Welcome to the Conference Call on MTU Aero Engines Q1 2022 Results. For your information, the management presentation, including the Q&A session, will be audiotaped and streamed live or made available on demand on the Internet. By attending in the conference call, you grant permission for audio recordings intended for publication on the Internet to be taken. The speakers of today's call are Mr. Reiner Winkler, Chief Executive Officer, and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.
Thank you, Crystal. Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q1 2022 results. We will start with a review and some key messages presented by Reiner. Peter will start with a financial overview and a more detailed look into our OEM and MRO segment. After that, Reiner will share our view on the current situation and the remainder of 2022. After that, we will open the call for questions. Let me now hand over to Reiner for the review.
Yeah. Thank you, Thomas, and also a very warm welcome from my side. Let me start with the market environment. The positive recovery trend continued in February. Global air traffic improved to roughly 54% from 2019, driven by strong domestic demand. In 2022, passenger traffic is expected to reach 74% of 2019 levels, and cargo traffic is expected to remain elevated above pre-COVID levels. However, the impact of the war in Ukraine, as well as the zero COVID strategy in China, creates some uncertainties that need to be closely monitored. Let me now share some of our key messages we discussed with investors and analysts over the last few weeks. The activity in our OEM and MRO segment is ramping up, which requires additional manpower.
Currently, we are facing some staff absence due to a high number of COVID cases in our shops, but are seeing a decline in the daily number of cases. In the coming months, it will be key to increase our workforce and to train and qualify our new employees. From a general demand situation, we are convinced that there will be sufficient market demand in the next few years to justify higher production rates. With our existing infrastructure, we are very well-positioned for the future. Consequently, we are continuously evaluating the necessity of investments and other measures in preparation for higher production rates. Supply chain management is challenging but remains stable at the moment. We are monitoring the situation very closely. We are profiting from our strategy of two or three suppliers for certain components to secure the availability of all materials.
Most of our crucial suppliers are larger companies that are well-positioned in the market and are able to manage the current environment. A very limited number of suppliers source titanium directly from Russia. In total, this amounts to 10% of usual yearly volume. However, we have sufficient alternative sources in Europe and the U.S. and already have sourced enough material in order to secure our production until year-end and further. With regard to the short-term price increases, we have a certain layer of protection due to the broad use of long-term supply contracts. On the other side, contracts usually allow to pass price increases towards our customers. In our military business, we are currently evaluating requests from the German Armed Forces for additional spare parts and engines. Additionally, the prioritization of MRO services is under evaluation in order to increase the availability of the existing military aircraft fleet.
In the medium term, we expect further revenue benefits to be possible. Let's have a look on a few key highlights from the first quarter, 2022. Recently, Air Canada has increased its order for A321XLR aircraft and announced its engine selection for the GTF. The order has a volume of 36 aircraft and 14 options. This is a great proof of the GTF's position, especially in the upper end of the A320 family, with Air Canada being a new customer for IAE on the A320. On Wednesday this week, Boeing announced a further postponement of the entry into service of the 777X to 2025. We will take the respective measures within our company to adapt to the new timeline.
In March, we signed an agreement with Pratt & Whitney to introduce the GTF engines for the A220 and Embraer E2 jets into our MRO product portfolio. This portfolio expansion further strengthens our position as the leading MRO expert in the market. EME Aero, our MRO joint venture in Poland, will carry out the maintenance of these GTF engine types and has already successfully completed the first shop visit for the PW1500G engine. The PW1900G engine will follow next year. On our MRO business, MTU Maintenance is the first MRO provider to perform engine test runs with sustainable aviation fuels.
Testing on the V2500 engine with a 10% SAF blend began already in November last year and will be extended to other engine types. For future engine tests, it is intended to increase the SAF content up to 50%, which is currently the maximum blend limit permitted. At MTU, we are using SAF early on and promoting it to use to our customers. JetBlue and LATAM are the first customers to support this initiative with their V2500 engine fleets. At its meeting in March, our supervisory board agreed to the dividend proposal of EUR 2.10 per share for our upcoming AGM on May fifth. This is an increase of EUR 0.85 compared to last year. With a dividend payout ratio at 32%, we are back on track of reaching our target of 40% within the coming years.
