Welcome to the conference call on MTU Aero Engines AG Q3 2023 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 conference call are Mr. Lars Wagner, Chief Executive Officer, and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President of Investor Relations, for some introductory words. Please go ahead.
Thank you, Ria, and good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q3 2023 results. As usual, we start with a review and some key messages presented by Lars. Peter will start with a look on overall financials and more details on our OEM and MRO segment. Lars will continue with some thoughts on the 2023 guidance and a more general outlook. This will end the presentation part, and we will open the call for questions. Let me now hand over to Lars for the review.
Okay, thank you, Thomas, and also welcome from my side. Good to have you with us. As usual, let me start with the market environment. Passenger traffic improved to 96% of 2019 levels, with a net domestic traffic exceeded pre-COVID levels already by 9%, whereas international traffic recovered to roughly 88%.
Cargo flights remained robust, with, as it is currently, 27% above 2019 level. This is despite a moderate, gradual downward trend as cargo airlines slowly reduce capacity to take weaker demands into account. I would like to also give you a brief update about the GTF inspection program. As you heard and as discussed in early September, RTX has announced an enhanced GTF inspection program. On this Tuesday, RTX provided further updates at their Q3 results release and confirmed the expectations of the impact operationally as well as financially. Further information has also been provided on the impact on other fleets, such as the smaller GTF variants, as well as the V2500. While these fleets might also be challenged with life limits to be applied on certain components, there will be only minor effects on the operational and financial side from these programs.
Key focus, and that's clear, of all GTF partners, remains on limiting the impact on our airline customers. We are working very closely together with Pratt & Whitney to increase MRO capacity and to find intelligent and smart solutions to manage the shop visits and work scopes in the best possible way. Defining factors for the program remain the ability to speed up turnaround times and ensure the availability of spare parts. Increasing GTF MRO capacity at MTU and at other MRO sites is still under review. We are working on all areas like shifting non-GTF MRO work from, for example, our Hannover facility to other MTU MRO shops, as well as accelerating the ramp up at our EME Aero facility. In Q3 2023 numbers, we have reflected the current knowledge in our results.
The encouraging market trends support the positive developments in all our business segments. This is well in line with the assumptions we made as we reiterated our guidance on adjusted numbers. Another topic, a four-year technology contract with the German Government, was signed for the FCAS program. This includes the official order for additional technology studies for the Demonstrator Phase 1B. These span from prototype production of hybrid titanium blisk to, for example, a new test cell concept for low and high pressure compressors. Also, interesting news on the technology side, MTU's Flying Fuel Cell concept was selected as one of three fuel cell concepts evaluated by Clean Aviation. MTU will take the lead in a new Clean Aviation research project, which is named Hydrogen-Electric Zero Emission Propulsion System, or in short, we call it HEROPS.
The program is funded with EUR 30 million by the European Union. Together with our partners, the aim is to develop a Flying Fuel Cell ground demonstrator within the next three years, which is capable of powering a 70-seater regional jet. This again reflects MTU's ongoing commitment to provide solution for emission-free flying. Let me now hand over to Peter for the financials.
Yes, thank you, Lars, and also a warm welcome from my side. In our nine-month financial highlights, we present MTU's clean performance without the impact from powder metal. I will dive into the details on this topic on the next chart. In the first nine months, 2023, adjusted group revenues increased 21% to EUR 4.6 billion. This growth was supported by all business segments, as expected. In U.S. dollar terms, revenues were up 23%.
Adjusted EBIT increased 33% to almost EUR 600 million, resulting in an EBIT margin of 13%. Adjusted net income was up 37% to EUR 438 million. Free cash flow of EUR 257 million, up 70%, reflects a strong cash collection in the third quarter. Before we move onto our segments, let me guide you through the financial impacts of the GTF inspection program, significantly burdening our reported key figures. The GTF inspection program has a significant impact on reported revenue and EBIT numbers. MTU has to share obligations for expected customer support costs, as well as for expenses for additional MRO efforts. The largest effect results from a revenue-reducing buildup of refund liabilities for MTU's expected share of customer support costs, amounting to $961 million.
