In the third quarter of 2024, MTU Aero Engines (OTC:MTUAY) AG (MTU), a leading provider in the aerospace industry, reported robust financial results during its earnings call. The company saw a significant increase in adjusted group revenues and earnings before interest and taxes (EBIT), attributing the growth to strong demand in air travel and a rise in cargo flights spurred by e-commerce. Despite ongoing supply chain issues, MTU remains optimistic about its growth trajectory, expecting to exceed €1 billion in adjusted EBIT for the full year 2024.
Key Takeaways
- MTU's adjusted group revenues for the first nine months reached €5.3 billion, a 14% increase year-on-year.
- Adjusted EBIT rose by 25% to €744 million, with the company anticipating it will surpass €1 billion in 2024.
- Global passenger traffic increased by 8.6% year-on-year in August, fueling demand for air travel and cargo flights.
- The MRO segment and a favorable mix of spare and lease engines drove revenue growth.
- MTU signed 28 GTF fleet management agreements, covering 75% of the fleet.
- Supply chain improvements are seen, especially with powder metal production.
- The leasing business in MRO is projected to yield approximately €500 million for the full year.
- Q4 revenues are expected to be around €2.1 billion, with an EBIT margin in the high 13% range.
Company Outlook
- MRO revenue from GTF is expected to be between 35% to 40% in 2025.
- The pricing environment remains strong, with an average spare parts price increase of about 6%.
- The Boeing (NYSE:BA) 777X program delay is anticipated to slightly increase working capital needs.
- R&D expenses are up, with €148 million spent in the first nine months and a projected full-year expense of around €220 million.
Bearish Highlights
- Supply chain challenges persist, though improvements are noted in powder metal production.
- The Boeing 777X program delay may impact revenue timing and raise working capital.
- R&D expenses have increased, indicating higher investment in innovation and future readiness.
Bullish Highlights
- Strong demand in the MRO segment and favorable engine mix contribute to revenue growth.
- GTF fleet management program shows significant progress with the majority of the fleet covered.
- The leasing business in MRO delivers above-average margins and is expected to continue to grow.
Misses
- There were no specific misses reported during the earnings call.
Q&A Highlights
- Analysts inquired about spare parts pricing, which increased effective October 1, 2023.
- The company discussed the growth in original equipment engine output.
- MTU has over 100 engines in its leasing portfolio, with an average green time of three to four years.
- The new Advantage engine's entry into service is projected for 2025, post-certification.
- FX hedging strategies were addressed, with the company utilizing a step-hedging model.
MTU's strong financial performance in the third quarter of 2024 reflects the company's resilience in the face of supply chain challenges and its ability to capitalize on the robust demand for air travel and cargo services. With a clear strategy for growth and a focus on maintaining a leading position in the independent market, MTU Aero Engines AG continues to navigate the complexities of the aerospace industry with confidence. The company's ticker, MTX.DE, represents its listing on the Frankfurt Stock Exchange, where investors and stakeholders closely monitor its performance and future prospects.
Full transcript - None (MTUAF) Q3 2024:
Thomas Franz: Good morning, ladies and gentlemen. Welcome to our Conference Call for MTU's Q3 2024 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 the latest update on the 2024 guidance. This will end the presentation part, and we will open the call for questions. Let me now hand over to Lars for the review.
