Mtu Aero Engines Hldgs Ag

Good morning, ladies and gentlemen. Welcome to our conference call for MTU's preliminary full-year results 2023. As usual, we will start with a business review presented by Lars. Peter will give you the financial overview, a comparison to our 2023 guidance, as well as a more detailed look into our OEM and MRO segment. Following that, Lars will walk you through the guidance for 2024. This will be the end of the presentation part, and we will then open the call for questions. Let me now hand over to Lars for the review.

Thank you, Thomas. Good morning, ladies and gentlemen. A warm welcome also from my side. 2023 was indeed a year of contrast. As you know, on one hand, operationally, MTU is in top form, and we once again posted record results for this financial year. 6.3 billion euros adjusted revenues, 818 million euros adjusted EBIT, and a strong free cash flow of 352 million euros, we demonstrated again the strength of our company. On the other hand, due to the GTF fleet management plan announced in the second half of 2023, we had to book a billion US dollar charge This resulted in a significant reduction on reported revenues and a loss on reported EBIT. But let me start with the market environment. 2023 was very encouraging. Air traffic has almost fully recovered to the levels we saw before the pandemic. Global passenger traffic reached 98% of its pre-crisis levels and is expected to grow by 10% in 2024, exceeding pre-COVID levels by roughly 5%. Strong demand for MRO services and increasing production rates for new aircraft are further signs that the recovery is nearly completed and the industry is back on track. This upswing is also visible in significant order intakes at the airshows in Paris and Dubai. MTU secured order wins in the value of over $1.5 billion at these trade fairs. And more recently, At last week's Singapore Airshow, this trend continued where we received orders worth 500 million US dollars. Main orders came for a GE NX engine as well as for the GTF on the A220 as well as on the A320. Let's take a look at MTU. Our recent investment in shop extensions has proven to be the right strategy to be prepared for extremely high market demand and increased capacity needs for the GTF fleet management plan. The upgrade and improvement of our facilities is ongoing. Our latest addition is our new turbine disc center in Munich, which will bring a new level of automation to our operations. It is now fully equipped and will start its operation in a few weeks. Furthermore, we celebrated the groundbreaking ceremony of our new engineering center at our Munich site. The construction of our geothermal power plant is progressing as planned. The drilling has started and we are expecting to reach the desired depth in about two and a half months. In the MRO segment, we are seeing progress at the expansion of MTU Zhuhai. The second test cell is running since June and is part of our new MRO shop in China. The additional shop is expected to start its operation in early 2025 After ramping up, it will add an additional annual capacity of 260 shop visits to our MRO network and will primarily focus on MRO for GTF and V25 engines. Now let's focus on the challenges around the GTF fleet management plan. As previously said, I would like to emphasize that MTU is not part of the problem, but we are part of the solutions. We are working very closely with Brett and Whitney to manage the plan in the best possible way as we are assessing options how to increase MRO capacity and to develop intelligent and smart solutions to manage shop visits and optimize work scopes. The defining factor for the program remains the ability to speed up turnaround time and to ensure the availability of exchange parts. While this plan is progressing and expected maximum AOG numbers are updated, for the time being, we are not updating the financial and operational outlook. Anyway, I would like to emphasize once again that the GTF powder metal issue is a manufacturing problem and not a design problem. The gear turbofan has the right forward-looking architecture and is an indispensable part of our technology roadmap towards a sustainable aviation. This brings me to our update of our technology roadmap. As part of the European Clean Aviation Funding Program, we are now focusing on two projects where we are leading the consortiums on these tasks. On the one hand, we continue to drive forward our water-enhanced turbofan concept in the project SWITCH. On the other hand, our activities and work on the flying fuel cell recently lead to the launch of the project HEROPS, Let me continue with the progress in our military technology programs. In 2023, we started development work for the engine to power the future combat aircraft system, FCAS. This also comprises a four-year contract for additional technology studies for the German armed forces. We see great potential for MTU in this project, not only for NEXT European fighter engine, but also to improve our abilities in the commercial place. And in addition to that, we are working together with Safran from a European team to form a European team to explore technologies for an engine for a European next-generation rotorcraft. The target is to equip European armed forces with a purely European helicopter engine. This program could be key to reinforce European sovereignty and strengthen the European supply chain. To wrap the review up, despite the challenges of the GTF fleet management plan, MTU is in excellent shape and all business segments are performing well. We are financially and operationally a very strong company and we see a great future lying ahead of us. In 2024, we will see further growth in all business segments, which I will present to you in a few minutes. We also remain confident beyond 2024. our 8-1-25 target remains unchanged. This means in 2025, we want to generate sales of 8 billion euro and an adjusted EBIT of 1 billion euro. As already mentioned in the beginning, 2023 was a year of records in terms of adjusted revenues and adjusted EBIT, as well as a strong free cash flow. but at the same time we have to deal with the financial burden of 1 billion US dollars for the GTF fleet management plan. In this light, we have to balance the interests of both our equity and our debt investors. With this in mind, and as announced last week, we will propose a dividend of 2 euro per share at this year's annual general meeting on May 8th. We see this proposal as a reasonable balance between the expected cash outflows and the company's strong growth progress. This ends my review on 2023, and I would like to hand over to Peter for the financials.

