone. I have a very basic question and forgive my ignorance here, but the risk and revenue sharing partnership, the agreement, I know it's confidential, so Unfortunately, none of us can have access to that. But what the discussion is suggesting is that one partner can make big mistakes and then everybody suffers proportionately. Am I correct in understanding that? Because here, the high-pressure turbine supply issues solely with crack. MTU do not supply that part, yet you will bear 18% of the cost, and I imagine also the liability with the consequential liability with the airlines. Am I correct in understanding that?

Well, Jeff, we are in a great collaboration with Pratt & Whitney, but these are the terms and conditions of a risk and revenue share. So, yes, you are correct.

But what incentive is there for any of the partners to make absolutely sure that everything is 100%? Because there doesn't seem to be any consequence. Let's say I were a partner in this relationship, and I'm trying to save my spot.

As a consortium, we try to build, develop, and build the best motors, the best performing motors ever. There's no hidden agenda, obviously. the consequences are what you're describing, and we're going to talk to Pratt about this, obviously, but the intention of a consortium, of us as a consortium, is to build a high-performing motor. So, point.

Yeah, I mean, this is like communism, isn't it? Everybody works hard, but you know, the concept is a good one, but what is the check and balance here? I don't understand this. This is Looks like a prat problem, yet your shareholders are bearing 18% of the responsibility for this. I don't understand this agreement. And respectfully, I think it sounds like a pretty, I don't know how to describe this, but it's a pretty crazy kind of agreement saying, you know, you can go ahead and screw things up and I'm going to bear the consequences of that.

Is there any way we can... This is the situation these days, you know, but I'm not going to comment on our collaboration agreement. This is a great partnership.

But would you agree with me that it raises this question in terms of, you know, the equitable basis there for an agreement? One partner can be at fault and everybody suffers.

Well, it could also be the vice versa.

I always look at the downside, and upside looks after itself. Here we've had downside. I think there have been three issues that Rob highlighted in the Raytheon meeting yesterday, and this is the third issue. So anyway, I'm very surprised. It would be very helpful, I think, to all of us looking at MTU, to get better understanding of what the main elements are of this RRSP. I know it's confidential in its nature, but yesterday I had a lot of clients calling up and asking if you guys are on the hook to the same extent that Prats were. And I wasn't really in a position to be helpful to them. So I think it will help us to understand this agreement better, maybe Peter could do a teaching at some stage. So this is an appeal, please.

We should do that today. These are the terms and conditions since 20-plus years, and we're certainly not discussing on the framework of this collaboration agreement today. Maybe we have a separate session, or you can talk to Thomas on this one. Let's not do it in this conference call, please.

Okay, that's fine. And then I have... Just a question on the OEM segment, please, which is the 24.7% margin in the first half this year. I think in the note you say it's a mix of business mix as well as underproportional cost in the first half. How much was that underproportional cost? Can you give us some idea year on year what the difference is and what the margin is? would have been if that underproportional cost hadn't been around?

Well, roughly 20 million or so in that ballpark.

20 million? Yeah. Okay, that's very helpful. Thank you.

Thank you. We'll now move on to our next question. Tristan Sanson from BNP Paribas Exan. Please go ahead with your question.

Good morning, gentlemen. Thanks for taking my question. A few quick ones. The first one, I understand that the 1,200 show visits we're talking about in the inspection process are accelerated or anticipated show visits that were due to happen for most of them in the coming years, which means that on top of the inspection, you will have to complete a number of block D upgrades and other maintenance events. Does it create any supply chain stress here, or can we consider that this part is going to be totally manageable for you securing the right part on top of the HPT disk? That's the first question. Second, it's very simple. Can you put a number today on the total contingencies and provisions that are covering the GTF on the balance sheet? I'm not so sure about what to look at. And third question, between the EBIT adjusted and the EBIT reported in Q2, you have two one-offs that are netting each other. One is a $22 million headwind from litigation. The other one is $21 million tailwind from a provision release related to Ukraine. You could give a bit of color on this. That would be helpful. And if I can squeeze in a fourth one, when do you think you will update the market on the reason of the inspection? You say it's going to take a few weeks to get a better view. Should we wait until Q3 reports or you think together with Pratt you can come up with some more details there than that? Any sense?