Lars Wagner: All right. Thank you, Thomas, and also very warm welcome from my side. Let me start as usual, with a view on the market environment. Worldwide passenger traffic in August grew 8.6% year-on-year. Within that domestic travel, traffic rose 5.6%, while international traffic increased 10%. The Asia Pacific and Latin America regions experienced double-digit growth, while other regions grew between 4% and 10%. As in previous months, strong ticket sales and consistently high load factors reflect sustained high demand for air travel. Cargo flights remains at elevated levels as it continues to benefit from rising e-commerce demand, particularly from consumers in the U.S. and Europe, as well as ongoing capacity limitations in maritime transport. This strong growth reflects the favorable demand environment for air traffic. The demand needs an constrained level of new aircraft deliveries still suffering from supply chain challenges. As a result, older aircraft are kept in service longer than previously expected, resulting in lower retirement rates and a very solid demand for aftermarket services for these platforms. Limited MRO capacity and parts availability provides a solid base for price increases for future MRO services, spare parts as well as aircraft and engine leases. So what are the effects on MTU? Lower delivery numbers of new aircraft are resulting in a reduction of new engine shipments to air framers. This allow an increased delivery share of spare and lease engines to customers. We have seen this already in the first half of the year, and this trend continued in Q3, resulting in an ongoing favorable mix effect on our EBIT line. MRO demand remains robust for mature engine platforms like the V2500, GEnx, GE90 and CF34. Additionally, MTU's lease and asset business benefits from high lease rates, boosting MRO EBIT. The spare parts business performed strongly in Q3, particularly for narrowbody and mature wide-body platforms, reinforcing confidence in meeting our full year targets. Regarding the GTF fleet management plan, we are continuing the execution of the program in alignment with our program partners and are progressing in line with expectations. The output in new parts production as well as MRO output is improving. RTX further reported on the progress in customer settlements. Now 28 agreements covering 75% of the fleet are signed. Key factors to watch remained improvements in turnaround times, growth in MRO capacity and the availability of exchange parts. Pratt & Whitney is continuing to ramp up the production of these parts and we anticipate additional improvements through the coming quarters. And finally, last week, as you've seen, we published an ad hoc statement with our strong Q3 key figures and were able to raise our earnings forecast for 2024. Our EBIT is expected to exceed €1 billion already in 2024, reaching our 2025 target a year ahead of our previously communicated outlook. I will provide further details in a few minutes. Let me now hand over to Peter for the financials.
Peter Kameritsch: Yes. Thanks, Lars, and a warm welcome also from my side. In the first nine months of 2024, we achieved adjusted group revenues of €5.3 billion, up 14% from last year. This growth was supported from all business segments. In U.S. dollar terms, revenues were also up 14%. EBIT adjusted increased by 25% to €744 million, driven by a strong contribution from our MRO segment and a favorable business mix effect in the OEM segment. EBIT margin stood at 14%. Net income adjusted was up 23% to €541 million. And free cash flow ended at €213 million. Ongoing supply chain issues continue to put pressure on working capital also in Q3. Let's have a look into the business details, and let me start with the OEM segment on the next page. Total OEM revenues increased by 11% to roughly €1.8 billion. Military revenues were up 16% to €426 million. TP400 and EJ200 aftermarket and funded development work for the next-generation fighter engine were the growth drivers in that segment. Commercial business revenues in Euro rose 9% to almost €1.4 billion. Organic OE revenues in dollars were up in the low 20% range, mainly driven by higher GTF and IGT deliveries. As in previous quarters, we saw a healthy volume of spare and lease engines supporting profitability. Organic spare parts sales in U.S. dollars were up high single-digit. Main growth drivers were the V2500 wide-body platforms and PW2000 and the GEnx, as well as business jet engines. EBIT adjusted in absolute numbers increased 19% to €444 million, resulting in a margin increase to almost 25%. The EBIT benefited from the strong growth in military revenues, a more favorable business mix in the new engine sales and an increased volume of spare parts sales. Now let's turn the page and move on to the Commercial MRO segment. Reported MRO revenues increased by 15% to roughly €3.6 billion. U.S. dollar revenues were up in line also with 15%. Main revenue drivers here were GE90, the V2500, GEnx and CF34, and our engine lease business. The GTF share was at 31%, which remains slightly below our full year expectation of 35%. EBIT adjusted increased 35% to €300 million, resulting in a margin of 8.4%. The higher margin was the result of a better contract mix in independent business and a lower share and material intensity of GT FMO. Furthermore, the strong results from our engine lease and asset management business continue to be very supportive on EBIT. At this point, I would like to hand back to Lars for some words on the update with guidance 2024.
Lars Wagner: All right. Thanks, Peter. As announced on October 15, we updated our guidance for the year 2024. While the organic growth outlook as well as the free cash flow guidance are unchanged, we raised our earnings guidance for the financial year 2024. Adjusted EBIT is now guided to slightly over €1 billion. Our previous guidance implied an EBIT adjusted between €950 million and €980 million. This upgrade was based on the strong development we presented in the Q3 results as well as the outlook for the remainder of the year. At our Capital Markets Day in 2022, we issued our ambition for 2025 with €8 billion of revenues and €1 billion of EBIT adjusted, 8/1/25. These challenging targets were well received by the market and being able to cross the finish line on EBIT adjusted one year earlier greatly demonstrates the potential of MTU, our teams and the market we are in. And to put this into the right light, we achieved our absolute profit goal one year ahead of time. While some of the results are supported by trends that became more pronounced than expected, we are very pleased by this development. And to sum it up, MTU has taken advantage of all the opportunities the market offered and will continue to do so in the future. With the current tailwinds, we are heading into the future and will continue to benefit from the significant growth opportunities in our industry. Thank you very much so far for your attention, and we are ready to answer questions.