Yes, thank you, Larsen, and welcome also from my side. So let me start with a comparison of our full year 2023 numbers with our respective guidance for the year. Adjusted revenues came in at 6.3 billion euros at the upper end of our guidance range. These are growth in both commercial segments in line with our expectations. Only in our military segment growth was slightly below our guidance. With an EBIT adjusted of 818 million euros and a margin of 12.9%, we ended the year perfectly in line with our expectations. Free cash flow adjusted was at 352 million euros, well ahead of our 2022 achievement. cash conversion rates stood at 59%. Further, I want to highlight the significant impact the Fleet Management Plan had in 2023. This can be seen in the reported numbers where we showed a revenue of roughly 5.4 billion euros, while EBIT reported was negative at minus 161 million euros. Turning the page and comparing adjusted numbers of 2023 with 2022. Total adjusted group revenues increased 19% to a new record high of 6.3 billion euros. This growth was supported by all business segments. In US dollar terms, organic revenues were up 22%. EBIT adjusted increased 25% to 818 million euros, resulting in an EBIT adjusted margin, as just mentioned, of 12.99%. This number also exceeds the achieved adjusted EBIT of the previous record year in 2019, where we had 757 million euros. Net income adjusted was up 25% to 595 million euros. In this figure, we are applying a slightly higher normalized tax rate of 27%, resulting from a different distribution of profits in our global network. Free cash flow adjusted was at 352 million euros, up 8% from 2022 levels. So let's move on to the business segments and let me start with the OEM segment. Total OEM revenues adjusted for the impact of the GTF managed fleet management plan increased 21% to roughly 2.2 billion euros. And within that, military revenues grew 8% to almost 540 million euros, which is slightly below our full year expectation due to some delayed deliveries. Adjusted commercial business revenues in euro rose 25% to 1.6 billion euros. And within that, organic OE revenues in U.S. dollars were up roughly 30%, which is in line with our full-year expectation. Higher GTS deliveries, as well as increased output of BISCHAT engines and IGT deliveries, were the main growth factors. On a quarterly basis, OE sales were also up 30%. Organic spare part sales in dollars were up in high teens. This growth was visible in all platforms, in particular, white bodies and IGTs. On a quarterly basis, spare part sales were also up in the high teens. On even adjusted results, the expected decline in profitability in the fourth quarter with a margin of 18.1% compared to the other quarters of 2023. This development was based on the already discussed pickup in cost over the course of the year, for example, salary increase in mid-2023. And secondly, we saw a higher share of installed engine deliveries, especially in the fourth quarter. Year over year, we saw a slightly better profitability, mainly resulting from achieved ethics rates and higher ad equity results. However, we finished the year with a slightly lower profitability than expected. This is the result of military revenues being a bit behind and spare parts revenues being at the lower end of our expected range. Moving on to the commercial MRO segment on the next page, MRO revenues increased 17% to 4.2 billion euros, whereas US dollar revenues were up roughly 20%. All engine platforms saw a solid demand. GTS MRO growth was mainly driven by the continued ramp-up at NTU Shuhai and at EMB Aero in Poland. Our lease and asset management business in the Netherlands also booked strong revenues. Within the segment, our GTS MRO share was roughly at 35%. On EBIT adjusted, we saw a constant improvement over the year, and especially in Q4, we had a very strong EBIT margin of 9.5% in that segment. Year-over-year, EBITDA trusted increased 23% to 329 million euros, resulting in a margin of 7.8%. The strong margin, especially in Q4, was possible through a few positive trends I'd like to mention. First, the GTF share on revenues was at the lower end of our full year expectations, while the work scopes turned out to be less relative to margin. Strong contribution from inequity companies, especially from MTU Shuhai, were very beneficial for the margin. And third, the mix of contract and work scopes in the independent business continued to be very profitable, as already seen in the third quarter. At this point, I would like to hand back to Lars to some thoughts on our guidance 2024. All right, Peter, thank you.