Well, let me state again, I begin and then hand over to Peter. First of all, the reason of this inspection we have mentioned now several times. Brad did it yesterday and we did it this morning. It's a material anomaly and we have updated our lysing model and this is the reason why we're now cautious and inspecting these discs. Then again, on the shop visits, these 1,200 are neither additional shop visits nor are they shop visits that are already expected. it's kind of an in-between solution. We have to do the logistics around that, but from the figure 1,200, there will be a certain amount of shop visits that are on top, and this situation is going to be analyzed, and the supply chain out of this topic is not an issue. Again, the disk will be inspected and then will be reinserted into the engine, If everything is fine, fallout rate to be 1%. On the other supply chain issues, on the block D, et cetera, this is normal business as we do since several of months and years. And I told you supply chain is generally improving. So we should see that in shortened turnaround time and then improving the AOG situation towards our customers.

So, I mean, regarding balance sheet positions of the PW1100, we don't split them out by program. But, I mean, it's obviously part of the major part is that PW1100 obviously creates a significant part of our refund liabilities on the balance sheet. But that is created in a regular process. I mean, as I described it before, with every spare part we deliver into the consortium, we put up a provision on the balance sheet for the future issuers. for the future aftermarket cost, basically the shop visit cost. So it's built up by selling spare parts, and it's consumed by receiving the billings from the aftermarket network. But as the market grows, obviously, or the aftermarket grows, in general, that balance sheet provision is built up net.

It's part of the $1.95 billion at the end of June.

It's part of the refund liability.

The total was $1,093,000.

Yes, but it obviously consists of a lot of refund liabilities of different programs, but the major part is, but it's not 90% of the refund liability.

Very clear.

Obviously, it's the biggest program, and it creates a significant share of that position, but it's not, let's say, 80% or 90% or so. Regarding, you asked about the adjustment and these are two points. So the one Ukraine adjustment is the following. So we had last year, I mean, we leased in four engines from lessors and we leased these engines out to Russian operators. So obviously due to the Ukraine war, you don't get the engine back. And we compensated our lessors for the loss of these engines in Russia. And we took the hit last year, so the 20 million, and adjusted it in a positive way. So we adjusted the burden. And this year, but these engines are, we have insurance coverage for these engines, but we couldn't book that insurance claim last year. I mean, under IFRS, you have to have an unconditional cover letter from the insurance company. Otherwise, you cannot book the insurance claim into your account. So we didn't have that last year. Now we have it. We booked the insurance claim, so it's part of the other operating income. It's a positive contribution to other operating income, the $20 million, and adjusted it backwards. So it's the other way around compared to last year. So that's the Ukraine thing. And the other thing, I mean, you might have followed the Raytheon call yesterday or the Raytheon presentation. They had also that we have to go first insolvencies. They are under Chapter 11. And in, let's say, a precautionary move, we fully wrote off the net asset on our balance sheet. And that's worth $22 million. That is airline insolvency or credit risk, as you want to put it, and we have adjusted that.

Okay, that's super clear. Thank you, Peter.

Thank you.

And all the timing on communication?

Yeah, I mean, I think we are in the backseat. Normally, I would say in Q3, if Pratt communicates earlier, then we would follow, obviously.

Yeah, okay. Thank you so much.

Thank you.

Thank you. We'll now move on to our next question. Jorge Gonzalez Saturnil from Aufhauser Investment Banking. May we have your question?

Hello. Thank you very much for taking my questions. In fact, I have two. The first one is more of a clarification regarding the guidance for PCAS flow. Can you clarify, please, if you have already included these potential headwinds for the rest of the year linked to the inspection, or if you still need to study the impact and maybe adjust that later on? I'm especially asking this because yesterday RTX, without specifying any number, I guess there is free cash flow for the year for more or less $500 million. So that will leave a small room for your free cash flow target in the year if I look at the consensus for 2023. So it will be interesting to know that. And then regarding the commented modest effects in P&L from these inspections, Do you see the impact related to more visits, or you are already expecting to maybe move some of the part business or to lose some part business for these potential replacements in the future, in the next few years? Thank you very much.

