MTU Aero Engines AG (OTC:MTUAY), a leading manufacturer of aircraft engines, reported record adjusted revenues of €6.3 billion for the full year of 2023. Despite a significant charge due to its GTF fleet management plan, the company showed resilience with a strong recovery in the market environment, securing substantial orders and projecting further growth across all business segments in 2024.
Key Takeaways
- MTU Aero Engines achieved record adjusted revenues of €6.3 billion in 2023.
- Adjusted EBIT was reported at €818 million, with a free cash flow of €352 million.
- A charge of USD 1 billion was booked due to the GTF fleet management plan, affecting overall financials.
- Air traffic rebounded to 98% of pre-pandemic levels, with a 10% growth expected in 2024.
- The company secured over $2 billion in orders from international air shows.
- Strategic investments were made in shop extensions and a new geothermal power plant.
- MTU expects group revenues of €7.3 to €7.5 billion in 2024, with an adjusted EBIT margin above 12%.
Company Outlook
- Projected group revenues for 2024 are between €7.3 billion and €7.5 billion.
- The company aims for an adjusted EBIT margin above 12%.
- A low 3-digit million euro free cash flow is anticipated, despite AOG compensation payments.
- A dividend of €2 per share will be proposed at the Annual General Meeting.
Bearish Highlights
- The GTF fleet management plan led to a USD 1 billion charge.
- GTF recall situation is ongoing, with around 350 aircraft grounded.
- The MRO margin is expected to decrease to 7-7.5% in 2024 due to higher GTF volumes.
- Dividend policy adjusted to conserve cash for the next 2-3 years.
Bullish Highlights
- Secured significant orders at international air shows.
- Expansion of facilities in China and investments in new technologies.
- Strong recovery in air traffic and expected growth in military and commercial sectors.
- Positive trends in EBIT adjusted and a strong 9.5% margin in Q4.
Misses
- Delay in engine deliveries for the T408 helicopter due to supply chain shortages.
- Lack of specific guidance on independent MRO growth and GTF inspection impacts.
- Uncertainties around the timing of the GTF maintenance needs estimate.
Q&A Highlights
- Clarification on GTF shop visits contractual obligation: 30% of all visits, not an increase in program share.
- Growth expected from widebody engines in 2023 and narrow-body engines in 2024.
- The GTF inspection program will slightly contribute to spares growth.
- Preparedness for potential delays in the Advantage program due to FAA certification.
- Nickel hedging strategy involves long-term contracts with suppliers, mitigating risk.
MTU Aero Engines has demonstrated a robust financial performance in 2023 and a strategic approach to growth and investment. The company's initiatives in expanding its global footprint, investing in new technologies, and securing a strong order book position it well for future success. Despite challenges such as the GTF fleet management plan and the need to manage cash flow carefully, MTU Aero Engines remains optimistic about its prospects for the coming year. With a clear focus on technological advancement and market expansion, the company is poised to capitalize on the recovering aviation market and the increasing demand for its engine products and services.
Full transcript - None (MTUAF) Q4 2023:
Thomas Franz: 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 more -- 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.
Lars Wagner: Yes. Thank you, Thomas. Good morning, ladies and gentlemen, a warm welcome also from my side. 2023 was indeed a year of contrasts. As you know, on one hand, operationally, MTU is in top form and we once again posted record results for this financial year with €6.3 billion adjusted revenues, €818 million adjusted EBIT and a strong free cash flow of €352 million, 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 USD 1 billion 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 precrisis 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 air shows 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 USD 500 million. Main orders came for GEnx engines 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 disk 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 depths in about 2.5 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 shops in China. The additional shop is expected to start its operation in early '25. 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 V2500 engine. 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 solution. We are working very closely with Pratt & 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 workshops. The defining factor for the program remains the ability to speed up turnaround time and to ensure capability 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 Geared Turbofan has the right forward-looking architecture and is an indispensable part of our technology roadmap towards the 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 2 projects where we are leading the consortiums on these tasks. On the one hand, and 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 led 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 engines to power the future combat aircraft system FCAS. This also comprises a 4-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 ability in the commercial place. And in addition to that, we are working together with Safran (EPA:SAF) from an European team to form an 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. The revenue 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 very strong -- 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 present -- 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 and an adjusted EBIT of €1 billion. 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 USD 1 billion for the GTF fleet management plan. In this slide, we have to balance the interest of both our equity and our debt investors. With this in mind and as announced last week, we will propose a dividend of €2 per share at this year's Annual General Meeting on May 8. 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. I would like to hand over to Peter for the financials.