Yeah, for the 2024, and the market environment continues to look very positive with air traffic finally exceeding 2019 levels. Supply chain is improving, but remains a challenging factor, while demand remains very promising. Nonetheless, the operational environment will be very much influenced by the execution of the GTF fleet management program. Overall, we expect growth in all business segments, which we expect to reside in the group revenues between 7.3 and 7.5 billion euros. This outlook is based on an US dollar FX rate of 1.10. Within that, we expect military revenues to grow in the low to mid-teens percentage range, driven by solid deliveries, while revenue contribution from FCAS demonstrator phase one builds up. Organic commercial OE revenues will be up in the low to mid-20% range. Main drivers here will be higher production rates for the A320neo, A220, and E-Jets, and higher deliveries for Boeing 787 and business jets. Also contributing to this will be the first deliveries on the GE-9X program. Organic commercial spare part sales are expected to grow in the low teens range. Spare part sales should benefit from the ongoing recovery in air traffic and list price increases. Main revenue contributor will be the V-25 and older wide-body platforms. The aircraft on ground situation of the A320neo could trigger additional spare parts demand for narrowbody engines. And organic MRO revenues will grow in the mid to high teens percentage range. Positive market environment should further support independent MRO demand. Strong increase in GTF MRO shop visits due to the fleet management plan are also part of this outlook. As described, business developments provide a slight headwind for profitability we expect to be able to generate an EBIT adjusted margin above 12%. We expect a low three-digit million euro number in free cash flow, mainly affected by AOG compensation payments due to the GTF fleet management plan. This marks the end of the 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'd like to ask a question, please press star 1, 1 on your touchstone telephone. Once again, please press star 1 and 1 on your telephone. Thank you. We are now going to proceed with our first question. And the questions come from the line of . Please ask a question. Your line is open from UBS. Thank you.

Hello, Xenia on the line. Thanks for taking my question. I have two, please. So first one on commercial spares, organic growth guidance for 24 looks quite cautious considering supportive backdrop and then also commentary from your peers. Can you help us understand assumptions behind the number and in particular what pricing growth you are baking for this year? And my second question will be on your free cash flow outlook. Again, the guidance seemed to reflect a degree of caution. Can you just help me to understand moving parts year on year and also maybe around how your expectations around GTF payments for 24 and 26 and phasing of those has changed since the last update? Thank you.

I mean, coming to a spare, yes, it is a cautious outlook that's definitely true that we could see tailwinds. from, let's say, from the grounding situation, but on the other side, we saw already in 2023 that we had some supply chain constraints. That was also the reason why our spare parts performance in 2023 was at the lower end of our guidance range, so high teens instead of, let's say, low 20s. So we still have to look at the supply chain. So especially in narrow-body programs, we had some incidents at suppliers You know that we had a fire in the factory of one supplier and so on. So I would say that's the bottleneck, let's say, for more aftermarket revenues. That's true for MO, but it's also true for spare parts. Cash flow, cash flow guidance. I mean, the outcome in 2023 will heavily depend on the phasing of the payments towards airlines. There, at the beginning of the year, the situation is cloudy and unclear. So we could see the situation that, let's say, some payments move to the right, so rather into the year 2025, the cash flow will be higher, or we have more payments in 2024 that the cash flow will be lower. So that's why, let's say, the guidance for our free cash flow is a wider range than usual, so low triple digits. So our own assumption regarding cash outflow for the payment is still let's say, more or less unchanged and in line with what RTX gave you at their earnings call. So they provide also numbers for their outflow. So there's no reason to deviate from that assumption currently. But we will have more clarity as we go through the year.

Perfect. Thank you. Can I just clarify one thing on the spares outlook, if you can just help me with pricing growth you're expecting for 2024? Thank you.

The pricing increases will be a bit lower compared to the previous year, so mid to high-end digits, something like that.

Okay, understood. Thank you very much. That's helpful. Thanks.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Robert Salaud from Vertical Research. May we have your questions? Thank you.

Thanks very much. Good morning. Good morning. A couple from me. First of all, on the GTF recall, from what RTX said, it sounds like you're going to be seeing a smoother profile, I suppose, where you could put it on the engine shop visits. I was wondering if that helps you out in terms of how that could impact the workflow and also the cash flow impact down the line. And then secondly, on the dividend, I was wondering if you could elaborate on the announcement you made the other day or the board made the other day, and what this exactly means. Does it mean you're actually going to cut the dividend going forward, or there won't be a dividend going forward? I was wondering if you could help on that. Thank you.

I started with the GTF. Rayson communicated a lot of these news already last week. It is actually true that we see a reduction of the peak that was previously anticipated to be around 600, 650 for the end of this quarter or the second quarter. This peak is reducing. I would say the challenge is still ongoing to find significant shop visit capacity to induct all these engines. It's still too much than we see capacity for this year. So it is positive news that the peak is reduced, and that is due to, on the one hand, the timing of the AD issue and the also proactive fleet management by our customers. But I would say still the challenge is ongoing to ramp up MRO capacity and then to reduce the shop turnaround time.

