MTU Aero Engines AG

Good morning, ladies and gentlemen. Welcome to our conference call for MTU's Q1 2022 results.

We will start with a review and some key messages presented by Reiner. Peter will start with a financial overview and a more detailed look into our OEM and MRO segment.

After that Reiner will share our view on the current situation and the remainder of 2022. After that, we will open the call for questions.

Let me now hand over to Reiner for the review.

Yeah. Thank you Thomas and also a very warm welcome from my side.

Let me start with the market environment. The positive recovery trend continued in February.

Global air traffic improved to roughly 54% from 2019, driven by strong domestic demand. In 2022, passenger traffic is expected to reach 74% of 2019 levels and cargo traffic is expected to remain elevated above pre-COVID levels.

However, the impact of the war in Ukraine as well as the Zero-COVID strategy in China creates some uncertainties that need to be closely monitored. Let me now share some of our key messages we discussed with investors and analysts over the last few weeks.

The activity in our OEM and MRO segment is ramping up, which requires additional manpower. Currently we are facing some staff absence due to a high number of COVID cases in our shops, but are seeing a decline in the daily number of cases.

In the coming months, it will be key to increase our workforce and to train and qualify our new employees. From a general demand situation, we are convinced that there will be sufficient market demand in the next few years to justify higher production rates.

With our existing infrastructure, we are very well-positioned for the future. So consequently we are continuously evaluating, the necessity of investments and other measures in preparation for higher production rates.

Supply chain management is challenging, but remains stable at the moment. We are monitoring the situation very closely.

We are profiting from our strategy of two or three suppliers for certain components to secure the availability of our materials. Most of our crucial suppliers are larger companies that are well-positioned in the market and are able to manage the current environment.

A very limited number of suppliers source titanium directly from Russia. In total this amounts to 10% of usual yearly volume.

However, we have sufficient alternative sources in Europe and the US and already have sourced enough material in order to secure our production until year-end and further. With regard to the short-term, price increases we have a certain layer of protection due to the broad use of long-term supply contracts.

On the other side, contracts usually allow to pass prices increases towards our customers. In our military business, we are currently evaluating request from the German Armed Forces for additional spare parts and engines.

Additionally the prioritization of MRO services is under evaluation in order to increase the availability of the existing military aircraft fleets. In the medium-term, we expect further revenue benefits to be possible.

Let's have a look on a few key highlights from the first quarter 2022. Recently Air Canada has increased its order for A321XLR aircraft and announced its engine selection for the GTF.

The order has a volume of 30 fixed aircraft and 14 options. This is a great proof of the GTF position especially in the upper end of the A220 family with Air Canada being a new customer for IAE on A220.

On Wednesday this week, Boeing announced a further postponement of the entry into service of the 777X to 2025. We will take the respective measures within our company to adapt to the new time line.

In March, we signed an agreement with Pratt & Whitney to introduce the GTF engines for the A220 and Embraer E2 jets into our MRO product portfolio. This portfolio expansion further strengthens our position as the leading MRO expert in the market.

EME Aero, our MRO joint venture in Poland will carry out the maintenance of these GTF engine types and has already successfully completed the first shop visit for the PW1500 engine. The PW-1900G engine will follow next year.

On our MRO business, M2 maintenance is the first MRO provider to perform engine test once with sustainable aviation fuels. Testing on the V2500 engine with a 10% SAF plant began already in November last year and will be extended to other engine types.

For future engine tests, it is intended to increase the SAF content up to 50%, which is currently the maximum blend limit permitted. At MTU, we are using SAF early on and promoting it to use to our customers.

JetBlue and LATAM are the first customers to support this initiative with their V2500 engine fleet. At this meeting in March, our Supervisory Board agreed to the dividend proposal of €2.10 per share for our upcoming AGM on May 5.

This is an increase of €0.85 compared to last year. With the dividend payout ratio at 32%, we are back on track of reaching our target of 40% within the coming years.

And finally, based on the results for the first quarter, we are able to confirm our outlook for the current year. This reflects our current assessment and may be subject to reductions regarding the current developments in Ukraine-Russia and the development of air traffic in China.