Peter Kameritsch: Yes. Thank you, Lars, and I would like to welcome also from my side. So let me start with the comparison of our full year 2023 numbers with our respective guidance for the year. Adjusted revenues came in at €6.3 billion at the upper end of our guidance range. We saw 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 and a margin of 12.9%, we ended the year perfectly in line with our expectations. Free cash flow adjusted was €352 million, well ahead of our 2022 achievement. Cash conversion rate 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 the revenue of roughly €5.4 billion, while EBIT reported was negative at minus €161 million. 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. This growth was supported by all business segments. In U.S. dollar terms, organic revenues were up 22%. EBIT adjusted increased 25% to €818 million, resulting in an EBIT margin -- adjusted margin, as just mentioned, of 12.9%. This number also exceeds the achieved adjusted EBIT of the previous record year in 2019, where we had €757 million. Net income adjusted was up 25% to €595 million. 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, 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 fleet management plan increased 21% to roughly €2.2 billion. And within that, military revenues grew 8% to almost €540 million, 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. And within that, organic OE revenues in U.S. dollars were up roughly 30%, which is in line with our full year expectations. Higher GTF deliveries, as well as increased output of [indiscernible] engines and ITT (NYSE:ITT) deliveries, were the main growth factors. On a quarterly basis, OE sales were also up 30%. Organic spare part sales in dollars were up high teens. This growth was visible in all platforms, in particular, widebodies and ITTs. On a quarterly basis, spare part sales were also up in the high teens. Adjusted result, we expect a 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 costs 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 FX rates and higher debt-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. So moving on to the commercial MRO segment on the next page. MRO revenues increased 17% to €4.2 billion, whereas U.S. dollar revenues were up roughly 20%. All engine platforms saw solid demand. GTF overall growth was mainly driven by the continued ramp-up at MTU Zhuhai and EME Aero in Poland. Our lease and asset management business in the Netherlands also booked strong revenues. Within the segment, our GTF 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, EBIT adjusted increased 23% to €329 million, resulting in a margin of 7.8%. The strong margin in the year and especially in Q4 was possible through a few positive trends I'd like to mention. First, the GTF share revenues was at the lower end of our full year expectations while the work scopes turned out to be less dilutive to margins. Second, strong contribution from equity companies, especially from MTU Zhuhai, were very beneficial for the margin. And third, the mix of contracts that work scopes in the independent business continue to be very profitable, as already seen in the third quarter. At this point, I would like to hand back to Lars for some thoughts on our guidance 2024.
Lars Wagner: All right, Peter. Thank you. Yes. For the 2024, 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 result in the group revenues between €7.3 billion and €7.5 billion. This outlook is based on a U.S. 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 1 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 (NYSE:BA) 787 and Business Jet. Also contributing to this will be the first deliveries on the GE9X program. Organic commercial spare parts sales are expected to grow in the low teens range. Spare parts sales should benefit from the ongoing recovery in air traffic and list price increases. Main revenue contributor will be the V2500 and older widebody platforms. The aircraft on ground situation of the A320neo could trigger additional spare parts demand for narrow-body 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 3-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.
Operator: We will now begin the question-and-answer session. [Operator Instructions] We are now going to proceed with our first question, and the questions come from the line of Kseniia Maslova from UBS.