Go ahead. Regarding dividend, that's a cautionary stance, I would say. I mean, we are at the beginning of two, three years where we see significant cash outflows, so we have to balance our capital needs. On the one hand side, we still have to invest heavily into our business, or into our capacity, into R&D, into technology. On the other hand side, we want to pay a dividend, and we also, I mean, we have to look also on the rating agencies, so to maintain our indefinite graduating is also a very, let's say, urgent task. So that is, the two euro is, I would say, a balanced approach of all the stakeholders' interest, so I would call it like that. And going forward, we have not defined yet a new, let's say, payout ratio for the next two to three years, but it's definitely not the target to reduce the dividend further, so rather, at least to maintain the two euros, through the two to three years where we have that situation. But that's not our dividend forecast or dividend analysis for next year.

All right, thank you.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Phil Bula from Burenberg. May we have your questions, please?

Hi. Good morning. I have three, if I may, please. Firstly, on the GTF, it sounds like the situation is relatively unchanged, or if anything, the cash profile you talked about might be smoother than originally anticipated. But on that dividend policy shift topic, it does feel as though something has changed somehow. So I guess I'm wondering if there is anything broader than just the GTF powder issues we're focused on, i.e., has there been any other wider supply chain issue that may have emerged that is embedded in the revised view on the cash profile? That's question one.

Thanks. No, not at all. So there's nothing new on other issues. It's really a cautionary stance at the beginning of the two to three years. That's it. There's no more hidden secret or so we could share.

No, that's right.

As I said at the beginning, all traffic lights show a green light going forward in terms of demand, both on OE and on MRO, also on military side. So the only issue we are facing here is the cash drain from that GTS fleet management plan. So nothing, no hidden agenda.

Got it. Okay, thank you. And then how many of the GTS that do need to be grounded are now currently on the ground? And at what point will we have carried out enough of the fixes in order to have de-risked the current provision in either direction? At what point in time should we be more comfortable?

That's a good question. I would say the first answer is we are currently at around 350-ish, I would say, aircraft on ground. That is according to the forecast. We have started, as you know, in the middle of September, end of September, to induct the first engines. We would say, in total, we have probably a high double-digit, low three-digit number of returns already, and we should come pretty soon to a point where we can estimate what's ongoing. Everything relies on the supply chain situation and basically on the powder metals. And Rayson said cautiously that during the year of 2024, we will have a good view on the parts inflow, most likely in the second half of this year. And I would say then we can be confident on turnaround times, on shop visit capacity, and then on the financial outflow.

Thank you. And finally, just a bit of help or clarification, please, just in terms of accounting. You talked about the GTF maintenance accounting for about 35% of MRO revenue. I'm keen just to understand a bit better really how the mechanics of that work exactly. I think you said that revenue was slightly below your expectations, but the work scope was slightly better. So I'd just like to better understand really how revenue and earnings are being booked on the GTF and how we should think about the the EBIT margin for MRO in 2024, please. Thanks.

Well, I mean, we talked about that several times on the calls on Capital Markets Day. So, I mean, we get shop visits allocated by IE, LSE, so the OEM company, and they hold the aftermarket contracts, and there's a pricing framework for the whole, let's say, GTF MRO network, And based on that pricing framework, you can maybe generate a low single-digit margin, and that is below our independent margin, and as a consequence, obviously dilutes the MO margins. So when the share is higher, it's diluted to MO margins. Typically, we don't give a segment guidance, but if you read our 2024 guidance correctly, try to, let's say, in the OEM segment, stay at roughly where we were in 2023, so around 22%. And MO margins probably, due to a higher share of GTF volumes, will go down a little bit more in the range 7% to 7.5%, not the 7.8% we saw in 2023. So a little bit dilution comes from more GTF work.

Understood.

Thank you very much. Based on our expectations for the MO segment, let's say two, three years ago, where we expected 6% to 7%, we are beyond that now. We are better than that.

Anything.

Thank you. We are now going to proceed with our next question. And it comes from the line of Chloe Lemagie from Jefferies. May we have your questions?

Yes, good morning. Thank you for taking my question. I'd like to start with the DTF recall campaign. I just wanted some clarification in terms of where you've identified opportunities to reduce the wait time, how you're progressing in terms of unlocking those opportunities. Also, in terms of the first engines in the shop, I'm not sure if you clarified that, but the number of days that they have spent and how they've been returning to the fleet at this stage. And on the MRO margin, so you mentioned your high contribution was strong in 2023. I was also wondering if there's anything maybe exceptional in this performance or if it should continue into 2024. Thank you.