The second effect results from sharing expected additional MRO efforts, estimated at roughly $1.5 billion for 100% of the program. These MRO efforts burdens MTU's profit share in the program, program's aftermarket contracts, and this results as a consequence in the need for a revenue-effective buildup of corresponding refund liabilities by $52 million, and a small, cost of goods sold, effective devaluation of corresponding inventories, by $17 million. The remaining charge for MTU from these expected additional MRO efforts will be, recognized when we recognize future profit shares from respective program aftermarket contracts. All in all, this results in a total impact on revenues and EBIT of slightly above $1 billion.
On reported numbers, this leads to a revenue of EUR 3.65 billion for the first nine months of 2023, with a negative EBIT of EUR 410 million. The detailed reconciliation from reported to adjusted figures, including all items, can be seen in the appendix as usual. So having said that, let's jump into the segments. And let me start with the OEM segment. Total adjusted OEM revenues increased 26% to roughly EUR 1.6 billion. Military business was up 19% to EUR 367 million, representing a very strong third quarter in line with our full year expectations, especially driven by TP400 and the RB199 aftermarket.
Adjusted commercial business revenues rose 29% to 1.2 billion, and within that, organic OE revenues were up in the 30% range, which is in line with our full-year expectations. That was driven by a higher installed number of GTF, GEnx, and business jet engines. Further, a slightly increased IGT output was supportive. On a quarterly basis, OE sales were also up roughly 30%. Organic spare parts sales in dollars were up in the 20% range, driven by growth in all platforms, in particular, wide bodies such as the CF6, GEnx, GP7000, and also the PW2000. On a quarterly basis, spare parts sales were up in the high teens range, so very similar.
The overall favorable business mix, lower general cost, and a supportive FX rate resulted in an Adjusted EBIT of EUR 374 million, with a margin improvement to 23.6% for the nine months. Margin in Q3 was a bit weaker than the first half of the year, following cost impacts like salary increases in Germany starting in June, and a higher share of installed engine deliveries in the quarter. Turning the page, and let's move to the commercial MRO segment. Reported MRO revenues came in 18% up to the level of EUR 3.1 billion. Dollar revenues were up 20% and all engine platforms saw solid demand, while the GTF MRO growth was mainly driven by a further ramp-up at MTU Zhuhai and EME Aero.
Within the revenues, the GTF MRO share was roughly 35%. EBIT adjusted increased by 14% to EUR 223 million, resulting in a margin of 7.2%. GTF share of revenue was in line with the expectations, while the work scopes turned out to be less dilutive to margins, compared to expectations. The mix of contracts and work scopes in the independent business was very profitable in the quarter. So at this point, I would like to hand back to Lars for some words on our guidance in 2023.
All right, Peter, thank you. Well done. As already mentioned at the beginning of our presentation, we are once again confirming our guidance today on adjusted numbers.
Based on the current FX environment, we expect revenues to reach the upper end of our EUR 6.1 billion-EUR 6.3 billion range. Growth rates within the business segments remain unchanged. EBIT adjusted should be slightly above EUR 800 million, and free cash flow should slightly exceed previous year's levels of EUR 326 million. Before we end here, let me say some words on the overall situation beyond the dominating headline around the inspection program. As you can see, and you know, there's a lot going on and a lot to like at MTU. The core of MTU and of our businesses is in tremendous shape. All business segments are performing smoothly. The positioning in new programs, while having mature engines in the best phase of their lives, gives us confidence that we are greatly positioned to work through the current challenges.
At the same time, we contribute to technological solutions for the future of aviation. We'll continue to benefit from the bright long-term outlook in our industry.... Of course, don't get me wrong, the current challenges are tough, and we need to work through them. But we believe in the fundamental strengths of our company and the great future that lies ahead of us. We have a very strong and motivated management and workforce that works hard to justify the trust set in MTU. It was important for me and us. With this, thank you very much for your attention, and we're now ready to answer your questions.
At this time, I would like to remind everyone that in order to ask a question, press Star, then the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. Our first, first question is from Kseniia Maslova from UBS. Please go ahead.
Hi, good afternoon. I have two questions please, if I may. So first one, on your relationship with RTX. Just wondering, are there still any negotiations going on with RTX regarding metal quality incident, and if they are willing to provide any support to the partners, maybe some help with financing? And second question on commercial MRO, maybe if you just can spend a bit more time explaining the step-up in margins this quarter and how you feel about the sustainability of the drivers. Thank you.
So the first one, as you can imagine, I'm not, I'm not commenting on the ongoing discussion, but I, I'd like to clearly say, yes, we are in discussion about this one, and once we have found an agreement, then we will notify you.