Kseniia Maslova: Kseniia on the line. I have 2, please. So first one on commercial spares outlook, 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 seems 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, '26 and phasing of those has changed since the last update?
Peter Kameritsch: Yes. I mean, coming to spares, yes, it is a cautious outlook that's definitely through that, 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 have 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 1 supplier and so on. So I would say that's the bottleneck, let's say, for aftermarket revenues. That's true for MRO, 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 the airlines. And 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 digit. So our own assumption regarding cash outflow for payments 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.
Kseniia Maslova: Perfect. Can I just clarify one thing on the spares outlook, if you can just help me what pricing growth you're expecting for 2024?
Peter Kameritsch: Pricing will be a little bit -- the price increases will be a bit lower compared to the previous year. So mid- to high single digits, something like that.
Operator: We are now going to proceed with our next question, and the questions come from the line of Robert Stallard from Vertical Research.
Robert Stallard: 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. So 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. .
Lars Wagner: Yes. Well, I start with the GTF and Raytheon (NYSE:RTN) communicated a lot of these news already last week 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 then 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 IT issue and the also proactive fleet management by our customers, I would say still the challenge is ongoing to ramp up MRO capacity and then to reduce the shop turnaround time.
Peter Kameritsch: Regarding dividend, I mean that’s a cautionary stance, I would say. I mean we are at the beginning of 2, 3 years, where we see a 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 investment grade rating is also a very, let’s say, urgent task. So that is -- the €2 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 2 to 3 years, but it’s definitely not a target to reduce the dividend further. So rather at least to maintain the €2 through the 2 to 3 years where we have that situation, but that’s not our dividend forecast or dividend announcement for next year.
Operator: We're now going to proceed with our next question, and the questions come from the line of Phil Buller from Berenberg.
Phil Buller: I have 3, if I may, please. Firstly, on the GTF. It sounds like this situation is relatively unchanged. 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.
Peter Kameritsch: No, not at all. So there's nothing new on other issues. It's just -- it's really a cautionary stance at the beginning of the 2 to 3 years. So that's it. There's no more hidden secret also we could share.
Phil Buller: No, that's right.
Lars Wagner: I said at the beginning, Phil, 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 the GTF fleet management plan. So nothing -- no hidden agenda. .
Phil Buller: Got it. Okay. And then how many of the GTF 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 derisked the current provision in either direction? Or at what point in time should we be more comfortable?
Lars Wagner: 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 middle of September, end of September to induct the first engine. We would say have -- in total, we have probably a high double-digit, low 3-digit number of returns already, and we should come pretty soon to a point where we can estimate what's ongoing it. Everything relies on the supply chain situation and basically on the powder metal and very sense that cautiously that during the year of '24, we will have a good view on the part inflow most likely in the second half of this year. And I would say then we are -- we can be confident on turnaround times on shop visit capacity and then on the financial outlook.
Phil Buller: 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. Can you just 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 is 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 EBIT margin for MRO in 2024, please?
Peter Kameritsch: I mean we talked about it several times on costs on Capital Markets Day. So I mean we get shop visits allocated by i.e., LSE. So the OEM company, which they hold the aftermarket contracts, and we get -- there's a pricing framework for the whole, let's say, GTF MRO network. And based on that pricing framework, I mean, you can maybe generate a low single-digit margin, and that is below our independent margin. And as a consequence, obviously, dilutes the MRO margins. So when the share is higher, it's dilutive to MRO margins. . Typically, we don't give segment guidance. But I mean, if you read our 2024 guidance correctly, I mean we try to, let's say, in the OEM segment, stay at roughly where we were in 2023, so around 22%. And MRO margin is probably due to a higher share of GTF volumes will go down a little bit more in the, let's say, range 7% to 7.5%, but the 7.8% we saw in 2023. So a little bit dilution comes from more GTF right ow. But that will be based on our expectations for the MRO segment, let's say, 2, 3 years ago, where we expect 6% to 7%. We are beyond that. We are better than that.