Let's start with your operational questions first, Chloe. I think with the first shop visit I mentioned, we are pretty much in line in the shop turnaround time of what we have expected. But it is our challenge and our ambition, obviously, as I said previously, that we want to drive down the turnaround time. And that comes by pure capacity in terms of wing-to-wing turnaround time and secondly by new technology. methods, new engineering methods, new way of disassembly and assembling in order to reduce the shop turnaround time. And we have ideas for both of them. I'm currently in discussion with the network with our partner, Pratt & Whitney, to introduce them. And as soon as we have the good ideas fixed, then we probably go public, because that will increase and decrease, basically, the turnaround time. But so far, let's say, we're in line of what we have announced.

Shuhai equity results we had in 2023, a little bit more than 70 million euros of equity contribution coming from Shuhai, and that will grow further. So in 2024, we're going to make a good leap forward, and more so than in the coming years. I mean, from 2025 on, we have an additional shop capacity. almost 300 additional shops with capacity there. And from there, we're going to also see more dynamic growth coming out of Shuai. So that is a very profitable shop down in China. That's why we invested in additional capacity there.

Perfect. And just if we can have a technical confirmation. So we've seen Q4, you actually reversed a little bit of the PW adjustment on the EBITs. So I just wanted to do a confirmation that this was just technical and not a changing view.

That's only technical. That's ethics driven. So the spot rate at the end of the year was a little bit higher compared to Q3. And so we had to, the US dollar provision was devaluated a little bit in Euro. And we didn't want to digest it as a game. So we adjusted it backwards. So it's just a technical issue.

Perfect. Thank you very much.

Thank you. We are now going to proceed with our next question. And the questions come from the line of David Perry from JP Morgan. May we have the question?

Yeah. Hi, Lars, Peter, and Thomas. So three from me, please. The first one is, Lars, when you said in your opening comments there's no change to your operational or financial guidance on the GTF at the moment, Would it be wishful thinking to think that when, if, when or if you do update us, it could be a better update rather than just a negative update? Or is that too optimistic? The second one is, could you say a few words on the GTF advantage? Is it all on track? And the third one is the OEM margin came in a little bit lower than we thought at the beginning of the year. Do you still stick to the 25% OEM margin target, please? Thank you.

The last one, Peter, is easy, because yes, we stick to that target. The second one, the GDS Advantage, it is our next program, and so far we are in line towards certification and enter into service in the beginning of next year. As you know, this program should incorporate all the block fixes and the upgrades and the lessons learned of what we have seen in the GTF program so far and should be a super-performing engine starting then next year and being the predominant choice for the larger single A321 long-range and extra-long-range fleet. And the first one. Well, yeah, you know, I'm an optimist per se, so if I should come out with better news than obviously, or with news, then it should be better than forecasted. This was a build-up that we did in the last quarter of 2023, and the whole organization of MTU and Pratt & Whitney, and partly Rayson as well, is focusing on improving these figures, hence increasing capacity and reducing turnaround time.

Thank you.

Thank you. We are now going to proceed with our next question. And the questions come from the line of George Sao from Bernstein. May we have your question, please?

Hi, good morning, everyone. First, on the dividend again, in the past, you said you had this target leverage of 0.5 to 1.5 times net EBITDA. Is that still your target leverage? And what will be the expected 2024 year-end leverage following the reducing reduction in dividend? Because it looks like you would have been on the low end of it, even if you had kept the same payout ratio. And the second one, just on GPS, in the last quarter, you said a low triple-digit number in the turnaround time, but that was before the heavier work scope. So, I guess, what is it now at the facility that you have? Thanks.

Now, on the leverage, I mean, if you read our 2023 numbers, that we had an EBTA of 170 and a depth of 660. So, we were almost at a leverage rate of four, so far beyond our target leverage ratio, but I mean, we still have the target leverage ratio of 0.5 to 1.5, and next year, in 2024, we will be in the corridor again, because we don't foresee any earnings charge for the GTF issue anymore. So that's clear. As I said, I mean, the dividend cut was a real a real precautionary measure, not so much looking at leverage ratio, rather cash flow performance. Because also rating agencies don't judge NTU based on, let's say, leverage ratio, rather on cash flow performance in that period of time.

And again, for the operational question, it is, as a matter of fact, the GTF has several work scopes. We call them light work scope, we call them heavy work scope, we call them a smart work scope, and every work scope has a different exchange mechanism or replace mechanism, so you can't really put it on one line. For the heavy work scopes, where we incorporate all the block patches and fixes, and when we put in the new material, this number is still in line of what we've discussed, the low three-digit number for the shop turnaround time. If the work scope is is easier or smarter, then this could shift into a double-digit timing. So it really depends on what we have to do with that engine.

