Welcome to the conference call on MTU Aero Engines first quarter results 2023. For your information, the management presentation, including the Q&A session, will be audio taped and streamed live or made available on demand on the Internet. By attending in the conference call, you grant permission for audio recordings intended for publication on the Internet to be taken. The speakers of today's conference call are Mr. Lars Wagner, Chief Executive Officer, and Mr. Peter Kameritsch, Chief Financial Officer. I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.
Yes, thank you. Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q1 2023 results. We will start with a review and some key messages presented by Lars. Peter will start with the financial overview and a more detailed look into our OEM and MRO segment. After that, Lars will share our view on the current challenges and opportunities in light of our 2023 guidance. After that, we will open the call for questions. Let me now hand over to Lars for the review.
Thank you, Thomas. Also welcome from my side. Good to have you guys with us. Let me start with the market environment. Passenger traffic is further improving, strongly supported by travel policy relaxation, mainly also in China. In February 2023, global passenger traffic reached 85% of 2019 levels. Domestic traffic was almost back on 2019 levels, and international traffic has recovered to roughly 80%, 78% in general. Cargo traffic remains roughly 3% above pre-COVID levels, showing a slight slowdown to recent tailwinds. This development supports the strong demand environment we are currently in, while additional MRO shop visits are still limited by supply chain and labor shortages. Industry-wide supply chain pressure is expected to ease later this year, which will support increased output of new and overhauled engines.
While there are signs of improvements with some key suppliers, we see new difficulties rising. As one example, one of our key supplier had a fire in one of its facility, with the potential to further tighten the availability of certain parts. Good progress on our new military engine program, the next European fighter engine. In March, just recently, we formally kicked off the program within MTU and have already allocated more than 100 engineers working on this game-changing platform. We continue to hire people for the program and are targeting a speedy progress on the technology for this engine. Regarding our capacity expansion, good news from two international sites in the MRO segment. MTU Serbia, our new parts repair shop with a planned maximum capacity of 400,000 repair hours annually, has started its operations at year-end 2022.
In the meantime, it has already received more than 54 repair process certifications. In the coming years, we will increase the workforce to 400 at this site. Additionally, we achieved a major milestone with our capacity expansion in China. The new test cell is ready to start operations with an initial certification for test runs for the PW1100G. These investments in our capacity are important pillars to further strengthen the flexibility within our MRO network and MTU's global competitiveness. On another topic, we are further preparing ourselves to expand our technological expertise to different fields. Last week, MTU announced the acquisition of eMoSys GmbH, a high-tech company for electric motors. The company, with around 30 employees, is specialized in innovative electric drives. This technology is part of our strategy and R&D efforts on our Flying Fuel Cell.
Lastly, a few words on the guidance 23. The encouraging market environment that I just mentioned and our strong results in the first quarter 2023, which Peter will present to you in a few minutes, make us very confident that we are on the expected growth track. Despite all the good signs, we remain cautious and stick to our full year outlook for today. I share our view on that in a few minutes. Before we go into the financial details, let me take the opportunity to comment on recent news about the GTF. The engine entered service in 2016, and the engine was able to deliver the best-in-class efficiency from day one onwards. We are very confident that the architecture itself forms the future of aircraft propulsion. Nonetheless, we faced and we have overcome technological challenges in the early years of the program.
While the engine performance and reliability of GTF engines have significantly improved since the entry into service in 2016, not all engines in the field are on the latest standards, and the development of improvement is not over. Next big step will be the introduction of the GTF Advantage. Amid struggles in the global supply chain and labor shortages in conjunction with an overwhelming demand, the ability to maintain and upgrade the GTF fleet remains below our targets. In certain cases, this leads to aircraft on ground and resulting in disruptions at airlines. The entire GTF MRO network is doing its best in supporting the MRO customers in every way they can in the current situation. As previously mentioned, further technological upgrades, technical upgrades, and improvements are on their way to improve the on-wing time in the near future.
Let me hand over to Peter for some financials.
Thank you, Lars, and a warm welcome also from my side. For the first quarter, 2023, total group revenues increased 31% to more than EUR 1.5 billion based on very strong growth in our commercial OEM and our commercial MRO businesses. We had some tailwind from FX, so we had to 107 in the first quarter, 27, 112 in the first quarter, 2022. If you adjust for that, in US dollar terms, revenues were up 26%. EBIT adjusted increased 62% to EUR 212 million with a margin of 13.7%. This strong performance was driven by a couple of effects. A very favorable business mix and lower general costs were pushing the results, while the agreed salary increases become effective not before the second half of 2023.