Operator: Thank you very much. We will now being the question-and-answer session. [Operator Instructions] We will now take our first question. Mr. Robert Stallard from Vertical Research, may we have your question.
Robert Stallard: Thanks so much. Good morning.
Lars Wagner: Good morning.
Peter Kameritsch: Hi Robert.
Robert Stallard: I have two for you. First of all, on the timing of GTF fleet management plan compensation. Do you see these payments moving to the right, but the overall total remaining at the same? And then secondly, on the spare engine mix, very strong year-to-date. But when do you expect that mix to revert to something more normal? Thank you.
Peter Kameritsch: Peter here, Rob. So, I mean regarding the payment schedule of the fleet management plan, I mean you heard probably the RTX call. So they expect €1 billion of payment for the full year, and we see it in a similar way. I think it moves a little bit to the right. If you look only into 2024, and 2025 and 2026, that has to be seen how the exact allocation to the two years will be. But in [indiscernible], I mean, 2025, 2026, the payments will be probably be done for the full provision amount.
Lars Wagner: And then the mix on the spare engine, we would see – what you see the mix in the market, how fast obviously was this able to ramp up its production. We are also laser-focused on supporting their delivery stream. And whenever there's a potential opportunity, we go into the sales and leading market.
Robert Stallard: That’s great. Thank you very much.
Operator: Thank you. We will now take our next question. Mr. Ian Douglas-Pennant from UBS. Please go ahead, we may have your question.
Ian Douglas-Pennant: Thank you very much. Firstly, on the spare part sales, could you comment to what extent has improvements in the supply chain allowed for this result that we've seen here versus your expectations at the beginning of the year and the challenges that we saw? Has that eased up maybe quicker than you thought? And secondly, on the MRO side, can I just confirm that your contract terms have not changed in any way that allows this increase in profitability on the core maintenance work? Thank you.
Peter Kameritsch: I wouldn't attribute it to different conditions. So as we said in our presentation, I think the strong leasing business, strong asset and leasing management in our Netherlands facility that was, I would say, the main driver. And the contract mix and engine mix, that is also a small tailwind, but the major tailwind came from that part of our business. The equity sale contribution was more or less flat year-on-year. So we reduced the losses from EME in the quarter slightly. So that is the effect we see on the equity contribution. These are the two elements, I would say.
Lars Wagner: And regarding supply chain, I mean, I'm okay with the status of the supply chain. Am I happy? Not yet. But some of the parts have improved and recovered way earlier than we expected, and some of them will do so in the remainder of the year or even next year. The powder metal itself is ramping up very quickly. Is it enough? Not yet. But I see a good trend here as well. So in general, supply chain is improving to the better side.
Operator: Thank you. We will now go to our next question. Ms. Chloe Lemarie from Jefferies. May we have your question?
Chloe Lemarie: Thank you for taking my question. I have two, if I may. The first one would be actually on the leasing business in MRO. Could you maybe share a little bit more color on this? So how much it represents in the total now? And maybe help us understand the scale of the year-on-year contribution to EBIT from the leasing business. The second one was actually on the free cash flow guide. So at this point, you're obviously not refining the guide. So I was wondering whether you still have some high level of uncertainty on the compensation payment amount for Q4 or if it's got to do more with inventory and other line items? Thank you.
Peter Kameritsch: I mean, the latter. I mean we have two moving parts – two big moving parts, obviously. So the situation in the working capital. So depending a little bit on parts supply across all programs in the MRO, not only GTF, obviously, also all other engine programs suffer from very extremely stable supply chain. That's the one element of volatility, and the other is the exact timing of payments to airlines. And so that is why we don't refine the guidance. It's still – the outcome can still be in a broad range, yes. So that is special to that year, I would say. Leasing business, I mean, for the full year, we expect something in the magnitude of €500 million for that unit. So for the nine months, it was in the magnitude €350 million or so. And that is – we don't strip locations out EBIT-wise, and also – but it is significantly above average margins compared to the average MRO margin. So I mean, what we do there is we buy basically used engines, lease these engines out to airline customers, our MRO customers. And at the end of the lifetime, we typically tear it down, extract the used material, use the used material in our on shop or sell the used material to other shops or we do also to engine trade. So buying the engine, selling the engine directly. So there are all kinds of, let's say, asset management operations, which you find there and that's under the roof in Amsterdam.