I will provide some more details in a few minutes, but first let me hand over to Peter for the financials.

Yes. Thank you, Reiner, and a warm welcome also from my side.

For the first quarter 2022, total group revenues increased 19%, roughly €1.2 billion. In the quarter, we had a substantial tailwind from the FX rate.

So in US dollar terms, revenues were up 11%. EBIT adjusted increased 52% to €131 million, resulting in an EBIT margin of 11%.

Net income adjusted increased by 60% to €93 million and the free cash flow with €134 million is a strong start into the year. Main reason is our strong incoming customer payments, following our strong business performance in Q4 and dividend payments from associated companies.

In our adjusted earnings numbers, we have adjusted €52 million of one-off effects caused by the war in Ukraine, mainly factors are write-down on our participation in the engine program PW1400 for the Irkut MS-21 aircraft. So jumping into our business segments and starting with the OEM division.

Total OEM revenues increased 15% to €386 million. Military revenues are strongly up 25% to €108 million, mainly driven by spillover effects from EJ200 export engines from Q4 2021 into Q1 '22.

Commercial business revenues rose by 11% to €278 million. And within that, organic OE sales in US dollars were down by around 15%, driven by lower GTF and GEnx deliveries in Q1 '22.

GTF deliveries will pick up over the next quarters and also GEnx deliveries are expected to restart mid of the year or Q3 in the year. Organic spare part sales in [indiscernible] were up in the high teens year-over-year, mainly driven by narrowbody engines.

This business mix resulted in a strong EBIT increase of €78 million. EBIT margin improved to 20% in the segment.

So switching to the commercial MRO segment. Reported MRO revenues increased 21% to €890 million, while US dollar revenues were up 12%.

The GTF MRO revenue share came in a bit lighter than our expectations for the full year. EBIT adjusted increased by 34% to €53 million, resulting in an EBIT margin of 6.4%.

The higher EBIT adjusted margin was the result of a favorable business mix. At this point, I would like to hand back to Reiner for some words on our guidance 2022.

Yes. Thank you, Peter.

The first quarter results were broadly in line with our expectations. So therefore, we confirm our guidance for the full year.

We see overall improvements in air travel, especially with a decline in COVID infections and the lifting of travel restrictions. However, there are some developments that might impact this outlook.

China's zero tolerance policy towards COVID and its impact on air travel, as well as the impact of the ongoing war in the Ukraine, might affect this outlook. And furthermore, supply chain stability remains a challenging area of action.

We will monitor these developments very closely in the coming months and update our outlook, if necessary, in the course of the year. For our total group revenues we confirm our expectation at €5.2 billion to €5.4 billion, based on an FX rate of $1.15.

And within that, we expect military revenues to be up high single digits, commercial MRO revenues to be up in the mid to high 20 range, commercial OE to be up mid to high teens, spare parts to be up in the mid-teens. The EBIT adjusted in absolute numbers should grow in the mid-20% range.

And our cash conversion rate should be in the mid to high double-digit percentage range. Therefore, thank you very much for your attention and we are now ready to answer your questions.

Yes. Good morning, everyone.

Thanks for the question. So I saw some headlines this morning around you confirming a narrow-body production increase.

We heard something -- where we heard about a new deal with Safran this morning. I was wondering if there's any color that you can give us on what that means for you for 2024.

That would be the first question. And then, the second question would be on Zhuhai.

How is that being impacted at the moment, if it is being impacted by China? What's going on in China and how we should think about that?

And then, thirdly, on your comments on labor. Is labor constraints something that could be an issue as we move into Q2 as well, or is that something that you have line of sight on getting resolved?

Thank you.

Maybe, I'll start with the first question regarding production rates. We said this morning, yesterday is a similar, let's say, way of an agreement, as Safran mentioned this morning, with Airbus, to get, let's say, in minimum 1 to 1.5 years in advance an agreement about the production rates that means now for 2024.