Finally, based on the results for the first quarter, we are able to confirm our outlook for the current year. This reflects our current assessment and may be subject to adaptations regarding the current developments in Ukraine, Russia, and the development of air traffic in China. I will provide some more details in a few minutes, but first, let me hand over to Peter for the financials.
Yes. Thank you, Reiner, and a warm welcome also from my side. For the first quarter, 2022, total group revenues increased 19% to roughly EUR 1.2 billion. In the quarter we had a substantial tailwind from the FX rate, so in U.S. dollar terms, revenues were up 11%. EBIT adjusted increased 52% to EUR 131 million, resulting in an EBIT margin of 11%. Net income adjusted increased by 60% to EUR 93 million, and the free cash flow with EUR 134 million is a strong start into the year. Main reason is our strong incoming customer payments following our strong business performance in Q4 and dividend payments from associated companies. In our adjusted earnings numbers, we have adjusted EUR 52 million of one-off effects caused by the war in Ukraine.
Main effect was a write-down on our participation in the engine program PW1400G-JM for the Irkut MC-21 aircraft. Jumping into our business segments and starting with the OEM division. Total OEM revenues increased 50% to EUR 386 million. Military revenues are strongly up 25% to EUR 108 million, mainly driven by spillover effects from EJ200 export engines from Q4 2021 into Q1 2022. Commercial business revenues rose by 11% to EUR 278 million, and within that, organic OE sales in US dollars were down by around 15%, driven by lower GTF and GEnx deliveries in Q1 2022. GTF deliveries will pick up over the next quarters, and also GEnx deliveries are expected to restart mid of the year or Q3 in the year.
Organic spare parts sales in US dollars were up in the high teens year-over-year, mainly driven by narrow body engines. This business mix resulted in a strong EBIT increase of EUR 78 million. EBIT margin improved to 20% in the segment. Switching to the commercial MRO segment. Reported MRO revenues increased 21% to EUR 890 million, while US dollar revenues were up 12%. The GTF MRO revenue share came in a bit lighter than our expectations for the full year. EBITDA adjusted increased by 34% to EUR 53 million, resulting in an EBIT margin of 6.4%. The higher EBITDA adjusted margin was the result of a favorable business mix. At this point, I would like to hand back to Reiner for some words on our guidance 2022.
Yeah. Thank you, Peter. The first quarter results were broadly in line with our expectations. Therefore, we confirm our guidance for the full year. We see overall improvements in air travel, especially with a decline in COVID infections and the lifting of travel restrictions. However, there are some developments that might impact this outlook. China's zero-tolerance policy towards COVID and its impact on air travel, as well as the impact of the ongoing war in Ukraine, might affect this outlook. Furthermore, supply chain stability remains the challenging area of action. We will monitor these developments very closely in the coming months and update our outlook if necessary in the course of the year. For our total group revenues, we confirm our expectation at EUR 5.2 billion-EUR 5.4 billion based on an FX rate of 115.
Within that, we expect the military revenues to be up high single digits, commercial MRO revenues to be up in the mid- to high-20 range, commercial OE to be up mid- to high-teens, spare parts to be up in the mid-teens. The EBITDA adjusted in absolute numbers should grow in the mid-20s% range, and our cash conversion rate should be in the mid- to high double-digit % range. Therefore, thank you very much for your attention, and we are now ready to answer your questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and then one on your telephone. The operator will announce your name when it's your turn to ask a question. In case you wish to cancel your question, please press the pound key. Mr. Ben Heelan from Bank of America, may we have your question?
Yeah. Morning, everyone. Thanks for the question. So I saw some headlines this morning around you confirming a narrow body production increase. We heard about a new deal with Safran this morning. I was wondering if there's any color that you can give us on what that means for you for 2024. That would be the first question. Then the second question would be on Zhuhai. How is that being impacted at the moment, if it is being impacted by China? What's going on in China and how we should think about that. Then thirdly, on your comments on labor, is labor constraint something that could be an issue as we move into Q2 as well?
Is that something that you have line of sight on, getting resolved? Thank you.