Lars Wagner: And it's a very good business, and we see that as a continuing very good business. So we are we're actually focusing how to grow this business in the future. And you can see now this year, it's a significant benefit and impact on our EBIT line.
Chloe Lemarie: Perfect. Thank you.
Operator: Thank you. We will now take our next question Mr. George Zhao from Bernstein. May we have your question?
George Zhao: Hi, good morning, everyone. I wanted to ask for some clarification on the OEM numbers. Year-to-date organic growth for the commercial OEM was plus 9%. In H1, that was plus 16%. Do you have the Q3 organic number? In either case, it seems like there was a huge gap between the Q3 organic and the 18% reported growth for commercial OEM. So what is driving that gap?
Thomas Franz: George, I think we have – this is Thomas speaking. I think we have a slightly different baseline there from the growth numbers. I think that's something that we can clear up on the – between the IRs from our side with you, if you want.
George Zhao: Okay. But what's the Q3 organic growth for the OEM business?
Thomas Franz: So at the end, the organic growth, year-to-date is what Peter has illustrated, so low 20% range for the OE revenues and high-single digit for the spare parts. And how that comes up to the overall number, that’s I think a detail we should clarify between ourselves.
Peter Kameritsch: Yes. Different small elements in revenues play a role there. So it’s a very detailed question, actually.
George Zhao: Okay. We can follow-up on that later.
Peter Kameritsch: Yes, yes.
George Zhao: Separately, on the increased EBIT guide, could you talk about kind of how you’re thinking about margins in terms of the division? I mean clearly, MRO, last quarter, you said 8% for H2, you’re above that. How do you see that sustaining the currently elevated levels for Q4 and potentially into next year?
Peter Kameritsch: In Q4, it will be more or less in the same ballpark, a little bit below, I would say a little bit – maybe a little bit below 14%. I mean if you do the math, I mean, we’re going to have a Q4 in the magnitude of €2.1 billion of revenue. So we’re going to see a pickup in even more MRO volumes. We’re going to see also spare parts growth. We’re going to see a strong Military quarter. So a very strong revenue quarter, 2.1%. If you take the midpoint of our guidance, 7.4% versus the 5.3% after nine months. And if you do the math, I mean, we expect something like €180 million, €190 million of EBIT. So we’ll be a little bit above the €1 billion, and that translates into a margin of, let’s say, high 13%, 13.8%, 13.9%. But we have to see how, let’s say, the spot rate at the 31st December plays out and so on, that all plays a role how revenues come in. So that’s the picture more or less for the fourth quarter. And then going forward, I mean, for 2025, I think you should wait for the Capital Markets Day that we’re going to speak about 2025 revenue drivers, so how the delivery skyline will be roughly from our point of view and so on. So there’s nothing I think we should talk about on the nine-months call.
George Zhao: Sure. 4Q for us, thinking more about by segment, that’s the Q3 strong MRO margins, should that be sustainable through Q4?
Peter Kameritsch: Yes, in that magnitude of 9%, I would say. Is it then 8.8% or 9.2%? Let’s see. It all depends, let’s say, which shop visits you bill, is there a high material intensity or lower material intensity. So it’s not completely exact revenue number will be. But in the range of 9% is a reasonable estimate, yes.
Operator: Thank you. We will now take our next question. Mr. Carlos Iranzo Peris from Bank of America. May we have your question?
Carlos Iranzo Peris: Hey guys, good morning, and thanks for taking my questions. I actually have two. The first one, I just wonder if you could comment a little bit how should we think about the MRO split in GTF versus independent for 2025? And then any color you could share in terms of pricing dynamics on the independent MRO, that would be really appreciated, please.