Furthermore, we also had positive year-on-year FX effects. Net income adjusted increased 70% to EUR 157 million. Our free cash flow with EUR 93 million is a good start into the year. Q1 2023 free cash flow is a bit below Q1 2022, mainly due to the EUR 120 million working capital increase we saw this year, caused mainly by supply chain challenges in both segments, as Lars pointed out. Turning the page and jumping into our business segments, total OEM revenues increased 42% to EUR 550 million. Military revenues are, yeah, more or less stable, EUR 103 million, still impacted by supply chain constraints also in this segment.
Commercial business revenues rose EUR 446 million, and within that, organic OE revenues were up in the 40% range in Q1 2023, mainly driven by higher GTF engine deliveries and slightly more IGT sales. Easier comps from 2022 and a higher volume of spare engines and IGTs with a richer revenue contribution led to this exceptional performance. Organic spare parts sales in U.S. dollar were up around 35%, driven by growth in all platforms, in particular old wide-bodies and IGTs. Whereas this is also a strong increase, it comes from Q1 helped also in this area. The favorable business mix, combined with lower general costs at our German sites and a positive FX impact, resulted in an EBIT adjusted of EUR 141 million and a margin improvement to 25.8%.
Let's move on to the commercial MRO segment. Reported MRO revenues increased 25% to more than EUR 1 billion, while US dollar revenues were up 19%. The strong growth came predominantly from wide-body and freight engines, the CF34 and IGT business. The GTF MRO ramp-up at EME in Poland and our Zhuhai plant provided growth on GTF MRO. Within the revenues, the GTF MRO share was roughly 32%. EBIT adjusted increased by 32% to EUR 70 million, resulting in a margin of 6.8%. The higher EBIT adjusted margin was a result of a favorable business mix on the one end side with a lower share of GTF's maintenance compared to full year expectations and further tailwinds we saw also here from a more favorable FX environment.
At this point, I would like to hand back to Lars for some words on our guidance 2023.
Thank you, Peter. Sounds good. As mentioned earlier, our end markets are performing very well, with demands even surpassing our expectations. This dynamic meets an already stretched MRO capacity and supply chain. The level of uncertainty on this side prevents us from setting the bar higher, even though the strong Q1 2023 results are a very promising start. For the time being, we'll keep our full year guidance unchanged. Nonetheless, we are constantly monitoring all factors and will review the outlook regularly. Group revenues are expected between EUR 6.1 billion and EUR 6.3 billion based on a U.S. FX assumption of $1.10 per Euro. Within that, military revenues are expected to be up 10%, driven mainly by FCAS demonstrator work and some spillover effects from 2022.
Commercial OE will be up 30%, driven by growth of the GTF volume, a moderate increase of the GEnx production, and strong growth in business jet engines. Commercial spares are expected to grow in the high teens to low 20s, and commercial MRO is expected to increase in the high teens. Drivers for both businesses will be narrow bodies, ongoing strong demand for cargo engines, and the growing demand for wide-body engine. On free cash flow, we're not putting an official guidance into the market while the situation remains as volatile as it is. Regardless, it is our target to reach last year's level of free cash flow.
This closes our presentation. Thank you for your attention, we're now happy to answer your questions.
Thank you very much. We will now begin the question and answer session. If you would like to ask a question, please press star one one on your touch-tone telephone. The operator will announce your name when it's your turn to ask a question. In case you wish to cancel your question, please press star one one again. Please stand by. Our first question comes from the line of Ksenia Maslova from UBS. Please go ahead.
Hi. Morning, everyone. Just two questions from my end, please. First one on your spares performance in Q1. You mentioned cargo platforms have been driving some of the outperformance there. Could you just please provide a bit more color, given flying hours have started to normalize, and also if you could comment additionally on narrow-body platform performance in Q1. My second question is on your full year outlook. With your guidance numbers as unchanged, I'm thinking about their spare parts performance. Should we assume 2023 should be more front and loaded for your aftermarket? Why is that, and to what extent this is functional supply chain, please? Thank you.
Maybe on the second one to start with, this is Lars. We do not really believe it's front and loaded. We just see what we've mentioned several times, our MRO capacities are fully loaded. Clearly the demand is higher than the capacity, so that's why we are cautious to really improve our view on the year-end performance while we still have these supply chain issues. We would like to deliver way more engines and spare parts than we are currently enabled to. We review, like I said, we review that in the second quarter and then come to a new guidance eventually in our forecast too, in the middle of this year.