Maybe I start with the first question regarding production rates. We said this morning, yes, there's a similar, let's say, way of an agreement, as Safran mentioned this morning with Airbus to get, let's say, in minimum 1 to 1.5 year in advance, an agreement about the production rates. That means now for 2024. We will not provide the exact numbers, but what we can say, yes, there is a similar, let's say, agreement with Airbus, as they said. We are sure that the market demand is there for this additional production rates. Then we have to look what will come next. That means for 2025 or later on. It's too early now, definitely.
Regarding China, I think in absolute terms, it's okay still. We see very high volatility in the traffic development in China, but still our shop in China is, I would say, the workload is okay. Last one, labor. There are some challenges to, let's say, to get all the people, but I would say that it's not really a constraint we are facing with. It's we are hiring on the one side, engineers, especially for the expected European fighter program, and also we expect via blue collars for the expected ramp up of production rates. I would say it's not a big challenge.
I mean, I would add that especially our suppliers in the MRO divisions, so outside vendors, so for where we outsource repairs to third-party shops, especially, I mean, the U.S. shops typically, they are very aggressive in workforce cuts, and so they have issues to rehire. We see that turnaround times of parts repairs are longer, definitely. That increases also turnaround time in our MRO shops, for example. While we don't have issues or limited issues, as Reiner mentioned, in our own shops, there could be challenges in the supply chain, especially from the U.S.
Just a quick follow-up on the rate comments. Is it fair to assume that the rate will go up in 2024 for you from a deliveries perspective versus 2023? Is that a fair assumption to make?
Yes. It's a fair assumption. Sure.
Cool. All right, great. Thank you.
Thank you. Our next question is from Robert Stallard from Vertical Research. May we have your question?
Yeah. Thanks so much. Good morning.
Morning.
Morning.
I've got a couple of questions for you. First of all, the first quarter margin in the OEM division was very strong. Do you expect that to ease in subsequent quarters as the mix of new engines, particularly the GTF, starts to head higher? Secondly, you commented, Reiner, on the German defense budget increase. Is it realistic to expect any sort of increase from that in 2022, or is this more 2023 and beyond? Thank you.
I mean, regarding the OEM margin, yes, we had a 20% margin, strong increase. I mean, it was driven by a bit stronger military business as we saw a 25% increase in the commercial division. We had obviously a decline in OE shipments driven by GEnx and PW1100G-JM, but also on the other hand side, a strong growth in spare parts business, so in the high teens range. Definitely, I mean, if you read our guidance, I mean, we expect, I mean, the press release two days ago said, I mean, the 70 PW1100G-JM engines moved into the you know in the following quarters. I mean, there is a recovery plan for the deferred PW1100 shipments.
OE will be stronger in the next quarters. On the other hand side, we expect a continuous growth in spare parts levels. We won't see a strong decline in the OEM margin in the following quarters, so.
Regarding the military business, I would say for 2022, it's a limited potential to increase maybe a little bit more spare parts or services, but the main impact will come in the coming years, not so much for 2022. Maybe a small portion, but I would guess the majority of the impact will come 2023 onwards.
That's great. Thank you very much.
Thank you. Our next question comes from Mr. George Zhao with Bernstein. May we have your question?
Yes. Hi, good morning, everyone.
Hi.
Hi.
I guess two related questions. First, you know, a sizeable portion of your narrowbody spares revenue comes from, you know, engines on the flight-hour contract. So how much pricing can you pass with the escalation clauses for those engines under contracts as opposed to the, you know, the time and material where you can push through the pricing escalators annually? Second question is, you know, we've seen strong narrowbody traffic recovery, but most of that has been driven by the new aircraft, and the V2500 cycles has recovered slower, versus the, you know, the GTF. So is that a downside risk for your spares recovery trajectory? I guess, I mean, what's embedded in your forecast regarding specifically the V2500 cycles? Thanks.
I mean, in our forecast, and also, we are perfectly aligned with Pratt & Whitney, and they expect something like a 15% increase in shop visits on the V2500. I think we don't look at the cycles specifically rather in shop visits, not number of shop visits, and there the assumption is a 15% increase in shop visits, obviously also with a higher work scope per shop visit.
Pricing on the FJ.