Peter Kameritsch: Revenue split in 2025, that’s also something we will give on the Capital Markets Day. So it will be in the range of 35%, 40%, so in that, that ballpark. We’re going to stay that in the ballpark, I would say. Pricing environment in MRO is obviously a good one. We have a very high demand and limited capacity in that environment. Obviously, it’s a very good environment for pricing. On the other side, I mean, we have obviously long-term contracts with our customers. So in a running contract, you have maybe escalation clauses, but it can directly increase prices. But some new contracts, obviously, and for contract extensions or so, you can renegotiate or can negotiate higher prices. Sure. And you’re going to see that, that tailwind we’re going to see for some years for sure, yes.
Operator: Thank you. We will now take our next question, please standby. Mr. Phil Buller from Berenberg. May we have your question?
Phil Buller: Hi, good morning.
Peter Kameritsch: Good morning.
Phil Buller: Thanks for the questions. I also have two, if I may, I’ll go one at a time. Firstly, you’ve got some pretty favorable dynamics at the moment. You referenced the word elevated in the text, which makes sense. But do you believe that anything has changed or will change structurally in the minds of customers in terms of their planning for average retirement age is being structurally higher as they are temporarily? Or should we not expect that average age and the pricing dynamic to reverse at a similar pace as soon as the line of sight improves for Airbus and Boeing deliveries? I appreciate that might be a way off. But I was wondering if there's anything that you think maybe structurally change on that topic first, please.
Lars Wagner: A little bit of crystal ball, honestly. So maybe on the other side of the Atlantic, you see what's going on there right now. On the Airbus side, I know this continues focus on the rate increase. I would just say we benefit from that as long as we can. But I have no crystal ball to say how long is this ongoing. Plus, we are ramping up our production line in our MRO facilities. So we continue to serve the market. And this is our task to benefit from every possible upside that we can see. I have – it's difficult to say yes on that question, yes.
Phil Buller: That's understood. And then in terms of the competition, I guess when markets are this attractive, normally other people want a piece of the action, I'm thinking about the likes of Fortress, which feels like it's a growing threat, maybe that's wrong. But do you have any thoughts on how the competitive environment is evolving? And is there anything you're doing differently to gain share or fend off potential new entrants, please? Thanks.
Lars Wagner: Well, obviously, in our industry, there are only a handful of players who can do what we need to do. And MTU is very well positioned and the number one independent MRO provider. So we will benefit from that tailwind for sure. We have a look at what's happening at Fortress, and we're going to make up our own minds of how to react to that. And eventually giving some light in the Capital Market Day, but this is not a strategic call here. So we will investigate, we are investigating. But for now, we feel quite comfortable with our number one position on the independent market.
Phil Buller: Got it. Thank you.
Operator: Thank you. We will now take our next question. Mr. Ross Law from Morgan Stanley. May we have your question?
Ross Law: Yes. Good morning, everyone. Thanks very much for taking my questions. So two for me as well. On the GTF share in MRO, so you've tracked at around 30% for the nine months, but you've maintained the 35% expectation for the full year. That would imply a tick-up to around 50% in Q4. So is that the right interpretation? And what's driving that very large uptick in Q4? And then secondly, on spare parts sales growth in Q3. Could you give us a split between volumes and price, please? And lastly, if I can just squeeze one in, delay of the 777X, what's the impact on your business? Thanks.
Peter Kameritsch: Delayed 777X, I, mean we monitor the situation. It's – compared to our expectation, it's a small delay. I mean ultimately, it will result in a slightly higher level of working capital as we, let's say, produce – as we produce parts and modules and they don't find the very finally to the customer. So the delivery, the time for delivery is higher and the level of our consignment store is slightly higher. So ultimately, it will result in higher level of working capital and a slower – let's say, are slower and later ramp-up of revenues and dilution of margin, because also that program at the beginning will be slightly negative. Pricing, well, I mean, you know how spare parts price lists are increased. It's in the level of, let's say – net, let's say, 6% on average, I would say, because that is – the average, I would say, increase of spare parts prices, labor rates, maybe 2%, 3% upwards. And you can take the blend of both. So I would say, 4%, 5% tailwind from pricing and the rest is volumes. So GTF in Q4 will be above the 31% definitely, and it's both. So we're going to ship more engines, and that has to do with, let's say, the continued ramp-up we have in our Zhuhai facility and in the EME facility. So that ramps up throughout the year. And also we’re going to build more engines with, let’s say, a higher material content. So that will drive revenues upwards in Q4. Is it that exactly 35%? Let’s see. It could also be 33% or 34%, but it will be higher compared to the nine months.