I mean to add to that, I mean, the comparison base, obviously Q1 2022 is the lowest in absolute terms. The growth rate might come down sequentially when the comparison base gets higher, especially in the second half of 2022, spare parts revenues were higher. Still stick to the roughly 20% spare parts guidance, but as Lars said, we're gonna review that in the middle of the year.
Okay.
Regarding the engine platform, your question, I mean, the major source of growth Q1 2023 versus Q1 2022 came from the older wide body platforms which are used for freighter aircraft as the 767 freighter and also the 757 freighter, CF6-80, PW2000, but also obviously from commercial airlines. These were two sources of growth. Also, IGTs or the LM6000, which is basically a CF6-80C used as an industrial gas turbine. These were the sources of spare parts growth. Narrow body spare parts grew a little bit under proportionally.
I would say for supply chain reasons, Lars mentioned the fire we saw in the facility of one supplier which impacts the V2500 spare parts business. On the PW1100, we have the situation that obviously spare parts and new engines tap the same raw material source. You know, that limits a little bit the spare parts sales in the PW1100. As supply chain pressures ease, we're gonna see a pickup of growth sequentially throughout the year. That's the picture we have in mind.
Let me add on this, that when we talk about freighter engines, we obviously should not forget that military is using the same engines.
We still see a very high demand in the military aircraft usage. This supports the spare parts sales of our freighter engine programs.
Okay, Understood. Thank you very much. Can I just follow up very quickly on cargo engines comment? When I'm looking at flying hours data, it still points to quite considered normalization in Q1. How does it necessarily reconcile with growing demand from these platforms?
No.
Should we take it as more forward-looking numbers?
I mean, we have our freighter engines that are the CF6-80 and the PW2000. You saw, you see a pick up in demand for these two engine programs. Obviously, it's difficult to distinguish what demand comes from freight and freighter and customers and from commercial airlines. We see, as Lars said, on the PW2000, strong demand for PW2000 coming also from the C-17 fleet. For wide body commercial airlines, obviously you see limited, let's say, output for new engines on or new equipment and that also drives growth for older wide body platforms.
For 767 passenger aircraft, but also, the two big US carriers using the PW2000 on the 757, they also invest still in a lot of shop visits on these platforms. And as a whole, these two platforms grow, now the PW2000 and the CF6-80.
Okay. Thank you very much.
Thank you. We'll now move on to our next question. Please stand by. Our next question comes from the line of Robert Stallard from Vertical Research. Please go ahead. Your line is open.
Thanks so much. Good morning.
Morning.
Good morning, Robert.
A couple of questions from me. First of all, on the supply chain, RTX had some fairly encouraging things to say about the GTF supply chain yesterday. I was wondering if you'd seen similar things in your business, particularly on castings. Separately, on free cash flow in the quarter, you mentioned the working capital build. Do you expect this to reverse as we move through the year? Thank you.
Let me comment on the castings, Robert. Yes, of course, we are Everyone is going to the same two suppliers. Where, when Raytheon and Pratt are saying this is improving, we can see that obviously here as well. We always said it will massively improve over the year of 2023. The labor seems to be hired now, strongly, and then we add some qualification time. In a nutshell, we see the parts coming in way better than previously. Yes, I support that.
I mean, regarding working capital, yes, we expect to ease some easing in the course of 2023.
I mean, the major, the source of the working capital increase is, I mean, limited parts supply and for new parts on the one hand side, but also of re-repair parts, especially in our MRO division. You have unusually long turnaround times in all of our MRO divisions due to the fact that in some cases, new parts are missing or also repair parts that we use outside vendors for third-party repairs. There also turnaround times are quite long. In some cases you can counter that longer turnaround times with a higher, let's say, new material buffer in our MRO facilities. There's also in the first step to a higher level of working capital.
As supply chain pressures ease throughout the year, we expect working capital to come down.
That's great. Thank you.
Thanks.
Thank you. We'll now move on to our next question. Our next question comes from the line of Chloé Lemarié from Jefferies. Please go ahead.
Yes, good morning.
Good morning.
I have a couple as well. The first one is on the GTF. Could you actually provide a bit more color on the time and waiting performance improvement that you've already achieved with the fixes, you know, that are currently being rolled out? What would the GTF Advantage provide on top of this? Roughly how long will the retrofit program last? The second one is on the OEM. The obviously margin is quite, you know, solid, the margin improvements. I wanted to check how much the mix in new engine probably helped versus what you had, you know, with spare engines in Q1 last year.
In terms of cost being under proportional, if you could help us understand how much of a boost it was in Q1, that would be very helpful.