Operator: We are now going to proceed with our next question, and it comes from the line of Chloe Lemarie from Jefferies.
Chloe Lemarie: I'd like to start with the GTF recall campaign. Just wanting 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 first engines in the shop. I'm not sure if you clarify 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 Zhuhai 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. .
Lars Wagner: I'll start with your operational questions. First, Chloe, I think we -- 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 methods, new engineering methods, new way of this assembly and assembling in order to reduce the shop turnaround time. And we have ideas for both of them are currently in discussion with the network with our partner, Pratt & Whitney, to introduce them as soon as we have the good ideas fixed, and we probably go public that will increase in the or decrease basically the turnaround time. But so far, let's say, we're in line of what we have announced. .
Peter Kameritsch: Sure. Equity result, I mean we had in 2023 a little bit more than €70 million of equity contribution coming from Zhuhai, and that will grow further. So in 2024, going to make a good leap forward and more so than in the coming years. I mean from -- you know that from 2025 on, we have an additional shop capacity for almost 300 additional shop visit capacity there. And from there, we're going to also see more dynamic growth coming out of Zhuhai, that is also very profitable shop down in China. That's why we invested in additional capacity there.
Chloe Lemarie: Perfect. And just if we can have like a technical confirmation service. In Q4, you actually reversed a little bit of the PW adjustment on the EBIT. So just wanted to confirmation that this was just technical and not [indiscernible].
Peter Kameritsch: That’s FX 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 U.S. dollar provision was devaluated a little bit in euro and Zhuhai didn’t want to digest it as a gain. So we adjusted it backwards. So it’s just a technical issue.
Operator: We are now going to proceed with our next question, and the questions come from the line of David Perry from JPMorgan.
David Perry: Actually 3 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 just say a few words on the GTF Advantage? Is it all on track? And the third one is you -- 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?
Lars Wagner: The last one, Peter, it’s easy because, yes, we stick to that target. The second one, the GTF Advantage. It is our next program. And so far, we are in line towards certification 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 in the first one, well, yes, I’m an optimist, Perry. So if I should come out with better news than obviously -- with news that it should be better than forecasted, this was build-out that we did in the last quarter of 2023 and the whole organization of MTU and Pratt & Whitney and partly Raytheon as well is focusing on improving these figures, hence increasing capacity and reducing turnaround time. That’s our goal.
Operator: We are now going to proceed with our next question. And the questions come from the line of George Zhao from Bernstein.
George Zhao: First, on the dividend again. In the past, you've said you had this target leverage of 0.5x to 1.5x net debt to 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 GTF. 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 facilities that you have?
Peter Kameritsch: No. On the leverage, I mean, if you read our 2023 numbers, that we had an EBITDA of €170 million and net debt of €660 million. So we were almost at leverage rate of 4. So, far beyond our target leverage ratio but I mean we still have the target leverage ratio of 0.5 to 1.5 in next year. In 2024, we will be in the corridor again. So because we don't foresee any earnings charge for the GTF issue anymore. So that's clear. As said, I mean the dividend cut was a real precautionary measure, not so much looking at leverage ratio, rather cash flow performance because also rating agencies don't judge MTU based on, let's say, leverage ratio rather on cash flow performance in that period of time.
Lars Wagner: And for -- 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 we -- when we put in the new materials, this number is still in line of what we have discussed, the low 3-digit number for the sharp turnaround time. If the work scope 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.
Operator: We are now going to proceed with our next question. And it comes from the line of Ross Law from Morgan Stanley.
Ross Law: 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, 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? .
Peter Kameritsch: Military was -- there were some engines which we initially thought would be delivered in 2023 for the T408. So the engine for the new helicopter -- transport 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. .
Lars Wagner: 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.
Operator: We are now going to proceed with our next question, and it comes from the line of Christophe Menard from Deutsche Bank.
Christophe Menard: I had 4 quick ones. 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 million 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, I mean, on that front? I mean 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 the recruitment of people and training?