Yeah, typically the labor rates on the flight hour, you can adjust it. The flight hour rates are adjusted annually with a certain index, yeah. That is also embedded there, yeah. Typically, I mean, you have to do that. In a 10 years contract, you cannot fix the rates for 10 years.
Right. I guess, I mean, do you have as much flexibility to push through pricing for those flat hour contracts versus time and material?
That's not a flexibility. It's a fixed formula how that works. You cannot increase the pricing. I mean, as in a time and material contract where you increase the price list every year. You cannot react in this 10-year contract as flexible as in the time and material environment. Sure. Yeah.
All right. Thank you.
Thank you. Our next question comes from Olivia Charley from Goldman Sachs. May we have your question, please?
Hi. Hi, Reiner. Hi, Peter.
Hi.
Thanks very much for taking my question. I have two actually. The first one is just to kind of follow up on the pricing comment. I was just wondering, earlier in the week, Raytheon said that they'd put their pricing up for this year by about 6%, which wasn't gonna cover all of their kind of costs on some of those spare parts coming through this year. I was just wondering if. They said they were expecting there might be a bit of a headwind to margin from that.
I was just wondering if that was a sort of similar price that you've increased by, and whether there's any kind of risk at that price hike that was put through in the fourth quarter of last year sort of wasn't enough to cover some of the cost inflation that you might be seeing. My second question was just sort of around China and traffic, and just kind of what percentage of your fleet is exposed to China. It would be good to kind of hear if your factories are still open there. Again, Raytheon earlier in the week was saying that one of their factories in Shanghai was closed currently. Just would be good to kind of hear your thoughts on that. Thanks very much.
We are not in Shanghai. We are in Zhuhai.
Yeah, just more generally on China.
I mean, I think 15% of the worldwide narrowbody fleet is located in China, so 15% of V2500, 15% of the CFM56. Traffic has declined sharply due to the lockdowns, definitely. You can see that in the daily flight figures or in the RPK numbers. Typically these lockdowns are released after 30-60 days, if you look in the past. There is a certain risk for V2500 and CFM56 shop visits in our shop in Zhuhai.
Up till now, as Reiner mentioned earlier, I mean, the shop is full due to the fact that especially in Q4, we had a very strong deliveries to Zhuhai. That is a certain kind of risk which we have to monitor closely. Spare parts price increases, I mean, we are, let's say a shareholder or a risk and revenue share partner in the program, so we participate in the price increases, Pratt & Whitney, so the engine subsidiary of Raytheon does. So we have the same price increases on the program we are on with Pratt & Whitney as Pratt & Whitney has. So there's no other price increase from our side.
You have also in mind there is a time lag. I mean, it's not if we see actually, let's say increases of material costs or labor of some whatever number, that's not automatically transferred into the contracts because in some cases you have long-term contracts with pricing. It's not that the actual number exactly impacts your profitability in the contracts. That's what you have also to have in mind.
Okay. Thank you. That's very helpful.
Thank you. Our next question comes from Christophe Menard from Deutsche Bank. May we have your question?
Yes. Good morning. Thank you very much.
Morning.
Thank you for taking my question. Morning. A few quick questions. The first one, I understand you had longer turnaround times in MRO in Q1. Is it the same across the industry? I mean, does it mean that you could lose some market share around this, or it is just the norm at the moment? That's the first question. The second question is related to your Russian exposure in terms of MRO. Is it negligible, or do you have actually some V2500 or a little bit too V2500 there, or you used to maintain them? The third question is around German defense. I think in the past we discussed Tornado replacement program around 2024.
Do you think chances that this could move forward and that it could positively impact your 2024 kind of, guidance or vision or plan you presented, to us in the past in terms of, military revenues?
Let me start with the turnaround time in MRO division. I mean, I do not expect to lose market shares from that because, as Peter said, a lot of these issues are not caused by our own facilities. It's more that we have outside vendors, for example, having some issues, and I would guess that also the competitors use the same or similar outside vendors. I think everybody in the industry is faced with the same, with similar issues regarding that issue. Defense budget or the defense situation, yes, Tornado replacement, I would not guess that it would be put forward. Our expectation is from 2025, and then for the next, whatever, 3-4 years the replacement will take place. It's our guess as of today.