Yeah, regarding MRO margins, I mean, if you do the math, it, it was 7.9% margin in the MRO. I mean, driven on the one-hand side, we, we saw, if you look at it in the adjusted EBIT results, a strong performance at MTU Zhuhai, which came in roughly at 20 million in the quarter, which I would say from today's point of view, is a very sustainable level currently.
We have always had a little bit mix shifts in the MRO, so between different engine programs, between different customers, also between different work scopes. I mean, if you have a lot of, let's say, a material-heavy shop visits, then obviously the margin is a bit lower. And that specific quarter with it, we had also quite, I would say, a favorable work scope, so less material involved, more labor, more test, more testing, more repairs, and that also drives the margin. So a little bit of everything, but I mean, we gonna end the year definitely with a margin above the 7%.
Okay, understood. That's very clear. Thank you.
Next question is from Ben Heelan of Bank of America.
Yes, morning, Lars, morning.
Morning.
Peter, hope, hope you're both well. So I've got a bit of a technical one, to begin with on GTF. So you highlight additional MRO efforts of $200 million for your 18%, and you say that that'll be recognized over the course of future aftermarket revenue recognition. So I just wanted to check how I should read this, because the way it works traditionally under IFRS 15 is you are completing work, you're incurring cost, and therefore you recognize revenues against that at a contract margin. Is that how we should assume the revenue recognition will work for this $200 million of excess cost? And how should we think about the margin of that?
The reason I'm asking is because it feels to me that going into 2024, 2025 and 2026, there's obviously this excess cost that could drive actually quite a lot of incremental revenue recognition, albeit it may be a slightly lower margin because of the long-term contract margin. So that was the first question, and keen to kind of hear your views on that. And then the second question was around—sorry, not program costs, you just answered that. It was around CapEx. You talked on your prior call about looking at where you could save in terms of other CapEx programs. Is there any update on how we can think about that, or is that something we can potentially get in February? How should we think about that? Thank you both.
So, regarding the recognition of the $200 million, it's the second way, as you described it. So, I mean, we put—I mean, you can—we have obviously a calculation for each and every aftermarket contract with each and every airline. The additional costs based on the engine portfolio for each airline burdens the margin of these aftermarket contracts, and then you take the average of all aftermarket contracts. And if you look at that, so the margin of the aftermarket contract is obviously slightly reduced. And so with every spare parts we sell with every spare parts we sell in the future, we book we book a slightly reduced slightly reduced margin.
But it's not only concentrated over the time from 2024- 2026, so it's, it's the basket of the current aftermarket contracts, for today's, for today's, the today's basket of contracts with the airlines, yeah.
Okay, but with the EUR 200 million of cost that is gonna be incurred, you will be recognizing revenues against that at a contract margin?
Sure, sure, sure.
Okay, cool. Okay.
So you have a stream of-
Okay.
You have a stream of revenue out of these aftermarket contracts, and against that, you have a stream of costs, and these are the costs for the shop visits we do. Now the cost for the shop visits we do is 100% of the program EUR 1.5 billion higher, and our share is 200 million higher, and that burdens the margin of these aftermarket contracts. And it's if you only look at one contract, it's recognized over the remaining lifetime of the whole contract. So it could be that the contract spans over the next 10 years or so.... So it's not only recognized in the 2024-2026 timeframe, so the margin impact in 2024-2026 is rather tiny, yeah.
Okay. Okay, super clear. Thank you. And on CapEx and mitigations?
Oh, no, we are working on that still. I mean, we are currently in the process of our budgeting, internal budgeting process, and we collect all proposals, we talk about them. But also, I mean, if you postpone CapEx, you also have risk associated with that, so we have to balance that. We are not in a typical situation where, let's say, we have a low demand, so you can slash CapEx. So we have a very, very good performing business. We have to fulfill all the customer demands, so we have to be also a little bit, let's say, cautious, where we slash CapEx. So but it's not that there's no update yet. I mean, we are working on that.
Okay.
Once we give, let's say, a guidance for the full year, typically in February of 2024, we will have a clear picture of what we do and what we don't do.
Okay. Very clear. Thank you.
Thanks.
Next question is from George Zhao of Bernstein.