Ross Law: Okay. Thank you very much for the color.
Operator: Thank you. We will now take our next question Ms. Milene Kerner from Barclays. May we have your question?
Milene Kerner: Yes. Hello, Lars, Peter, and Thomas. So I also have two questions. The first one is on your R&D, the expense, so a material rise in Q3. What do you expect for the full year? You had €178 million expense last year, and you have already spent €148 million at the nine-month stage. And then my second question regards the GTF. Could you help us with some context on how much powder metal production needs to increase from the current level to satisfy all the demand you have from the air framer, but also in service, without the need to balance on the MRO side?
Lars Wagner: Milene, that’s a tough one to answer. As you know, right now, every new engine is fully equipped with unlimited disk and powder metal, the MRO still needs to increase. And that ramp will continue over the next years as we’re getting in more, more engines over the years to come. So powder metal, we said at the beginning, is an issue that travels through 2024 until 2026, and most likely a little bit into 2027. Then the replacement powder metal should be done. And there is a double-digit increase necessary, mid-double-digit probably year-over-year until this year. And then it falls back into the pure OE lines. So it is an uptick that we need for three more years, and then it goes to a normal level that is in line with our delivery rates. There’s no powder metal issue afterwards.
Milene Kerner: Very helpful. Thank you, Lars.
Peter Kameritsch: Well, regarding R&D. So after the nine months, we had €172 million company-expensed R&D, and we expect something like €50 million, €60 million for the fourth quarter. So in total, let’s say, €220 million or something in that ballpark. It depends a little bit on the timing also of the payments we do here in that respect.
Milene Kerner: Thank you, Peter.
Operator: Thank you. We will now go to our next question. Mr. David Perry from JPMorgan. May we have your question?
David Perry: Yes. Hi, Lars and Peter, congrats on the numbers. Two questions, a little bit technical, maybe for Peter. One, just a clarification on the comment Raytheon (NYSE:RTN) made a couple of days ago when they talked about the €1 billion of compensation. Is that just their share? Or is that the total compensation for all the consortium? So if it’s €1 billion, you would have 18% of that, just wanted to...
Peter Kameritsch: Right. I mean that is our understanding. The €1 billion is the 100% share, and they obviously have a 51% program share and we 18%. And the €1 billion is the 100% share. And initially, I think they gave a guidance of €1.5 billion, and that is the indication that it moves a little bit for the – to the right if you only look on 2024.
David Perry: Okay. That’s helpful. Thanks. And the next one, sort of conceptual, I guess. But if you look at what your comments a few minutes ago on MRO margins could be 9% in the quarter gets you to about 8.5% for the full year. You’re sort of getting back to levels you were at pre-COVID. I know it was better 2018. But you were around the kind of 8.5%, 9.5%. So you’re back at those levels. But you’re carrying €1.8 billion of GTS sales basically close to zero margin, I think. So I’m just trying to understand what is it that’s made the underlying sort of traditional MRO work much more profitable, if the question makes sense? And is there something temporary? Or is this the kind of new normal for core MRO? Thank you.
Peter Kameritsch: A tricky question. I mean we’re going to talk about that on our Capital Markets Day. I mean why we are – why the margins are so strong. I mean we have that market situation. So much more, let's say, demand compared to supply. So you have a favorable, let's say, pricing environment in the current year. I would say the current, let's say, 12 months, the last 12 months. We have a very strong – really very strong contribution from asset management and lease business. And we have also – I mean, that's a technical answer, also a strong equity contribution from a very profitable location. And equity contribution grew. And you know we have only the PW1100 portion of the revenues in our, let's say, MRO revenue line. And the EBIT we take just 50% of the net income into the EBIT line. So that also, let's say, gives a certain tailwind to margin. So on the long term, I think we have head and tailwinds, but we're going to talk about that in our Capital Markets Day.
David Perry: Yes. Okay. So if I could just try one more. I know you don't want to give too much away ahead of the CMD, but is that any – sort of the same question as Phil about – are there any exceptional benefits right now. Is there a risk that you're going to tell that MRO margins would peak in 2024 and then come down? Or can we assume that they can at least stay at this level, maybe get better, if I'm allowed to ask that ahead of the CMD?
Peter Kameritsch: At least it's not our intention, that not our target that 2024 is the peak level.
David Perry: For MRO.