Regarding Russia, I mean, we have roughly 60 aircraft with our engines operating in Russia, so 20 with the V2500, 40 with the PW1100G-JM. It's a very low number as a percentage of our fleet. Wouldn't expect a lot from Russia.
Okay. Thank you very much.
Excellent. Yeah. Thank you.
Thank you. Our next question comes from David Perry from JP Morgan. May we have your question?
Morning, Reiner and morning.
Morning.
I've just got one question. It's a bit more detailed than I normally ask on a call, but in your annual report, which came out a few weeks ago, I noticed you got a lot of cash, a lot more than normal out of your associates in terms of the dividends you received. In your press release today, you make a short comment about strong cash coming out of the associates. Has something changed in your relationship there that's allowing you to pull more cash out? Is there any guidance for this year, how much cash you'll get out of that business and perhaps ongoing?
No, I mean, what we meant regarding the associate, the company issued dividend out of the lease cost of the company which operates the lease pool of the PW1100G-JM, G. That entity distributed a dividend in the magnitude of EUR 40 million this year.
Sorry, 2021.
2022. No, I mean, I meant in Q1 2022. That you see it also in the cash flow statement in the other line that EUR 40 million increase compared to Q1 2021 is the dividend which we received out of the lease company where we are an 18% shareholder as which is our program participation on the PW 1100 engine. I mean, in the past, we contributed a lot to the building up of the lease pool. We injected equity there and now, I mean, the lease pool is operated, generates EBIT, generates cash and we receive as a shareholder dividend out of that entity. There's no real detailed guidance for that one.
That's a bit of a volatile number. Yeah.
I mean, in your accounts last year you had EUR 85 million dividends received. It's about a third of your cash flow.
We also receive, for example, dividends out of Zhuhai. Zhuhai is equity accounted. There's a policy that 50%-60% of the net income is distributed via dividends and so on. Obviously Zhuhai, the EBIT or net income of Zhuhai increases in the course of the years, and we get more and more dividends out of Zhuhai.
That bit sort of stable and easy to forecast. This lease pool number, you say we sort of extrapolate that forward. Is that sort of one off?
The line is very bad, David. Can't hear you.
Sorry. I'm just saying. The Zhuhai bit I think is fairly easy for us to model a standard payout. This cash coming out of the lease pool, is that a sort of temporary issue or is there a lot more to come?
Not a lot more to come. That is a permanent thing, but not always, in that magnitude. Yeah. It will.
Okay.
It will always be there, but not always. Let's say EUR 40million-EUR 50 million per year. Yeah.
Okay. Thank you very much. Appreciate it, sir.
Welcome.
Thank you. Our next question comes from Chloé Lemarié from Jefferies. May we have your question?
Yes. Thank you. I have a few. First one is I think I missed the comment you made on the spares momentum. Could you tell us what it was organically in Q1 again? Second is actually on the shop level, shop visit level in China at the moment. How does it compare to the low point of 2020 so that we have a sense of the downside risk there? Finally, just coming back on the cost inflation questions that were already asked. I mean, can you quantify roughly the impact that you've been seeing so far on margin and what potential measure you've taken, or if it's just purely offset by the escalation clauses that you have? Thank you.
Organic spare parts sales in US dollars were up 19%. Up till now, we haven't seen really impact from cost inflation because, I mean, in Germany, we have regarding labor cost inflation, we will see the next round of negotiations with the unions.
End of the year.
End of the year. We're gonna see probably the increase rather in 2023, as Reiner commented, on the supplier side, I mean, we have long-term contracts, so the pricing for 2022 is more or less fixed, I would say. That's true for the raw materials, for the semi-finished goods here in the OEM division, but also obviously for the spare parts in the MRO division, there's a fixed pricing. Price increase is rather something which we're gonna feel in 2023. Regarding-
The China shop visit? Yeah.
China shop visits, I mean, that is currently, I would say down something like 30%, but rather sequentially. We had very strong deliveries in Q4, so incoming shop visits, so that the induction by pipeline in front of the shop was quite full. The shop also is quite full. Now, I mean, due to the fact that on the one hand side, the 737 fleet is grounded in China, and flight activity has been reduced. Sequentially, the induction or the deliveries to the shop is on a lower level now.