Yes, hi. Good morning, everyone. I guess first one, you know, what is the average turnaround time for GTF engine at one of your MRO shops today? And how does that break down into the time waiting to go into the shop versus time inside the shop? Second one, just wanted to get your thoughts on, you know, yesterday, Spirit Airlines said that, you know, it was notified by Pratt that all of its GTF engines, you know, including engines slotted for future deliveries for an undetermined period, you know, are in the potential pool of engines subject to inspection and possible replacements. So do you have any comments on that? Because at the surface, that sounds more expensive than what you and RTX have been saying regards to the engines affected up to 2021. Thanks.
Let me try to answer both ones. This is Lars. What we see currently, and I don't obviously want to go far into the details, but take it a low three-digit number, 130, 120. Really depends on the work scopes. Sometimes it's even below 100, but let's say the average is close to 100 days, 110 days for the current work scopes. As we mentioned several times, this is not yet—it's not yet reflecting the heavy work scopes that we are anticipating out of this inspection program, as we only started to induct these engines, and we have a visibility on them, let's say, around Christmas time.
Because we said 150 days, that should be around the Christmas date, and then we know how smart, how what we will see in the engines, and we can give a better guidance of this 150 times TAT time that we mentioned. Now, the second one, I don't know. I have not read this news, but what's clear, I mean, the engines delivered today have been produced in the past. We have a lead time of, what is it? Roughly 12 months for producing these engines. And but I this is the only explanation I have right now. I need to look into the news from yesterday.
Thanks. And that, that triple-digit number, is that just the time in the shop, or is that from the time it's off the wings to back on the wing?
That's the time within the shop, because we have obviously planned our capacity towards the removals that we have seen. Now, we have these additional program, additional shop visits, and that's further congesting the shops or giving additional waiting time, and that's why we said it's going to be wing-to-wing. It's going to be roughly 300 days.
All right, thanks.
Next question is from Phil Buller. Please go ahead.
Hi, good morning.
Morning.
Thank you for, the very detailed run-through, that you provided on slide four. That's all very clear. On the numbers, it looks like you have the same numbers as Pratt and are taking 18%. I understand why that is, but have you managed to independently arrive at these numbers or independently audited the Pratt assumptions in some way? And, and outside of the numbers, can you take us through what has happened in the past month or so, I guess, on the softer side, so with regard to any evolved ways of working or communicating with RTX on this, and how the discussions are going with, with operators and, and Airbus, I guess? Thanks. That's question one.
Yeah, Phil, I mean, regarding, I mean, a 1 billion charge for MTU is obviously a significant charge, so you can imagine that, also our auditors—so we are, as a company, get access to the assumptions, going into the assumptions from Pratt, obviously, on the one hand side, but also, our auditors in Q3 and more so in the year-end close, will have access to the data and documentation for an issue like that. Sure.
Okay. And anything softer in terms of the-
Yeah
... working relationship, has anything else changed?
Yeah, it's a good relationship. I would say it's a good relationship. We have a long decade, a legacy of working together. Obviously, on every level, hierarchy level of the company, we are talking about how to limit the impact on our customers. So what can we do operationally? There are some discussions, obviously, on the financials. The discussions with the customers and Airbus are only done by RTX and Pratt & Whitney. So we are not participating in these talks, but I'm seeing Shane next week. There is phone calls. We are together on that, working through the challenge.
Okay. Just so I understand, that Airbus and Pratt discussion topic, that's on the idea of potentially diverting some engines into this spares pool concept that I think we've heard about?
There are plenty of discussion between Airbus and Pratt & Whitney. I don't know the details.
Of course. Okay. Okay, understood. In terms of what would make a difference, I know that the key focus is to reduce the impact at airline customers. So if that was to be a solution, what kind of numbers would we be talking about in terms of how big a spares pool would be to actually support the ground fleet?
No, I, I cannot comment on this. We are focusing as, as a partnership with Pratt, we are focusing on increasing the MRO capacity, making sure that all the spare parts are available, that we need for this exchange, and that we find smart work scopes to reduce the turnaround time, huh? And that is the question, like I said, the first know-how we have at the end of this year, when the first heavy shop visit, or maybe a little bit earlier at Pratt side, but at our side, at the end of the year. And then we know better what to assume and how to go into 2024. Before that, I, I don't want to give speculative figures.
Okay, thank you.
Next question is from Chloé Lemarié. Please go ahead.
Yes, good morning. Thank you for taking my question.
Good morning.