Let me start with the time on wing. Obviously, this is a story, Chloe. The story is starting in 2016 when we put the engine into service. Since then, we had several upgrades already. I don't want to compare 2016 with 2023, but we are at the Block D. We had A, B, C and D. Several improvements were slotted in. Obviously the new engine that we are delivering are incorporated all these upgrades. What we are now trying to speed up is to retrofit the older engines with the newer configuration. Here we still are faced with the supply chain issues that comes over time.
Then, we have all the, let's say, old engines retrofitted to the new standards. The GTF Advantage is a complete new design and a new engine. This won't be retrofittable to the old engine, as is a new program per se. The latest standard, if I'm correct, is a Block D that will be retrofitted to all the older engines starting in 2024. Beginning of 2024, we will deliver the GTF Advantage and only the GTF Advantage.
That should be bringing significant improvement with everything we know since entering the service is incorporated into the new engine, another 1% of fuel savings and we let it run cooler, the hot section that should improve furthermore, on the time on wing.
Sorry, just the retrofit to the Block D standard, when will that be completed, do you expect?
I cannot estimate. It takes a couple of years because we have thousands of engines out there. Take it a couple of years. I don't have a concrete figure in mind, no.
Okay. Thank you.
I mean, regarding cost, what we saw is that we had very low, let's say, general costs, especially in our German sites, for things like just the machine maintenance, IT, project costs, so these kind of things. But these typically don't run in a linear way throughout the year, but Q1 2023 was comparably low, maybe, let's say, EUR 15 million-EUR 50 million or so. We had some FX tailwind also in the, let's say, low to mid-teens or so in absolute terms. The rest is business mix. Strong spare parts growth and then on the one hand side, I mean, we have 40% growth in new engine business, so stronger compared to the spare parts.
In the with the new engines, we had unusual high level of spare engines. we don't, won't see that in the same way in the next three quarters. we will see some kind of reversion, but for the full year we are still quite optimistic.
Very clear. Thank you.
Thank you. We'll now move on to our next question. Our next question comes from the line of George Zhao from Bernstein. Please go ahead. Your line is open.
Hi, good morning, everyone.
Morning.
First question on MRO. Do you still expect 100 basis points of margin contraction for the year, given a strong Q1, as you think about the GTF share normalizing over the remainder of the year? Second question on the spares, you know, for the 35% spares growth this quarter, how do you think about the attribution from volume price versus work scope? You know, is there more room for work scope to grow from here?
Yeah, in margin compression, I would say the picture hasn't changed that much. We, I mean, we had a lot of support last year from a, let's say, unusual low share of GTF work. As you pointed out in some calls, we had tailwind from FX. Because of the development or the development of the US dollar versus the Euro throughout the year. Purchasing material rather cheap and billing it to the customer with a more favorable FX rate. We don't expect that to happen again to that extent in 2023. Yes, we still expect a lower margin in 2023 versus 2022. On the first one, probably the strong growth in Q1.
Yes, obviously we had some catalog pricing, catalog list, price increase late last year that certainly helped a little bit, especially on older programs and wide-body. The GTF, don't forget it's a long-term agreement most of the time, so the impact of the price increase is not that high. On the shop visit, it's difficult to forecast a smaller shop visit work scope or bigger ones. Some of the retrofits we talked earlier on the blocks, that's certainly a major shop visit. Some of them, we see some customers bringing in engines with a small work scope as well. It's difficult to forecast throughout the year.
Got it. How much would you say the GTF is as a portion of the commercial spares portfolio now?
No, we don't give the shares of the, of the programs in the, in the, in the commercial spares portfolio. Don't strip that down.
I guess as we think about the margin progression and implication on there, how significant is it versus your other major programs?
It's still, I mean, it's growing obviously, PW1100 spare parts. Don't forget, I mean, the PW1100 profitability also in the spare parts, is not at the level where we have it on the V2500. I mean, we commented that quite often that the V2500 had 20 years time to mature, to bring production costs down and so on. The profitability of PW1100 spare parts is still currently below the V2500. I mean, that's fair to say, but it's also no news.
All right. Thanks.
Thank you. We'll now move on to our next question. Our next question comes from the line of Sash Tusa from Agency Partners. Please go ahead with your question.
Oh, thank you very much indeed. Good morning.
Morning.
I've just got a question. I've just got a question about the military business. You highlighted that one of the reasons for the slightly slow start to the year was specific supplier problems, which didn't seem to come through in the same way to the commercial OE business. I just wondered whether you could sort of just a bit of cast a bit of light on why it is that the military business had supply problems that really did affect Q1, but commercial didn't. Is this actually a problem with one of your partners on EJ200? Presumably Rolls, Avio Aero or so forth. It's actually, it's a partner problem rather than a supplier problem.