Peter Kameritsch: So guidance for -- I would rather guide for investing cash flow, not for CapEx because under IFRS 16, it can be different in cash flows. 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 now, where we're going to see significant growth. Free cash flow ex-GTF, I mean that is a difficult thing. So -- but I mean, we had cash flow of €350 million last year. We are definitely without any, let's say, airline compensation payment, we would be above €400 million certainly. But it's not -- I mean it's not a black and white thing. So the GTF Advantage program also triggers working capital and so on, so you can strip that out black and white so completely. But that's, I think, that's my view on supply chain.
Lars Wagner: And the last point, Christophe, I think it is 2 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 is preparing to ramp up to higher numbers. When you look at the macro level of -- 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.
Operator: [Operator Instructions] We are now going to proceed with our next question. And the questions come from the line of Milene Kerner from Barclays.
Milene Kerner: I also have 4, please. The first 2 ones are on the GTF inspection again. So firstly, what has been holding the issuance of the final Air Force made 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 this 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?
Lars Wagner: Milene, this is the first time I received this question, and I must admit, I can't really answer what has postponed the issuance. We will come back to you and give an information. On the disk replacement, as far as I know, all the disks that have been replaced are not life-limited anymore. So hence, a new disk replacement.
Peter Kameritsch: Regarding on the V2500 growth, we don't give the exact numbers. But I mean, V2500 in 2023 grew under-proportionately. So we set the 19% or the high teens for the year and V2500 was a little 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 V2500 programs. 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, yes, mid- to high-teens, so in that range. .
Lars Wagner: Tax payment. So if you refer -- do you refer to...
Milene Kerner: In your cash flow statement, Peter, I mean there was a big swing in the tax.
Peter Kameritsch: In the minus €345 million. So that is the reversal of tax shield. So we booked the provision, obviously, which is the €930 million, and that is tax deductible. So you book in the net income, you book tax shields 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.
Milene Kerner: So for '24, we could be now more back to what you had in 2022 then as a base.
Peter Kameritsch: 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.
Operator: We are now going to take our next question, and the questions come from the line of Tristan Sanson from BNP Paribas (OTC:BNPQY) Exane.
Tristan Sanson: I appreciate the time. I have 3 ones, please. The first one is on the MRO division. I noticed on your slide that you have a significant increase in the D&A line for MRO in 2023, meaning that the EBITDA margin actually was really up a lot in '23 versus 2022. Can you explain to us what is driving that increase of D&A in MRO? Is it something structural and seeing related to especially the engine lease business? And a follow-up is I wanted to understand how big is now the contribution of the engine lease business to the dividend. And whether the changes like the size of this business, whether that changes a bit the pattern of development of the profit of that unit? And the final question, I just wanted to get a quick feel of your assessment of the evolution of number of shop visits on the core activities, so not GTF, that you are going to do in 2024 versus 2023.
Peter Kameritsch: MLS, we don't -- I would say we don't strip out numbers for -- you mean, [Netherlands] our own the GTF lease pool, but our own MLS leasing company in the Netherlands.
Tristan Sanson: Yes, correct.
Peter Kameritsch: I mean there we are -- so revenue-wise, we are close to, I would say, €300 million. And I think it's fair to say that we have a margin which is above the average MRO margin and that we will grow. That shows a very dynamic growth you can imagine. MRO, Your question on D&A. I think you have to discuss it with IR. So I don't.
Lars Wagner: And then the shop visits, I mean, we say mid- to high teens. That is 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 increase ex-GTF also double digit.
Operator: We are now going to proceed with our next question. And the questions come from the line of Aymeric Poulain from Kepler Cheuvreux.
Aymeric Poulain: Yes, I just wanted to go back on 2 questions. You did not answer in line. The first 1 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 explanation behind the stronger margin performance? That's the first question. I think David asked about the OEM margin target at 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?