I'd have the first one on the discussion with airlines, actually. Have any discussion been finalized at this point? Have you, like, set a dollar amount per day for aircraft on ground, or do these discussions still very much have to be completed? The second is, in terms of the charge you recorded in Q3, are you able to share some raw free cash flow hit timing in the past few, in the next few years?
Last point was, just in terms of the share of the shop visits that you're doing, the extra shop visits that you're doing, are you still comfortable with the mention you did in the past, that you can do a bit more than your current share in the total GTF work? Thank you.
So the first question, Chloé, I repeat myself, I don't disclose any information between the airlines, Airbus and Pratt. These discussions are done by Pratt and Raytheon, and they should comment on this one. Peter—
Regarding free cash flow timing, I mean, if you want to put something, I mean, that is obviously the result of these negotiations. But I mean, the lion's share of the cash out will probably happen in 2024 and 2025, with some spillover into 2026. That would be my assumption. So if you take the 1 billion we have, we have to share, then it's maybe 400 million next year, 400 million 2025 and 200 million 2026. So as a rough picture, huh?
I believe the last one was our share on MRO, and we are already doing today more than our program share. We have, in the past, significantly invested in our MRO capacity, so we would be able to do additional shop visits. That is dependent on a positive commercial discussion within our partnership.
If I-
And what I gave you, Chloé, was the pre-tax number, obviously. So the, the, that is obviously tax deductible. So when the AOG payment really happens, not upon putting in accrual on the balance sheet, so also the tax credit will happen in the same time frame, so 2024 to 2026, proportionally, obviously, yeah, with roughly 30% is tax deductible.
Perfect. Just if I can come back on the discussion with airlines. I know that you can't really share the outcome, but are they still very much ongoing? I mean, is this still something where there's a lot of, you know, potential different outcomes from this? Or do you have, like, a pretty good view of what these will turn out to be?
Well, the discussions are still ongoing. I think I've heard Chris mentioning that he personally is involved in the discussion. Shane Eddy, obviously, as well. They talked about 40-50 customers they talked to already. So I would say, there's a pretty good view on what's the status on both sides.
Perfect. Thank you very much.
Next question is from Ross Law of Morgan Stanley. Please go ahead.
Yeah. Morning, everyone. Thanks to take my question.
Morning.
I have three, if I may. Just to follow up on a couple of previous questions regarding your discussions with RTX on the GTF costs, and, and whether RTX's sizable share repurchase program, which they announced earlier this week, changes your stance or your negotiating power in, in these discussions at all. That's the first one. Second, on the GTF and how confident you are in the ability to ramp up this production to meet both Airbus OE and replacement demand during the additional shop visits?
...And then the last one is just on free cash flow. Obviously very strong in Q3, you mentioned, good cash collection. Can you just give a bit more color, and where that's coming from? Thank you.
Regarding the cash flows, we received a lot of payments, especially on the MRO side. We did a lot of-- It was a little bit-- We had receivables built up in the MRO in the first half year of 2023, and now in the third quarter, we really did a lot of cash collection. That was, in that respect, a very, very good quarter. It's really allocated in the all, the effect comes from our MRO customers. Maybe on the middle question, obviously, we are trying to increase capacity as fast as possible for the new engine production.
You need to distinguish between the MRO, obviously, where we have spare parts and labor work, and the new production. And in our industry, nothing is immediately. So there's an ambitious plan to increase production over the next year and years, and this needs to be backed by supply chain, by labor work, by skilled manpower. This is in discussion with Pratt & Whitney. And then that reflects me back to the, or brings me back to the first question. I don't know exactly what you asked, but this is a strong partnership, and we're discussing basically every day on what needs to be done to solve this issue, to overcome this issue, and to be back on our customer reputation as fast as possible.
No, no, no further details on this one.
Okay, thanks.
Next question is from David Perry of JPMorgan. Please go ahead.
Yes, hi, Lars. Hi, Peter.
Hi, David.
Two questions, please. The first one, maybe it's a bit unfair because for understandable reasons, you're not having the CMD this year. But when we, when I talk to investors, at least about MTU, one of the questions I'm getting asked a lot is: Is there any tail risk from the GTF situation? In other words, what, what does it mean for group margins post-2025? You've got very clear guidance to 2025, but is there any reason why we should think group margins would be weaker after 2025 or not, from, from this situation? That's the first question. And the second one is, I thought it was interesting that Raytheon announced a share buyback, with their CEO saying very strongly that he thought his shares were significantly undervalued.