Exactly. It's a different supply chain and it's a partner problem. There's one company, they also had an issue with the industrial site fire in one of the production plants. It's limited to one partner in the military program. That is not a partner on the civil.
That's very easy. Do you expect that the impact of that fire to persist through Q2 and possibly into Q3? Or are they now back on schedule?
We're getting very promising comments on recovery. I would say yes, probably in Q2 we are still impacted. After that it should be sorted out.
Great. Thank you very much.
Thank you. We'll now move on to our next question. Our next question comes from the line of Christophe Menard from Deutsche Bank. Please go ahead with your question.
Yes, good morning.
Good morning.
... three quick ones. Good morning. The first one is on the spare parts. You mentioned all the wide body spares up. What about A380 and Boeing 787, simmer catch up or is it just like narrow body? First question. Second question is on the GTF Advantage. You mentioned that it cannot be retrofitted on an existing engine, but can, or is your contract, according to your contract, can you be forced to actually swap an older engine for a GTF Advantage under some warranty programs? I mean, if an airline wants the GTF Advantage, can it adapt it on a neo? The last question is on HR.
Is it still an issue to recruit people for maintenance, or is it essentially supply chain that is causing most of the delays and turnaround time delays? Thank you.
Okay. Christophe, let me start with the GTFA. That's a fairly easy answer. No, it's not swappable. As far as I know, our contracts do not allow or enforce us to change GTFA with a GTF base engine. Very clear answer on that. HR, for us, we don't see labor issues in our global facilities. It's mainly we're waiting for parts. We would have the capacity available, and I'm not aware that we have significant numbers of open positions in our worldwide maintenance facilities. The A380-
I mean, the growth rates of the GP7000 and PW4000, they're huge, but the volume is low. I mean, last year we sold 0 spare parts for the GP7000, zero spare parts for the PW4000 for the old 777, and now we see a pickup of spare parts demands so the growth rate is fantastic, but obviously the absolute impact is yet quite low.
We expect obviously also in that field a recovery due to the fact that, I mean, a lot of wide body, new wide body platforms are postponed, so the ramp up is flat, so airlines are missing new wide body equipment, and they try to use the old platforms more intensive, and that's finally leads to more shop visits, on.
A380 is coming back into the.
Exactly.
In the air on almost every airline that has been lifted. Very, very significant reintroduction of this platform.
Thank you. Very clear. Thanks.
Thank you. We'll now move on to our next question. Our next question comes from the line of Milene Kerner from Barclays. Please go ahead.
Yes. Good morning, Lars, Peter, and Thomas.
Morning.
Taking my question. I have three, please. First, Peter, can you tell us how big the positive impact was from the cost phasing at OEM in Q1, and how these costs are expected to increase throughout the year? I have two questions on the GTF. The first question on GTF is what is the portion of GTF delivery that are for normal spare engine as compared to additional spare engine to improve the engine availability for the in-service fleet? My second question on GTF is, could you comment on the split of the GTF aftermarket between what is normal maintenance versus what is warranty and upgrades? Thank you.
Well, I mean, on the cost side, I would say, I mean, we had. I mean, it's always difficult to say what is the baseline, because costs do fluctuate. I would ask if we have comparably low costs for, as I pointed out before, for machine maintenance, IT costs and project costs, I would say. Maybe we had an advantage of EUR 15 million or so in our German side. That's.
On the GTF, Peter, I'm struggling to answer because obviously we don't disclose details on the spare engine mix. I guess it's fair to say that we are trying to allocate enough engines to the OE site of Airbus, obviously, while maintaining our customers' the fleet, keep them flying on the MRO side. It is a mix between OE and spare engines. We don't usually disclose these numbers.
Thank you, Lars. Maybe can I ask it, another way? Maybe can you comment on the trend in Q1 relative to what it was in the last two quarters? Do you have more or less same?
It's, you know, we are increasing our output at the same time, so most likely the trend is similar- in- similar regions, but in absolute numbers, more engines go to the final assembly line, more engines, more spare engines goes to the flying fleet. It's probably also fair to say it's slightly increasing because of the MRO issues and AOG issues we have out there.
I mean, the share of spare engines of the total output is a little bit higher in Q1. That supports obviously profitability in Q1 2023. Yeah.
Okay. Thank you. On the last, if you can comment at all, on the aftermarket, like, on the GTF, what is, like, normal maintenance spare parts versus what are, like, warranty and upgrades?
We're sitting here and nodding our heads. No, we don't do that.
I'm trying. I'm trying.