Peter Kameritsch: Last consult V2500 [indiscernible]
Lars Wagner: [indiscernible] What you make out of, you think I didn't answer the question. No, no. Well, I said immediately, yes, David, this 25%, we are keeping up. So don't make a different story out of that. You might have answered that.
Peter Kameritsch: Well, higher share, that's the normal course of the business. I mean we have 25% MRO 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 fleet management program due to the powder metal issue, we will perform more shop business that generates more revenues. And that obviously, a little bit dilutive also to margins in part. So -- but not significantly, obviously, because for the extra shares of everything we do above our contractual obligation of 30% of the shop visits to get better compensation. .
Aymeric Poulain: 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?
Peter Kameritsch: No. We have to do 30% of all GTF shop visits. That’s our contractual obligation. So that’s not the same as OEM section. So we have a program share of 18%. That’s the OE part of the business. And in the MRO words, we do 30% of the shop visits for the GTF. .
Operator: We're now going to proceed with our next question, and the question comes from the line of Ben Heelan from Bank of America.
Ben Heelan: I had 2. 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 what's going on there, and if that's right and if it is why. And then to come back to some of the answers around the spares growth. If you're doing kind of mid- to high single-digit pricing, this guidance of low teens, it seems -- 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, V2500 and the GTF, if there's any color that you can help us with a little bit there. .
Peter Kameritsch: [indiscernible] I would say, I mean we saw in 2023, we saw a majority or much growth comes from widebody. So PW2000, we had the GP7000, GEnx so on. Narrow-body growth was a little bit -- was a little bit muted. I think in 2024, we're going to see a little bit a different picture. So I would rather expect something like PW2000 CF6-80 more or less developing, more or less in a stable manner, and growth really comes more from the narrow-body side. So we expect a good growth in '25 from this jet 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 CF6-80 engines. Still, but the old wide-bodies GP7000 will continue to grow, I would say, and also GEnx, obviously, that transformation shows rather high utilization. So you see higher aftermarket demand year-over-year. So that's going to continue also beyond 2024, that tendency.
Lars Wagner: On the latter one, I don't think we published our independent growth separately. But I said several times, the demand out there is very, very high. And obviously, our tactic is that we try to do as many as possible shop visits for GTF in our 3 facilities that we have mentioned earlier, while preserving our independent customer base, and inducting as many wide-body and other engines as well in our shops to fulfill our promise over there. So there's significant growth possible. We have capacity, so we expect a good growth on both sides.
Ben Heelan: Okay. Great. 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?
Lars Wagner: Little bit, a little bit. Yes.
Operator: We're now going to take our next question, and it comes from the line of Olivier Brochet from Redburn Atlantic.
Olivier Brochet: Yes. I would have 3. 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 or? 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're now getting the older generation. Do they keep them? Do you take them back? So 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 the free cash flow adjusted in your presentation. What has changed versus Q3 or previous years where you were talking about free cash flow? Any differences there or just the name?
Peter Kameritsch: So I take your last question first. So we always publish free cash flow adjusted. But to make it completely clear, it's the free cash flow adjusted. We have in the appendix of the bridge. But the adjustments in the cash flow are really, really tiny. So that is the aircraft financing and that the activity is really low single digits. And then we'll do, let's say, then we invest into bonds or something like [beyond 12 minutes] it's treated as an investment. And so it's burdening.
Olivier Brochet: It's just a label that has changed?
Peter Kameritsch: Yes, exactly. So the contract is a failure, it hasn't changed. That's your question. So nickel hedging, that is really extremely, extremely, extremely tiny. So that is 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.
Lars Wagner: 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 GTF 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 less lots. So the focus is ongoing for the introduction of the base. And we are in final discussions with the FAA. We and Pratt & Whitney, obviously, our partnership is in the final discussion with FAA.
Operator: We have no further questions at this time. I will now hand back to Thomas Franz for closing remarks.
Thomas Franz: Yes. Thank you very much. Thank you all for your participation, for your interesting questions. And yes, thank you, Lars and Peter, for taking the call. And yes, speak soon. Bye-bye.
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