You could argue the same, perhaps, for MTU, with the share price drop you've had. Would you give any consideration to a possible share buyback? Thank you.
So I would say margins after 2025. I mean, I elaborated a little bit on the impact of the 250 million extra MRO cost, which go in the aftermarket contract. So we have a very tiny impact in the profitability of the PW1100 aftermarket, also beyond 2026. But that is on group level, not very significant. So there's not a big impact on margins coming from that one.
Obviously, it's one thing only, Peter, but in the totality, roughly, I know it's, you're not having a CMD, but direction, group margins flat, post 25? Rising?
No.
I mean-
We don't give, I mean, guidance beyond 2025. We haven't even given guidance for 2020, 2020, 2024 yet. So that depends on a lot of things. So, I mean, we expect obviously aftermarket growth throughout of the decade, a further ramp up of OE deliveries and reaching a certain plateau at a certain point of time. So that is all I would say, so supportive to margins, but I wouldn't give a complete guidance for the years after 2025 right now.
Mm. Okay. Thank you.
On the other question, David, of course, we are undervalued. That's a clear picture we have. Does it lead us to a share buyback? I currently, you know, I don't think so. We have roughly three years to look ahead to overcome the challenges, both operationally and financially, and this is not on top of my agenda right now.
Okay. Thank you very much.
Next question is from Christophe Ménard. Please go ahead.
Yes, good morning. I had two questions. The first one on the free cash flow impact that was detailed earlier in the call. Is it all cash, or is there a chance that you reduce the cash cost? I mean, you basically mentioned the 1 billion and pre-tax, so and 30% tax applied to it. Is there any chance in the negotiations you're currently having, that some of this will be non-cash? That's the first question. The second question is not technical, but it's in Q1 and Q2, you had FX impact on commercial sales that apparently is not recurring in Q3. So could you help us better understand this?
I'm doing a back-of-the-envelope calculation. I'm also a little bit surprised, I would say. I mean, given the growth rate you gave, organic growth in commercial OE is more around 20%. And the calculation, I mean, if we look at everything organically, you apparently grew by something like 17% in Q3. So trying to understand that FX impact we had in Q1, Q2, and the impact we may have in Q3. I hope it's clear enough. Thank you.
... No, I mean, I would say that the strongest focus is obviously in reducing the penalties via a reduced wing-to-wing time. I mean, that is the focus. Will there be any non-cash compensation for airlines? I don't, I mean, I wouldn't comment on that. I mean, the negotiation package is done or negotiations are done by Raytheon, as Lars commented earlier. So, that would rather be a question for them. But I, I can't agree that a big portion comes out of non-cash compensation now. We might be able, as a consortium, to reduce the overall burden, but that is it now.
Can I-
I would say that, I mean, the growth rate, I mean, that would be something to discuss with IR, honestly.
Okay. Okay. No, no problem. If I may, then, just on MRO margin, I know you already discussed it earlier in the call. You also mentioned in your press release that, I mean, beyond Zhuhai, your EME had a positive impact on the margin. Is it same reason as Zhuhai, or is it... I mean, you, I think you mentioned the ramp up of EME. Can you elaborate a bit more? I mean, I was pleasantly surprised by the margin of 7.9% in Q3. That's the reason why.
I mean, you, we have to distinguish between the margin impact and the revenue ramp up. So, I mean, the, if you look on the 7.9%, 7.9% EBIT margin of the MRO in the third quarter, then that is massively supported by a strong equity contribution from MTU Zhuhai. I mean, you know, that we take 50% of the net income from MTU Zhuhai into the MRO EBIT adjusted. So that was a strong tailwind. EME Aero does not contribute a lot to equity results, but it obviously contributes to the revenue growth from GTF, so they do more shop visits.
So the revenue contributions from them is more and more significant. And it's also a source for maybe additional capacity for additional PW1100 shop visits in the future. So EME Aero contributes a lot to revenues, but not a lot to EBIT.
Probably comes at lower cost, I guess, as well?
Yeah, but I mean, it's, I mean, EME Aero, they build the shop visits to our MRO. I would say an MTU MRO builds it then further on to the consortium. But I mean, it's obviously the labor cost in Poland are far, far lower compared to our German facilities, and that is obviously a positive. It has a positive impact, yeah, that's true, compared to a shop visit which we do when we do it in Hannover.
Okay, thanks. Thank you. Thank you.