Because I mean, we do not look, we do not look on our business in that way. You have a shop visit, and in each shop visit, you have a different mix of what is a pure warranty and what is proactive maintenance to keep the engine longer on wing, and what is really wear and tear and what you would consider as a real MRO. And each shop visit is different, and we don't analyze that in that way, so I couldn't give you that figure actually. It's not that we don't wanna tell it to you. We just don't have it on hand. No.
Okay. Thank you so much. Thanks.
Thanks.
Thank you. We'll now move on to our next question. Our next question comes from the line of Ben Heelan from Bank of America. Please go ahead.
Yeah. Morning, and hope you guys are well. Thank you for the question. First I wanna talk on the margin because it implies quite a material drop-off in margins in the second half of the year for you to be stable for the full year. I get the I get the MRO comments, but in the commercial OEM business, I think it does imply, like, quite a material drop-off. I just wanted to understand that a little bit more. Obviously you've got an FX benefit for the full year. Have you taken the vast majority of that FX benefit from hedging in Q1? Should we expect that FX benefit to continue in Q2, Q3, and Q4? Is there anything else that has been front-end loaded? I'm thinking, is it maybe operating leverage, phasing of cost?
You know, anything that can help us with that, 'cause it does imply quite a material drop-off in the second, in the last nine months of the year from a margin perspective. Secondly, just a bit of a clarification. I mean, you've got revenues in Euro terms in commercial OEM are up 60% and organic revenues in USD terms were up only 37%. The FX pact isn't 23 percentage points. I'm wondering if you can help me, you know, kind of square the circle there, in terms of what the difference is?
I mean, the outlook for the next three quarters, for the year, I mean, yes, I mean, the guidance is conservative. I mean, Lars mentioned that. I mean, what are the sources for the good margin in the OEM segment? I mean, we have quite low cost in Q1. I mentioned that. We gonna see a pickup throughout the year. We gonna have a salary increase that is agreed with the unions in Germany. Starting in June, as a 5% salary increase, that will impact H2, obviously not so much Q2.
I mean, we're gonna see obviously in the higher output of installed engines in the next three quarters and lower spare engines. Yeah. That is, that's more or less the story. We're gonna see also, I mean, we said that, I mean, the demand is really above what we saw when we issued our guidance. That's true. The market demand is there, but we have to execute on the market demand and the supply chain is currently the bottleneck, and we have to evaluate. We're gonna do that in summer. What we really can deliver then finally in 2023, I think in the summer we have more grip around that issue.
On the growth rates in the commercial segment, yes, you see that commercial business was up 60%. If you adjust for the average US dollar, US dollar development, I pointed out, I mean, 2022 was 1.12 on average. 2023 was 1.07 on average. If you adjust for that, the organic growth rate would be something in the low 50s or 52%-53% organically. If you compare that with the, let's say 35% spares, 40% OE revenues, maybe the blended growth rate would be something like 37%.
The gap is indeed the impact of hedging, which runs through the revenue line, but also FX valuation of our balance sheet positions like receivables and also liabilities run through the revenue lines, that is IFRS 15 predominantly. We had a negative, let's say, effect out of FX issues, so hedging combined with mark-to-market valuation of balance sheet positions, negative effect in 2022 and a positive effect in 2023. That's based on a quite low revenue basis. The EUR 278 in 2022 skews this the growth rate in that way. If you would compare the nine months, the effect is far lower. That's.
Okay.
Sorry.
Okay. No, that's clear. Sorry, to back on the margin. I mean, you said low cost in Q1.
Yeah.
Outside of the salary increase starting in June, what other costs are gonna be increasing in particular? On the FX, from a hedging perspective, there, I think there was a benefit in Q1 to adjusted EBIT. Is there gonna be a benefit Q2, Q3, or have you recognized a lot of that in the first quarter of the year?
Thanks, Peter.
The later. We had an achieved rate of, I mean, Q1 is always hedged by 100% you can say. The achieved rate is the hedge rate. We had 1.11 in Q1 2023, 1.17 in 2022. We had something like, if you do the math, we have to have something like a EUR 20 million tailwind in earnings from the achieved US dollar rate. That we're gonna see some benefit also in Q2, Q3, Q4, but it's gonna be lower and lower and lower. That goes away throughout the year. What cost increases we're gonna see? We're gonna see a reversion of this effect I just mentioned.
We gonna spend for machine maintenance. We're gonna see IT costs coming in, and also different projects we have.
Back on planning level.
Back on planning level. Exactly.
Under estimated or under exposed in Q1.
Okay.
back to normal levels, to planned levels in the, in the following quarters.