Yeah. Compared to the low point of 2020, roughly how-
I don't know.
You don't know? Okay.
Can't say that.
Thank you anyway.
Thank you.
Thank you. Our next question comes from Harry Breach from Stifel. May we have your question?
Yes. Hello, Reiner. Hello, Peter. Hello, Thomas.
Hey.
Hi.
Hi. Maybe just a few, hopefully quite easy ones. Maybe just to start with commercial MRO, can you? I think, Peter, you might have said that the mix of GTF versus legacy engine revenues in the first quarter was maybe a little bit lower than you expected. Can you share a number with us at all of that and what you're expecting now that the full year will turn out like? Also thinking about commercial MRO, I think back in February on the last call, you said that demand had been very strong. There were a number of engines outside Hannover and perhaps other facilities as well. Can you give us any idea about how you're seeing sort of current demand for commercial MRO?
Moving over just a little bit in terms of sort of supplier purchasing and long-term contracts. I know clearly you have a large supplier base and a number of contracts. Is there any feeling you can give for us about the sort of average contract length you have with your suppliers? Anything like that sort of. Effectively, should we think about supplier cost increases as sort of fading in over a number of years? Or do you have a large proportion of your contracts that would be renegotiated around the same time? Very last question, if I can, just sort of turning over to the issue of defense spending again, just in Germany.
For you guys, is there any opportunity in terms of work to improve the availability beyond what you do with your Cooperative Model contracts at the moment? Is there any sort of, if you will, opportunity on that sort of support or availability side to help the Defense Ministry? Beyond that, sort of what do you think maybe the most promising opportunities are for additional revenue for MTU, possibly in the coming years?
Okay. Maybe I start with your first two questions. PW1100G-JM share, that is, that was in Q1 in a 30% range, so it was a bit lower. I mean, for the full year, we expect something in the range of 40%. It was currently, as I said, a bit lower. Market demand is, I mean, the picture is a bit more diverse. I mean, I mentioned earlier the situation in China, where deliveries to Zhuhai are currently. I mean, coming out of the base business, V2500 and CFM56 is a little bit weaker, but also, I mean, we could divert some engines, PW1100G-JM also to Zhuhai to be done because we introduced the PW1100G-JM in Zhuhai last year.
There's more capacity for doing PW1100G-JM shop visits down in China, in China. Generally speaking, I mean, the market demand is strong in the MRO, so we have a full induction pipeline in Hannover. Also, I mean, North American carriers, European carriers, preparing for a strong summer season, continued strong demand from the freighter operators, from the customer base in Hannover. CF34 business in Berlin has recovered strongly. Overall, we see a very healthy demand in the global MRO business, I would say, with the little bit of the exception of China due to the lockdown situation.
Regarding supplier contracts, I don't have the exact number in mind, but I would guess that the typical, let's say, range is about 3-5 years contracts we sign. I mean, there's not a clear strategy, but I would also expect that every contract has to be negotiated at the same time. I mean, it's an ongoing, I would say maybe similar as our hedging policy. It's an ongoing process to extend the contracts, and not every contract, as I said, at the same time.
Therefore not a specific risk at a specific point in time. In the military business, I would say the short term, maybe especially for next year, is more the, let's say, increasing spare parts level for the Air Force, and some additional service business in that area. Maybe also some spare engines. It's limited, I would say it's not a EUR 50 million chunk or something like that. And mid to long term, it's the replacement of the Tornado, as we discussed before, where we see high probability that the Eurofighter will get a huge portion of that existing Tornado fleet. It's then the heavy helicopter program. There's been some announcements this week that selection has already been decided.
On the other side, we have heard signals that the decision will be prepared in May between Sikorsky and Boeing. If it's the Sikorsky, it's the engine we are participating in. Last but not least, it's the FCAS program, the new European fighter program. After the election in France, we see a high probability that this contract will be signed, let's say, in the second half of this year, mid to the end of the year.
Yeah. Great. Thank you. Thank you very much.
Thank you. Our next question comes from Miro Zuzak from JMS Investment. May we have your question?