Next question is from Jorge González Sadornil. Thank you. Please go ahead.
Thank you very much. Good morning. I also want to follow up, and I'm sorry, sorry about this, on the MRO margins. But together with the inspection program. So, in the previous call, that you provided us with the RTX findings on the cost, you mentioned that you were considering taking more or taking a greater share now, on the efforts to solve the problem in your workshops. And you even mentioned today that you were getting a little bit more than you were supposed. So I was wondering how this can impact your independent business, if it has an impact at all?
Just to have a better view on the evolution of the margins for the following quarters. And also, it would be very helpful if you can provide us the share of independent works for this quarter over the total. Thank you very much.
Jorge, I think I mentioned that already. Yes, we're doing more than our current program share. Also, yes, we would be ready to do even more on that one, but that comes with a commercial agreement. We have independent business, we have independent customers that need to be served, and this is our priority as well, and both needs to be aligned, huh? So once we have an agreement with Pratt, we'll be happy to talk about it. Until then, we try to manage as best as possible between GTF burden and independent customers. It's an ongoing project, and this is three years to go. So,
Mm-hmm.
We will try to succeed within the next couple of weeks, and then we inform you and the market.
Okay, so it is likely that this, we will need ramp up capacities of some kind and not immediately, not working immediately?
Well, we did. I think I mentioned that earlier as well. We did invest in our capacity throughout the last years already. That means we do have, here and there, a capacity available, but we only change the nature of the programs when it is equally, at least equally, profitable.
Thank you very much for the confirmation. Go back to the line.
... Next question is from Aymeric Poulain, please go ahead.
Yes, thank you. Good morning. Two questions, please. One is on the market share risk for the GTF. Have you seen, since the second recall, any cancellation on the backlog, and regarding the current campaign and bookings? Are you forced to discount more aggressively to retain your share of the A320 family? And as a second question, pricing on the aftermarket, I think you're planning a price hike in November. Are you also able to do this price hike as you are facing all these problems and challenges on the GTF?
Mm-hmm. All right, I have a clear position on this one. Firstly, I don't see, and I haven't seen any cancellations on the GTF orders. The GTF itself, as I said in the beginning, is the technology of the future, and we need to not forget that this is a manufacturing issue in the past. So that going forward, the engines are good and are better with every modification we bring into that, and we have a GTF Advantage in the pipeline which should be even better. So, and just not forget, if you order an aircraft today, your delivery time slot is going to be somewhere at the end of this decade. Until then, all these challenges will be solved.
So I'm very confident on the long-term success of the GTF program also going forward in the next year or two. The price increase on the price side has already been done in September, so there's no no-
Okay.
impact on the plan now.
Thank you.
Next question is from Markus Mittermaier. Please go ahead.
Markus, we don't hear you.
I'm sorry. You can hear me now?
Yeah. Yeah.
Yeah, I was on mute. I'm sorry. I've just one question. Thanks for taking it. I think the 500 million bond is due in 2025, which you need to refinance next year, and at the same time, you have the cash impact 2024-2026 from GTF and compensation, as you just explained. So in order to manage the refinancing, addressing the GTF impact, is it on your agenda to come to the bond market in 2024 to address both uses with a larger bond issue? I just try to understand how you think about the future capital and debt structure, if this is already on your mind.
No, I mean, we have, it's not only- I mean, we, we cannot focus only on the GTF inspection program. Yes, it's a, it's a cash flow burden over the next three years, but we have to have the full picture. I mean, we are currently working on our budget process, and end of the year, we're gonna have a full picture how the cash flow over the next three years will evolve, and then we're gonna decide on our refinancing needs coming up in 2025, 2024. I mean, yeah, normally, I would say that you would start thinking about refinancing the twenty-twenty-five bond in the second half of 2024. Maybe we, we, we supplemented it with the, the, with the second, second instrument, or maybe not, but it's not yet.
It's at the end of our agenda, I would say. I think we're gonna think about the situation at the beginning of 2024, how we're gonna proceed on that one now.
Okay. Yeah, and thank you very much.
Next question is from Zafar Khan. Thank you. Please go ahead.
Thank you very much. Good morning, everybody. I've got three questions, please, if I may. The first one's on the customer support cost that's estimated at 5.3 billion. For the 100%, that looks like a pretty kind of fine-tuned estimate. Just wanted to know, please, what's the assumption on wing-to-wing turnaround on that? Is it 250, 300, in between? 'Cause the range is quite wide, the 250-300, and clearly, depending on whether it's 250 or 300, would have a major impact on what that number is. So are you able to help us on that? That's the first question.