All right, thanks.

Thank you. We are now going to proceed with our next question. And it comes from the line of Russ Law from Morgan Stanley. May we have your questions?

Hi, everyone. Thanks very much for taking my questions. First one on military. Can you just talk us through the exact drivers of the miss there and what caused those delays? And equally, how should we think about your guide for 2024 in military? Is there a catch-up effect of the low to mid-teens guide, or is everything just shifted to the right? And then secondly, on the dividend cut again, obviously, this is designed to conserve cash within the business. Is it therefore fair to assume, given the timing of this decision, that your discussions with Pratt on compensation or at least some sort of help with the cash impact from the GTF have not progressed as you may have hoped?

Thanks. Military was some engines which we initially thought would be delivered in 2023. for the T-408, so the engine for the new helicopter from Sikorsky, that moved a little bit to the right. So that was rather driven by, I would say, supply chain, a little bit shortage in supply chain and everything. So the whole program moves a little bit to the right, but only slightly. So it's not that we recover completely in 2024.

On the second question, you can probably understand I don't do that publicly. We are in good discussion with our partner, Pratt & Whitney, and I wouldn't deteriorate from that message. The dividend cut was, as Peter previously mentioned, a balance between what we want to give back to our investors and what we think we need to invest in our company to profit from the growth period that is in front of us. And that was a decision we have done in the past couple of days and weeks. But don't make any connections to discussions with Pratt & Whitney.

Okay. Thanks very much.

Thank you. We are now going to proceed with our next question. And it comes from the line of Chris Menard from Deutsche Bank. May we have your question, please?

Yes. Good morning. Thank you for taking my question. I had the four quick ones. The first one is you mentioned on several times the need to invest in new capacity and new programs. So what would be the R&D and CapEx guidance for 2024? That's the first one. The free cash flow, I understand that the range is pretty wide. I mean, low triple digit can be anywhere from 100 to, I don't know, 300 million or more. Can you help us frame this? I mean, I understand that there is some volatility, but Can you help us understand a little bit what would be the conversion, the cash conversion ex-GTF? Would it be 60%, 70%? So that's the second one. I mean, bouncing on the last question, your share of the GTF in 2024, I mean, in the MRO mix is now 40 to 45. So it's probably exceeding a little bit your normal share in the program. So is it a good reason to think that you will be compensated by Pratt on that front? Is it another angle to look at this? And the last question is on supply chain and HR. You say supply chain is improving. Is HR also improving or you still have some issues with recruitment of people and training?

I would rather guide for investing cash flow, not for CAPEX because under IFRS 16, it can be a different pair of shoes. So investing cash flow should stay rather stable. So around, if you look at the cash flow statement, roughly $300 million cash outflow for the different things we invest in. R&D, obviously, I mean, self-funded R&D will grow, I would say, slightly, but really only slightly, but obviously customer-funded R&D will go up significantly due to the phasing of the FCAS program. So we're going to see significant growth. Free cash flow ex-GTF, I mean, that is a difficult thing. But, I mean, we had cash flow of 350 last year. We are definitely without any any, let's say, airline compensation payment, we would be above 400, yeah, certainly. But it's not, I mean, it's not a black and white thing. And so the GTF program also triggers working capital and so on, so you cannot strip that out black and white so completely, yeah. But that's, I think that's my view.

Supply chain. And the last point, Christoph, I think it is, two years ago, where I said we have a slight labor issue. Since then, I don't see any labor issues in any part of the world for our own MTU facility, nor do I see any supply chain hiccups right now for the MTU perimeter. So our perspective on our supply chain is strong and healthy, and it's preparing to ramp up to higher numbers. When you look at the macro level in our industry, then for sure we have some labor issues and probably some supply chain issues, but this should be commented by the other companies themselves.

Okay, thank you. Thank you very much.

Once again, as a reminder, to ask a question, please press star 1 1 on your touchtone telephone. Once again, it's star 1 1 on your touchtone telephone. Thank you. We are now going to proceed with our next question. And the questions come from the line of Mylene Kerner from Barclays. May we have your question, please?

Yes. Hello, Lars, Peter, and Thomas. Thank you for taking my question. I also have four, please. The first two ones are on the GTF inspection again. So, firstly, what has been holding the issuance of the final Airworthness Directive? Then my second question is, on the MRO that you have performed, have you received and replaced full life disk on any of the GTF that you have done? My third question is on the V2500 engine, if you can clarify how the spares revenue have performed last year and what you expect for 2024. And then I have a quick one on the accounts. Why has your tax cash pay been so high in 23 when we compare for 22? And what do you expect for 24? Thank you.