Yes. Hello, gentlemen. Thank you for.
Hello.
Taking my questions. I have actually a couple of them. I'd like to take them one by one if okay for you.
Sure.
The first one is regarding the impairment that you took, I think, on the R&D expenses. Could you just comment a bit on what that was and whether we basically can think of a normalized gross profit margin? If I add back the EUR 40 million that you booked into the COGS, that you had basically an underlying gross profit margin of 16 and 16.4%. Whether this would be like a base gross profit margin going forward, that would be the first question.
I mean, what we did, I mean, the PW1400, which goes on the Irkut MC-21 aircraft, I mean, there is a dual engine choice. There's one engine, as I said, the PW1400, which is very, very close to the PW1100, which goes on the A320neo family. So there was you had to do some adaptation work to fit the engine on the MC-21 Irkut aircraft. It's not in our work share, but we have obviously to share according to our program share of 18%, the adaptation R&D which Pratt & Whitney did. So we paid for that adaptation work according to our program share.
The payments were capitalized, which is obligatory under IFRS. Now, obviously, due to the fact that on the one hand side, we have the sanctions so that does not allow us to deliver the PW-1400 to Russia. On the other hand side, Russia communicated actively that they only rely on their domestic engine, the PD-14. So there's obviously no market for that product anymore. We had to write down the PW-1400 fully.
You have two impairment numbers in your presentation. One is on page 13, which is 39 on the R&D. The other one is on page 11, it's 52 under the adjustments.
The 39 is for the PW1400, so that's the impairment on the R&D. As we also pointed out in the press release and so on, the total impairment regarding Russia is EUR 52 million. There was some write downs also on receivables out of the MRO market, that were beyond the PW1400.
Okay. Also booked in the COGS, so the underlying margin would even have been even higher, 17.5%.
Yeah.
This is like the baseline that you expect now going forward. Should it increase from here on? You mentioned something that the MRO margin should increase from this point on. That would also be the case for the gross profit margin?
No, we don't guide for gross profit margin.
Okay.
I mean, we expect the MRO margin to be in the area of 5%-6%. I mean, it's always a question, what is the exact customer mix? What is the exact work scope? What is the spare parts content? What is the labor content? So that can be a bit volatile in that range. I mean, the Q1 was extraordinarily high as pointed out due to the fact that PW1100 share was in the area of 30%. These are shop visits which we have a very high material content in it, and material does not generate EBIT in the MRO division. So
Okay.
Now that we have a lower PW1100, higher independent MRO market, so the margin is a bit more favorable in Q1.
Okay. The shop utilization in MRO at the moment, so in Q2 versus Q1, is it? What is the level right now, and what is basically the capacity that you still have to increase?
No, maybe don't talk about Q2. In Q1, the utilization was very high, actually. The shops, more or less they were all full. Also, Schwer was full. I mean, what is currently a little bit our problem are a bit longer turnaround times due to the fact that outside vendors or the backflow of outsourced repair parts is longer than usual due to the fact that, I mean, the U.S., especially the U.S. shops have cut workforce aggressively and now struggle with their turnaround times, which impacts us.
Okay. You guide for an increase in revenues in mid- to high 20s. Now you had 20.8% in Q1, so it should increase from now on. You still have enough capacity for that? Is that very much back-end loaded or is it very linear?
No, it's. I mean, you do not forget that maybe we have a lot of that MRO revenues come from the PW1100, and we have the joint venture in Poland with Lufthansa, which is ramping up. I mean, so that will ramp up throughout the year. The MRO growth definitely will be back-end loaded, so it grows quarter-over-quarter.
Okay. The next question, sorry, that might be a bit of a basic question, but your guidance, you talk about organic revenue in your guidance, and what do you mean exactly by this? This is before FX changes and is it also before pricing changes or is it?
No, FX.
Including pricing? Just FX.
Including pricing before FX.
Okay. Thank you. The last one, if I still may. You talked about the military potential for the privatization of MRO.
No.
In the beginning of the presentation, you said that that's being discussed with the German ministry that potentially the MRO of the fighter jets or the engines of the fighters are being privatized, or didn't I get this correctly? Or is it?