Yeah, let me dive right into that.
Um, okay.
It's the best estimate we have right now, and obviously, there's a lot to happen, you know, and we, Peter-
Yeah
... said and I said, this figure needs to be improved, but we only have visibility on the first heavy shop visits later this year. So then we know exactly how to improve. Supply chain needs to ramp up quickly. All this is currently baked in this 250-300, and is our objective to bring that further down, again.
Okay. No, I was just wondering-
It has to work.
Yeah.
The turnaround, smart work scopes need to be addressed now.
I was just wondering, though, is it, is the estimate based more around the 300-day or the 250-day? 'Cause it's quite a wide range. So, you know, whether it's 250 or 300, I imagine we'd have quite a big variability on the final number. Are you sort of going in the middle of this range to get to that 5.3? Can you give us any help on that, because-
... Clearly, you know, if it's 300, you can get to 250, then that will be a major benefit.
It's probably somewhere in the middle, but the estimate in terms of cost that has been fine-tuned throughout the latest days and weeks, and that's why now RTX confirmed the figures. We are confirmed our figures, and everything that we improve is bringing this figure down.
Yeah. Just from the MRO-
Don't stick to that one number, 275 or so. It's, it's somewhere in the middle. Every engine is a little bit different.
Yeah. And then the additional MRO capacity that you're going to require. I think in the last call, you said that you were talking to RTX on maybe funding part of that. Are you still going down that route, or will you fund it yourself? The reason I ask is because, clearly, if RTX is funding that, then the extra work that you do may be on a smaller margin. If you're funding it, then maybe you can charge a commercial margin. So just trying to understand what the current thinking is on that.
All avenues are open. Yeah. When we say we talk about jigs and tools, we might talk about some hangar improvements, but we certainly do not talk about a new shop in the world, at least not short term. So the investments are rather, let's say, small, but we're talking all the avenues, whether they fund it and they have an impact on the margin or vice versa, part of the discussion.
Yeah. Okay. And just finally, please, if I may, can you give us any idea on what happens to working capital in the next couple of years, given this additional burden of these visits? Will there be major outflow on the working capital in the next couple of years, or can that be controlled? What's the thinking on that?
No, obviously, we try to limit the impact on working capital coming from the extra volume. That is also one part of the negotiation. So the commercial terms for the additional work we do cannot come along with a significant working capital impact, no.
Yeah, because that, that is a risk, I guess.
Yeah, that's-
Okay. Okay, yeah, thank you very much indeed.
Our final question comes from Olivier Brochet, Redburn Atlantic. Please go ahead.
Yes, good morning, Lars and Peter. I have a series of very small ones, if I may. The first one on the military OEM. You mentioned in the past that supply chain was providing some constraints, as it cleared. The second one is on the-
Yeah.
Okay, thank you. The second one is on the suppliers and the fire that happened at the beginning of the year and end of last year. Is it having still an impact on your, I would say, legacy programs?
Well, first of all, we are way better and advanced in terms of recovery. So the company and the employees over there are working very hard to overcome the issue, and we are quite pleased with the progress. It does not have an impact currently on the legacy programs, but we're still in the middle of the recovery. So that goes on until the first Q1, Q2 next year, once we are totally recovered. But positive message, yet we don't see an impact in our deliveries.
Then the PW 1500 and 1900 are not included in the numbers that you've shared for the cost. That's correct?
That's correct. Yeah.
And the last-
As RTX communicated, there won't be extra costs beyond already exist already scheduled shop visits. So that's the reason why there is no need to put up a liability or what, what's the extra cost?
Yep. So we won't have anything coming in the future on that?
From today's point of view, not.
Okay. Thank you, Peter. And then the last one on the, just to clarify, something. The impact of the PW1100, you've only booked it in the OEM division, and that is not going to have an impact on the MRO side?
Right.
Perfect. All very clear. Thank you very much.
You're welcome.
We don't have further questions. I will now turn the call back over to Mr. Thomas Franz for closing remarks.
Yes, thank you, Ria. And yeah, this marks indeed the end of the call. Thank you for your participation. Thank you to MTU's management for answering all your questions. And yeah, to all of you, have a good day and goodbye.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.