Peter Kameritsch: For MO. As in any other business, David, we have an ambitious target, and that goes up and not down.
David Perry: Look forward to the CMD. Thank you very much.
Peter Kameritsch: Yes. Me also. Thanks.
Operator: Thank you. We will now go to our next question Mr. Aymeric Poulain from Kepler Cheuvreux. Please ask your question.
Aymeric Poulain: Thank you very much. I've got some follow-up question to David's questions on the MRO. What is the turnaround time today at this MRO, if I may ask? And then on the associates, you mentioned Zhuhai as the driver of growth. But if you look at the EBIT contribution from the associates, it's growing at a lower pace year-on-year than the MRO top line. So what's driving the drag on the EBIT line there? And then on the OE side, you said V2500 organic growth was negative in the first quarter. It was coming back up in the second quarter. What was it in the third quarter, if I may ask as well? And then looking at the decision to cut the dividend in the first half, given the very strong progress you've had so far and the ambitious target you have, is there a reason to assume that you may actually resume the 40% payout sooner than later? Thank you.
Peter Kameritsch: No, there hasn't been a decision made regarding – I mean, we have finally canceled dividend policy for 2024 until 2026. So the time when we expect the payout for the fleet management program. And I would say we're going to revisit our dividend – or reinstatement of our dividend policy after we are positive [ph] that, I would say. So more or less at the end of the fleet management program. So we have the line share of the airline payments behind us. And so we have a very good picture going forward regarding cash flow. Regarding equity contribution, I mean, in the P&L, if you look on the P&L of companies accounted equity, it's an increase from 66% to 74%. So it's basically an increase. And MLS is not in equity, so MLS is in the – it's fully consolidated by 100%. It's not in the equity line. In the equity line, you find Zhuhai, you find the lease coal from the GTF and you find the EME joint venture with Lufthansa in Poland. Yes, the third question? It was about the turnaround time at MRO, but you need to specify. Because we have plenty of engine programs, is it in general or is it one program in specific?
Aymeric Poulain: In general, and how it's evolved throughout the year.
Lars Wagner: Well, I'd say this is – we have, I don't know, 20 programs in our facilities. I'd say overall, and this is in line with what we said all the time, supply chain was dampening a little bit the turnaround times, but we're improving on every program. So the average time I would probably say its three-digit. And it needs to go down to ideally double-digit, high double-digits in overall across programs. And then more specifically on other programs, you can touch base with our IR if you're more interested but the trend is decreasing in turnaround times generally for all our shops.
Operator: Thank you. We will now take our next question. Mr. Jorge González Sadornil from Hauck & Aufhäuser Investment Banking. May we have your question?
Jorge González Sadornil: Hello. Good morning. Thank you for taking my questions. Two, if I may. First one on the – on the spare parts and the spare parts increase in prices. Can you confirm from which month these price increases were started? That would be my first question. And second one, and again, on the growth of the OE segment. I am wondering if you can give us more or less the growth in output in general of engines in the period in units, if possible? Just to understand this growth, taking into account that normally the spare parts was understood to be like two-thirds of the revenue. Now at the base, it went up in the nine months, it looks like you are selling more engines at full price. Could you give us some color here why the OE revenues are going up at this pace, taking into account the spare part business in the nine months were not as high as what you are expecting for the end of the year? Thank you.
Peter Kameritsch: The pricing is effective October 1st. I mean, typically, we have something like a split two-third spare parts, one-third OE. So that's a rule of thumb. And then that can obviously fluctuate. So as engine mix, obviously, small engines, large engines, and that's why it does not make sense to add up deliveries. That gives you no information. If you have a quarter where you sell a lot of business jet engines, so the revenue impact is lower. If you have larger engines, then the revenue is larger and so on. So to add up deliveries doesn't really make sense. And yes, I mean the growth is supported by, I mean, spare engines are come at lower discounts, so the revenue impact is higher. So that one spare engine delivered has more revenue impact than one spare – one engine installed. That's true, but for at baseline, you can always say two-third, one-third.
Jorge González Sadornil: Okay. But then let me follow up on this. So for the commercial engine, sorry, for the organic commercial spare parts, are you here including also the expert engines who our selling at full price or only the parts itself?
Peter Kameritsch: No only the spare parts are spare parts, no engine. So the spare engine go into the commercial OE.