The first answer is easy. I mean, I answered the question earlier. I mean, I don't know how Raytheon came up with the $500 million guidance. I think that guidance downgrade they did for 2023. Yes, we have taken an assumption on the cash flow burden we have to bear in 2023, and that's included in our view that we can confirm our latest guidance. So, yes, it's included, yeah. I think I didn't get your second question, what really the question is.

Yeah, I was curious the impact in P&L from these inspections, the future, because obviously I understand that the impact in Freecast Flow in 2023 is related to these first 200 quick inspections. But later on, this impact that you are expecting is because you are expecting to to provide some parts for this?

No, I mean, not parts. I mean, as Lars said, I mean, the fallout rate is expected to be quite low. So if you calculate that, 1% on 1,200 inspections is 12 parts, which really would have to be replaced. So the amount of new parts, that is really tiny. So it's no extra stress for the supply chain. It's no no extra incremental cost. So now we have to work out how many additional shop visits that really creates. I mean, we said before, there's a lot of intersection with already planned shop visits in 2024. These 1,000 inspections does not mean we have 1,000 extra shop visits. So as we speak, I mean, the logistics are worked out, but the number of parts is not the cost. I mean, you have Transportation costs, obviously, lease engine support, you have disassembly, assembly work, also might be some compensation for airlines when the aircraft is on the ground. These are the major costs, not so much the spare parts needed.

Okay. Arjan is done. Thank you very much.

Thank you. We'll now move on to our next question. mylene kerner from barclays may we have your question mylene kerner from barclays may we have your question hello hello hello

Milene, we just heard you.

Oh, yes, sorry. Yeah, now I can hear. Sorry, I had an issue with my phone. Sorry about this. Yeah, good morning. So thank you for taking my question. I have two, please, for you, Peter. On the $50 million of positive cost phasing benefit you had in 2021, Could you tell us how much have reversed in Q2 and how much do you expect to reverse in the second half of this year, given that you have now the wage increase that are effective from June? And then within the OEM segment, I mean, the first half benefited from the spare engine mix. What do you expect for the second half?

I mean, the cost benefit has increased a little bit in Q2. I mean, we just spoke about 20, 25 million headwinds we have for half of the year. And I mean, it's going to, let's say, it's going to be in H2, it's going to rewind. So I would say 10 million remind in Q3, 10 million in Q4. So in that ballpark, yes, we have now the, We have now the wage increase since the beginning of June, at least in the German plants, not the international plants. But that's more or less the pattern now. Our cost spending is a little bit shifted to the right in that year. On the other side, I mean, we're going to have a strong H2 regarding military business, for example. So it's... I mean, we are now at more or less half of our, let's say at least half of our guidance EBIT. So we're going to deliver again 400 plus EBIT in the second half year. And the 10 million cost headwind in the second half year is definitely manageable. Regarding spare engine, I think it's going to, it's not only, I mean, it's not only the PW1100, it's also the GenX program, for example. I mean, we have no clear visibility on that one, but I think it's going to be a little bit lower compared to H1 2023, but not significantly.

Thank you. Thank you. We'll now move on to our next question. Bill Buller from Berenberg, please go ahead with your question.

Oh hi, thanks for letting me back in. Just a quick question if I may. You seem relatively confident in the scope being that 99% of these discs will be good to go once inspected or the replacements being limited to 1%. So I guess how do we get confidence in it not being 2% or 10% or some other number? Or is the fact that we're calling out these first 200 inspections, are they going to be providing a something of a sample set for the next 1,000 inspections, please.

Thanks. First of all, these are figures we are receiving from our partners, Pratt & Whitney. And I believe, like we discussed, these inspections have been done in the regular shop visits throughout the recent years. So I would say the confidence should be pretty high. And I'm not saying we're using the next 200 to come up with a potential fallout rate increase or decrease. this figure seems to be coming out of the recent year's shop visits.

Okay, thank you very much.

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

Yes, so thank you very much to everybody. Thank you, Lars. Thank you, Peter. Thank you for the plenty of questions, and yeah, we're perfectly in time. Wish you all a pleasant rest of the day, and for additional questions or remarks, just let us know. Bye-bye.

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