Marlene, this is the first time I received this question, and I must admit I can't really answer what has postponed the issue. We will come back to you and get information. On the disk replacement, as far as I know, all the disks that have been replaced are not life limited anymore, so hence new disks replacement.

Regarding on the B2500 growth, we don't give the exact numbers, but I mean B2500 in 2023 grew under proportionally, so we set the 19% or the high teams for the year, and B2500 was a bit below that. due to, as I mentioned before, especially supply chain issues. So there was a fire. I think we mentioned it also in previous earnings calls in the facility of one supplier, important supplier, the B25 program. So that prevented higher spare parts growth. And I mean, in 2024, I would say the V2500 will grow a little bit over proportionally compared to our low teens number. So rather, yeah, mid to high teens, so in that range. Tax payment, so if you refer, do you refer to... In your cash flow statement, Peter,

I mean, there was a big swing in the tax.

Minus 345, so that is the reversal of the tax shield. So we booked the provision, obviously, which is the 930 million euros, and that is tax deductible. So you book internet income, you book tax shield, and obviously the tax shield is not cash flow. You don't get the money, obviously, so you reverse it in the cash flow statement now.

So for 24, we could be now more back to what you had in 2022 than as a base.

Yes, exactly. I mean, as an assumption, I mean, we have the expected tax rate of 27%, and that is the run rate tax payment.

Okay, great. Thank you.

Thank you. We are now going to take our next question. And the questions come from the line of Tristan Samson from BNP Paribas Exxon. May we have your question, please?

Yes. Good afternoon. Thanks so much for taking my question. I appreciate the time. I have three ones, please. The first one is on the MRO division. I noted on your slide that you have a significant increase in the DNA line for MRO in 2023, meaning that the EBITDA margin actually was really up a lot in 2023 versus 2022. Can you explain to us what is driving that increase of DNA in MRO? Is it something structural? Is it related to especially the engine-less business? And a follow-up is I wanted to understand how big is now the contribution of the engine-less business to the MRO development and whether that changes the size of this business, whether that changes a bit the pattern of development of the profits of that unit. And the final question, I just wanted to get a quick feel of your perception of the evolution of number of shop visits on the core activities for NorthGTF that you're going to do in 2024 versus 2023. Thank you so much.

And MLS, we don't, I would say, we don't strip out numbers for it. You mean our Netherlands, our own, so not the GTF lease code, but our own MLS leasing company in the Netherlands, huh?

Yeah, correct.

I mean, there we are. So revenue-wise, we are close to, I would say, 300 million euros. And I think it's fair to say that we have a margin which is above the average MO margin. And that will grow, that shows a very dynamic growth you can imagine now. Emma, your question on T&A, I think you have discussed it with IR, so I don't... I will follow up.

Thank you. And then the shop visits, I mean, we say mid to high teens, including the GTF. I would say I see... like I said, a strong demand, and demand is higher than capacity, so you should see that increased ex-GTF also as double-digit.

Very clear. Thank you.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Member Rick Poulin from Kepler-Shiver. May we have your questions, please?

Yes, thank you very much. Good morning everybody. I just wanted to go back on two questions you did not answer in the line. The first one from Christophe on the growing share of GTF work in the MRO. Is it because of the higher share of the total program of GTF and therefore more money coming from Pratt & Whitney on that GTF work in your MRO, and is it one of the explanations behind the stronger margin performance? That's the first question. I think David asked about the OEM margin target, the 25% And you didn't answer it. I'm just wondering, is it because you see pressure, additional pressure, perhaps commercial effort that are needed to maintain your market share or other IFRS 15 effect on the spare margin? Could you help us on that, please?

Last confirmed to 25%. On the letter I see it says, fulfilling prophecy. What you make out of you think I didn't answer the question. No, not at all. I said immediately, yes, David, this 25% we are keeping up. So don't make a different story out of that. You might have not heard that.

Well, the higher share, that's a normal cost of the business. I mean, we had a 35% MO share, more at the lower end of our expected range in 2023, and in 2024, it will move up. I mean, also, in part, driven by the seed management program due to the powder metal issue, it will perform more shop visits, it generates more revenues, and that obviously is a little bit allusive also to margins, in part. But not significantly, obviously, because for the extra shares or everything we do above our contractual obligation of 30% of the shop visits, we get better compensation.

I'm not sure I followed. What you said is that your share of the total GTF program has increased from 25% to 30%. Is that what you said?

No. We have to do 30% of all GTF shop visits. That's our contractual obligation. So that's not the same as the OEM section. So we have a program share of 18%. That's the OE part of the business. And in the MRO world, we do 30% of the shop visits for the GTF.