Okay. Okay, great. Thank you. Appreciate it.
Thank you. We'll now move on to our next question. Our next question comes from the line of Zafar Khan from Societe Generale. Please go ahead.
Thank you very much. Good morning, everyone.
Morning.
I've got three questions, please. Just looking for some help and clarification for modeling purposes. The first one just on commercial OE. I remember pre-COVID, the OE theories versus spares, the split in commercial OE was around about 60% spares, 40% OE. Can you just tell us where we are on that at the moment? Peter, I know you mentioned the blended sort of growth rate. Just can you help us with the split between spares revenue and OE revenue, where that was in 2022 and where we might get to in 2023? That's one question. You mentioned the spare engines that you've been delivering. Do you actually make a positive, meaningful margin for spare engines? The third question is just on Geared Turbofan.
If I remember correctly, a lot of the contracts are flight hours contracts rather than time and material. Can you help us just understand how you're accounting for that at the moment, and how much of the revenues are coming through that and what's the cash impact?
I'm gonna start with the mix. I mean, roughly you can say 2/3 is spare parts, 1/3 is OE. That's the rough obviously hovering around that baseline from quarter- to- quarter. Yes, we do generate a meaningful profit by selling spare engines. I mean, on the one hand side of... That's for a reason, because spare engines are not as utilized obviously as an installed engine, and with a spare engine you have less aftermarket. That's why discounts on new engines are or on spare engines are lower than compared to discounts on installed engines.
On the accounting of the flight hour agreements around the GTF, I mean, we have pointed out in several capital markets day. Finally, I mean, the profitability of the flight hour agreements at OEM levels, so on IAE LLP levels, determine the margin which we book, together with the PW 1,100 spare parts. When we sell PW 1,100 spare parts, the margin we realize is depending on the profitability of the basket of flight hour agreements on IAE level. That's in a nutshell how we account for that. We get obviously our share of prepayments out of IAE. We get 18% of all prepayments the program generates.
Mm.
I mean, obviously IAE is a management company. IAE does not have own shops. The shop visits for these contracts are done in the GTF MRO network and our shops. Zhuhai, EME in Poland and Hanover, they perform GTF MRO work and bill that back to IAE with a framework of pricing which allows only a limited margin. These are, I think the different aspects of the GTF aftermarket.
Peter, we mentioned several times as well that the whole organization is working on the profitability issue, obviously.
Right
by designing, first of all, upgrades that help to improve the time on wing. Secondly, with the development of repairs, every repaired part is a very good part because you don't need a new part, obviously. Limit extension is another thing we are progressing in to extend the limits on certain parts. All these, faster shop visits, returned, reduced turnaround times. All these, are helping to improve the profitability on these on these fly by hour contracts.
Could I just summarize what you've said, Peter, so that I fully understand this? Essentially the entity that's supplying the services is the risk and revenue sharing partnership that's done that sort of prep, you know, that sort of level. MTU supplying into that will make profit on that spare part which is supplied, and that entity is doing the flight buyouts, and you take your share of that. Is that how it's doing? There's a kind of an arm's length between the supply and where the risk and revenue, revenues and profits are taken. Or maybe, you know, you could just point me, you know.
No, no, it's right. I mean, the contract, the contract holder with the alliance is IAE.
Yeah.
The management, the sales company in phase two, they do all the business with direct business with the alliance. We, so we supply our parts, our modules into IAE, and we do the work, or we do a share of the aftermarket work via our MRO network for IAE. For all these transactions, there are, let's say, there are prices between the two companies, and especially regarding spare parts, and that's what you specifically asked. The profit we book when we sell a spare part to IAE is depending on the profitability of the final flight hour agreement. That's the logic behind that.
Okay. Maybe, I'll take this offline with the IR team. Thank you for that.
Mm-hmm, you're welcome.
Thank you. We'll now move on to our next question. Our next question comes from the line of Tristan Sanson from BNP Paribas Exane. Please go ahead.
Yeah, good morning, everyone.
Morning.
Thank you for taking my questions. I have three as well. The first one is I wanted to come back briefly on reclassification of a provision into a liability to Pratt that was done in Q4 by EUR 219 million. If you quickly explain again what happened at that time, and for this quarter, I'm most interested in the feeling of the related cash out. I understand it's spread over five or six years, but is it happening every quarter, or is there one quarter that we'll see the cash out? And especially did we have an impact in the free cash flow of Q1 coming from this? That's the first question. The second is on the performance and service of the PW One Thousand engine.