No, that's not correct. We have for two engines a so-called Cooperative Model, which is now running for 15 years or more, but it's not the potential to increase that.
Okay, cool. Thanks a lot. Thanks for taking my question.
You're welcome.
Thank you. As a reminder to ask a question, please press star and then one. Our next question comes from Sam Vashi from RBC. May we have your question? Please check that your line is not on mute.
Dropped out, huh? We take Christophe.
We'll move to our next question. Our next question comes from Tristan Sanson from BNP Paribas. Your line is open.
Yes, good morning, guys. Thanks for taking my question. I've just a couple. I wanted to follow up a bit on the theme of cost inflation. I understand that cost inflation will be limited this year for you because you have long-term supply contracts and labor cost renegotiation that will happen in the back end of the year, which mean that I understand that it's gonna be more an issue for 2023. It's a bit early to talk about this, but do you have a feel for if the labor inflation continues and the raw material prices do not go down, what is the type of pressure that you will feel by then? You provided us at the end of last year with this ambition to exceed in 2024 to 2019, a bit adjusted.
Do you see a scenario where raw material prices and labor inflation would require you to put in place any additional cost saving initiatives to achieve that target? In that case, what is a typical type of cost saving initiatives that you could put in place quickly in order to protect the bottom line? Thank you.
I mean, it's a bit difficult because I mean, on the one hand side, yes, we have that inflationary pressure. On the other hand side, we have the ability to pass part of that inflationary pressure on to customers with a certain timeline. I mean, you can, if labor costs are increased, you can adjust obviously your labor rates in the MRO contracts. You have also that CPI basket, which is used to increase the pricing for new engines.
Obviously as Greg Hayes two days ago mentioned in his call, if the inflationary pressure is high, they could also use the spare parts price list and increase spare parts pricing for 1-2 years, maybe above the typical 5%-6%. There are also measures on the revenue side to counter part of that. On the other hand side, we have currently an FX rate of 1.05, which is obviously also benefiting our business. That's the flip side of the coin. Maybe not near term, because as you know, we have our hedging scheme in place, but that allows us also to secure mid- to long-term hedges, which are very favorable.
There are a lot of gives and takes, but I wouldn't walk away from the picture that we in 2024 can achieve or exceed the 2019 levels regarding EBIT.
Just to maybe phrase it another way. Are you today at group level contemplating the possibility of putting in place new cost saving initiatives just as a contingency plan in case it's required or you don't feel you need the, you're not at a level where you need to prepare for this?
I think we are not on the level where it's necessary. You look on the other side, we expect the ramp up in the production and I mean, to implement a cost reduction program at the same time when we ramp up the facilities. I mean, it would be very, very tough.
I mean, we do everything, as Peter said, to counter these issues, but I wouldn't see it as such a big issue as you discussed it today. I mean, yes, it's a headwind. On the other side, we have currency being a tailwind. Therefore, let's wait and see, but I wouldn't expect too much for this year and even for next year.
That's very useful, Carlo. Many thanks.
Thank you. Our next question comes from Miro Zuzak from JMS Investment. May we have your question?
Yes, thanks for taking my follow-up. Just one last. The selling cost of EUR 68 million or SG&A basically, sorry, was the fifth at EUR 12 million difference between the 52 and the 39 or the EUR 13 million difference booked in this line for the Russian impairment, or was it?
The depreciation on the receivables is typically booked into the SG&A line. Yes.
Okay. There, an underlying figure would not be.
No
68, but something like 55.
Yeah. Right. Right.
Thank you. Goodbye. Good luck.
Thank you.
Thank you. Our next question comes from Sam Vashi from RBC. May we have your question?
So we can-
Second try. We cannot hear him, huh?
Once again, if you're muted, please unmute your line or pick up the speaker phone.
So I think, given that we don't get a connection, I just can offer that you connect to the IR team, and we'll get things done. Other than that, we have no additional questions, and I think this marks the end of our call. Thank you for participating and for asking the questions. Yeah, stay safe and have a good rest of the day. Bye-bye.
We want to thank Mr. Reiner Winkler and Mr. Peter Kameritsch and all the participants of this conference. Goodbye.