Okay. Thank you.

Thank you. We're now going to proceed with our next question. And the questions come from the line of Ben Hillen from Bank of America. May we have your questions, please?

Yeah, morning. Thanks for fitting me in. I had two. So firstly, if I look at the MRO guidance, you've talked about the GTF share getting to 40% to 45%. If I do that math for mid to high teens, it's really not implying a huge amount of growth in the independent MRO kind of mid-single digit. I was just wondering if you could Give us a little bit of color as to as to what's going on there and if that's right and if it is and if it is why and then to come back to some of the answers around spares growth. if you're doing kind of mid to high single-digit pricing, this guidance of low teams does seem very, very low from a volume perspective. So I was wondering if you could talk a little bit through your expectations for the different elements of the portfolio. I'm thinking things like CF6, B2500, and the GCF, if there's any color that you can help us with a little bit there. Thank you.

On the spares, I would say, I mean, we saw in 2023, we saw a major, much growth comes from white bodies, so PW2000, we had the GP7000, GenX, and so on. Narrow body growth was a little bit muted. I think in 2024, we're going to see a little bit different pictures. I would rather expect something like PW2000, CF680, more or less developing more in a stable manner, and growth really comes more from the narrow-body side, so we expect a good growth in AD25. For BISCHET engines, obviously, still IGTs will grow in 2024, so that will be rather the sources of growth, not so much the, let's say, PW2000, CF680 engines still, but the old wide-bodies GP7000 will continue to grow, I would say, and also GenX, obviously. That platform shows a rather high utilization, so MBCC higher aftermarket demand year over year. So that's going to continue also beyond 2024, that tendency.

On the latter one, I don't think we publish our independent growth separately, but I said several times the demand out there is very, very high. Obviously, our tactic is that we try to do as many as possible shop visits for GDF in our three facilities that we have mentioned earlier while preserving our independent customer base and inducting as many white body and other engines as well in our shops to fulfill our promise over there. There's significant growth possible. We have capacity, so expect a good growth on both sides.

Okay, great. Thank you. But just a quick follow-up on the spares. I mean, you mentioned, I think, in your opening remarks that the GTF inspection program is going to contribute a little bit to that spares growth. Is that a significant contribution this year or not really?

A little bit. A little bit.

Okay. Okay. Thank you both. Appreciate it.

Thank you. We're now going to take our next question, and it comes from the line of Olivier Brochet from Redburn Atlantic. May we have your question, please?

Yes. Good afternoon, Peter and Lars. I would have three. First of all, on the advantage, to follow up on the question from David, If we assume that, for instance, it may slip because the FAA has certification delays, what happens? Can you ship baseline engines to airline? And then what happens next in terms of the contractual relationship you have with them and the fact that they were supposed to get advantage and they are now getting the older generation? Do they keep them? Do you take them back? That's the first question. The second one is on the nickel. The price evolution of late has been what it has been. Is that an issue with your nickel hedging, do you think, or are you fine on this front? And the last one is a quick question on the presentation slides. You talk about a free cash flow adjusted in your presentation. What has changed versus or previous years where you were talking about free cash flow? Any differences there or just the name?

So I take your last question first. So we always published free cash flow adjusted, but to make it completely clear, it's the free cash flow adjusted you have in the appendix of the bridge, but the adjustments in the cash flow are really, really tiny. So that is aircraft financing and that activity is really low single digits and let's say we invest into bonds or something like beyond 12 minutes, it's treated as an investment. It's just a label that has changed. Yeah, exactly. The content is the same but hasn't changed. Thank you. Then your question. Nickel hatching, that is really... extremely, extremely, extremely tiny, so that is absolutely, absolutely no issue. So we protect us against nickel price volatility rather with long-term contracts with our suppliers. So we are not very active in, let's say, nickel forward contracts or things like that. Don't worry about that.

Okay. Don't worry about that either. I mean, I have no signs currently that the advantage is moving. significantly to the right. And your question whether we could supply GCF base, obviously, yes. I mean, the introduction of a new engine model is slowly increasing the delivery rate of these new engines. We are fully prepared to deliver as many base engines as necessary, but we are also working fully in order to certify and introduce the base engine. as it is coming as discussed with a lot of patches and lessons learned. So the focus is ongoing for the introduction of the base, and we are in final discussion with the FAA. We are, Brett and Whitney, obviously, our partnership is in final discussion with the FAA.

That's helpful. Thank you so much.

We have no further questions at this time. I will hand back to Thomas Franz for closing remarks. Thank you.

Yes, thank you very much. Thank you all for your participation, for your interesting questions. And, yeah, thank you, Lars and Peter, for taking the call. And, yeah, speak soon. Bye-bye.