We are familiar with the issues of performance of the engine in harsh environments, so in the Middle East, I suspect China as well. But we also had complaints from a number of operators on the A220 operating in normal environments. Can you explain to me what is the actual issue on related to the timing of these engines in operating in normal environments? The last question is on the EUR 120 million of inventory increase that you reported in Q1, or working capital headwind. Is it fair to assume that it's mostly work that is being performed in the MRO division and that you cannot book in revenues because you're missing a few parts and so you have extended the turnaround times?
I would be curious to see what is, the assumption for this that you have for the full year underpinning your guidance of at least, stability in free cash flow. Many thanks for your answers.
I'll start with your last question. The working capital question, and as I said that before, I mean, the major source of the working capital increase is unfinished work sitting in our MRO division. That's accounted not in inventories. It's rather a so-called POC receivable as we account that work as a percentage of completion. Yes, I mean, the major, the basic source of that working capital increase is difficult part supplies or difficult supply chains or two or three parts are missing, and you cannot finalize the engine, put it on the test hill, and send it to the customer, bill it finally to the customer. It's sitting there waiting for the final parts.
The same is true also not only for new parts, but also for outside vendors. Where we use the tap outside sources for certain repair technologies we don't have in-house. These two are the problematic fields and leads finally to a working capital increase. As I said before, we expect a certain level of reversion throughout the next three quarters. On the-
To put it another way, it means that if you had all the parts you wanted, you could have done like 10% more revenues in, in MRO in Q1?
At least, I mean, we could have, I mean, as I said, I mean, we book, when we have the engine in the, we have the engine in the shop, we book a POC receivable, which means also you have the corresponding POC revenue. It is already revenue, although it's unfinished, but you recognize only a limited margin on the POC revenue. The major part of the profit you book when you send the engine finally to the customer. What's the second effect, you, when the shops are full, obviously because the engines are standing there and waiting for the final parts, you don't obviously impact new engines. It also limits your capacity to induct more shop visits.
That limits your MRO growth. The shops are congested.
Mm-hmm.
Maybe on the second one on performance, I mean, I'm not that astonished as you might be because it's a similar design. The 1500 and the 1100 is a similar design. You were mentioning quite rightly that the durability and the time on wing in especially harsh environment is not where we wanted to have. On the normal environment, it's also not as good as we forecasted, but it's not significantly lower, and especially not on the 1500 compared to 1100, as we have the same design. I'm not that surprised that we have similar issues on the 1500 than we have on the 1100 in normal environment as well.
Regarding the. Can you pinpoint,
I'm sorry to lean on that, but can you pinpoint, actually, are we talking about still, like, corrosion issues or accelerated wear and tear of specific parts of the engines in normal environments?
The latter one. Accelerated wear and tear.
Mm-hmm.
Regarding the reclassification of the liability, in 2022, we reached an agreement with FAT to settle, that is made more or less a production related re-related compensation payments, which we accumulated from the start of the program until end of 2021, which was always accrued for since then, there's no earning impact. That's, we mentioned the, we quantified that also it was something like $250 million. We reached an agreement to pay it over six years, and the first installment will be paid next year. We haven't seen any impact...
Okay. First one in 2023?
No.
It's gonna be, like, a bit every quarter or it's like?
Exactly.
one lump payment?
No, every quarter.
Okay. It's. Yeah. No, no quarter is liquidity for this.
Exactly. Now, it's that's because it's a long-term payment and it's, so the payment plan starts more in the future, more than 12 months. Under IFRS, you are obliged to classify that as a financial debt. It's, it went out of working capital and moved into financial debt now.
That's very clear and helpful. Thank you so much, guys.
Mm-hmm.
Thank you. We'll now move on to our last question. Our final question comes from the line of Charles Armitage from Citi. Please go ahead. Your line is open.
Good morning, and thank you.
Morning.
The overwhelming theme through the Q seems to be great demand held back by supply chain bottlenecks. Are any of these supply chain bottlenecks likely to be worse in the remaining quarters versus Q1?
No, clearly no. I think I mentioned earlier, labor is improving. The recruitment of labor is improving on all the sites that we are observing. Qualification is as forecasted. Industrial capacity has always been there. I'm a full optimist that we are getting better every quarter.
Lovely. Thank you.
Yeah.
Thank you. There are no further questions at this time, so I'll hand the conference back to you for closing remarks.
Great. We are perfectly in time. Thank you very much for participating. Thank you, Lars. Thank you, Peter, for answering these questions. Yeah, to everybody, enjoy the rest of your day. Bye-bye.
We want to thank Mr. Lars Wagner, Mr. Peter Kameritsch, Mr. Thomas Franz, and all the participants of this conference. Goodbye.