Jorge González Sadornil: Okay. But then we can say that you are selling more engines at full price and not a discount?
Peter Kameritsch: At a higher price, yes. Yes, sure.
Jorge González Sadornil: Okay. But this is...
Peter Kameritsch: And this is we mentioned that 2 or 3 times on the call that currently the share of spare and lease engines is higher than, let's say, a typical quarter. And that has...
Jorge González Sadornil: Okay. But maybe I have not – the question was not clear. So is there any trend on lower discounts in general for OEs or that remains more or less the same? And is it just a mix of this quarter and maybe the year?
Peter Kameritsch: Yes, it's the latter.
Jorge González Sadornil: Okay. Thank you very much.
Peter Kameritsch: Yes. Okay.
Jorge González Sadornil: I go back to the line.
Operator: Thank you. [Operator Instructions] We will now take the next question. Mr. Olivier Brochet from Redburn Atlantic. May we have your question?
Olivier Brochet: Yes. Thank you so much and good morning gentlemen. Thanks for taking my question. I would have a couple on leasing and on the portfolio. What is the asset value broadly that you have on your books for the leasing assets? And what's the average duration of the lease on the portfolio? That's the first question. The second one is could you give us an update on the timeline for the advantage, please?
Peter Kameritsch: I mean, Olivier, Peter here. So we don't disclose the asset value. But we have, let's say, a little bit more than 100 engines in our portfolio, covering, let's say especially the engines we have in our MROs portfolio. Because that is a typical exit after you – when you purchase a used engines, you use the green time on the engine. And when you have flown down the green time, you inducted for tear-down and use the used materials. So you have a naturally let’s say, exit via used material. The typical duration probably typically, as I said, used green time engines, you typically have, let's say, three, four years on average green time on the engine. So we have it, typically, three, four years in our portfolio and then you tear it apart for the lease engines. As I said, we have two – also asset management, so that can also mean you buy an engine and sell an engine directly, yes.
Olivier Brochet: Yes. Okay. Thank you.
Lars Wagner: And the advantage, Olivier, is I would say we are in a final approach towards certification. And what we said throughout the last months is that entry into service will happen in the year 2025. Don't point me on the month, but it will happen in 2025. Certification first, obviously, and then some months' time until the entry to service.
Olivier Brochet: And not a month, but quarter or half? Try my luck.
Lars Wagner: No, there are some variables also from the bureaucracy and from the authorities. I wouldn't – it's not at Q1.
Olivier Brochet: Okay. Yes. Thank you for that. I appreciate it.
Operator: Thank you. As there are no further questions, I would like to hand back to Mr. Thomas Franz, Vice President, Investor Relations, for closing remarks.
Thomas Franz: Yes. So I'm just seeing that we just arrived with another question, so we can digest that one more, and then we close the call.
Operator: Of course, no problem. We will take the last question. And the question comes from Victor Allard from Goldman Sachs. May we have your question?
Victor Allard: Good morning, everyone. Thank you for squeezing me in again. Just a question on FX. Looking at the evolution of the hedge book versus 2Q, we can see that rates for 2025 and beyond are, in most cases, seeing a deterioration of €0.01 or €0.02, which seems that in terms of the incremental hedges [ph] in Q3 that you've seen coming at significantly low rates. I'm talking like in comparison with what we've seen in terms of evolution of forward and spot rates. So I'm just wondering if there's been a change in your approach recently or should we just look through this 3Q evolution?
Peter Kameritsch: The latter. Yes. I mean you have to look to – I mean, actually, we have a step-hedging model. So we have a range – let's say, a range of hedge quarters for each quarter, so translating into obviously hedge covers for the year. And we roll that model forward and executed and tried to be not at the very low end. So we roll it forward, and we had a period of time when we had, let's say, a spot of 1.11 or so, a little bit above the 1.10. And if you add the forward premium, then you increase, let's say, the hedge book with these rates. Obviously, a little bit above 1.10, 1.13, 1.14, and that increases then the average hedge rate for the specific year, especially obviously, when the total volume of hedges is lower like in 2026, for example. So – but there's nothing specific to that.
Victor Allard: Okay, very clear. Thank you.
Thomas Franz: All right. So thank you all participants. Thank you, Lars. Thank you, Peter. Thank you for your questions. And if anything remains, get in contact with the IR team. Thank you very much, and have a good day.
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