We will not provide the exact numbers, but what we can say, yes, there is a similar, let's say, agreement with Airbus, as they said. We are sure that the market demand is there for this additional production rates.

And then, we have to look what will come next that, means for 2025 or later on. But it's too early now definitely.

Regarding China, I think, in absolute terms, its okay, still. We see very high volatility in the traffic development in China.

But still our shop in China is, I would say, the workload is okay. And last but not least, labor.

We are -- there are some challenges to, let's say, to get all the people, but I would say that it's not really a constraint we are facing with. So it's -- we are hiring, on the one side, engineers for the -- especially for the expected European fighter program and also, we expect blue colors for the expected ramp-up of the production rates.

But it's -- I would say, it's not a big challenge.

I mean, I would add that, especially, our suppliers in the MO divisions are outside vendors. So for where we outsource repairs to third-party shops, especially, I mean, the US shops typically we are very aggressive in the workforce cuts.

And so, they have issues to rehire. So we see that turnaround times of parts repairs are longer, definitely.

So that increase is also turnaround time in our MO shops, for example. So while we don't have issues or limited issues, as Reiner mentioned, in our own shops, there could be challenges in the supply chain, especially, from the USA.

Okay. And then, just a quick follow-up on the rate comments.

Is it fair to assume that the rate will go up in 2024 for you from a deliveries perspective versus 2023? Is that a fair assumption to make?

Yes, it is a fair assumption. Sure.

Cool. Great.

Thank you.

Yes. Thank you so much.

Good morning.

Good morning, Robert.

I've got a couple of questions for you. First of all, the first quarter margin in the OEM division was very strong.

Do you expect that to ease in subsequent quarters as the mix of new engines stick in GTF starts to head higher? And then secondly, you commented Reiner on the German defense budget increase.

Is it realistic to expect any sort of increase from that in 2022, or is this more 2023 and beyond? Thank you.

I mean regarding the OEM margin, yes, we had a 20% margin strong increase. I mean it was driven by a bit stronger military business you saw a 25% increase in the Commercial division.

We had obviously a decline in OE shipments driven by GEnx and PW1100, but also on the other hand side a strong growth in the that business so in the high teens range. Definitely, I mean, if you read our guidance I mean, we expect -- I mean the great case, two days ago said, I mean the 70 PW11 engines moved into the in the following quarters I mean there is a recovery plan for the deferred PW1100 shipments.

So, OE will be stronger in the next quarters. But on the other hand side, we expect continuous growth in spare parts levels.

So, we won't see a strong decline in the OEM margin in the following quarters.

Regarding the military business, I would say for 2022, it's a limited potential to increase maybe a little bit more spare parts or services. But the main impact will come in the coming years, not so much for 2022 -- maybe a small portion, but I would guess the majority of the impact will come 2023 onwards.

That’s great. Thank you very much.

Yes. Hi, good morning, everyone.

Hi.

I guess two related questions. First, a sizable portion of your narrowbody spares 70 comes from engines on the flight hour contracts.

So, how much pricing can you pass with the escalation clauses for those engines under contracts as opposed to the time and material where you can push through the pricing escalators annually? And second question is, we've seen strong narrowbody traffic recovery, but most of that has been driven by the new aircraft and the V2500 cycles, has recovered slower versus the GTF.

So is that a downside risk for your spares recovery trajectory? I guess, what's embedded in your forecast regarding specifically the V2500 cycles?

Thanks.

I mean in our forecast, I mean -- also, I mean we are perfectly aligned with Pratt and GE to see and what they say -- you see Raytheon. And they expect something like a 15% increase in shops on the V25.

So I think we don't look at the cycles specifically rather in shop visits, a number of shop visits. And there the assumption is a 15% increase in shop visits obviously also with a higher work scope pressure this is there.

Pricing on the FJ?

Typically, the labor rates on the slide -- or in the slide you can adjust it. So the flight hour rates are adjusted annually with a certain index.

That is also embedded there. It could be -- I mean you have to do that in a 10-year contract you cannot fix the rates for 10 years.

Right, I guess I mean do you have as much flexibility to push through pricing for the flat contracts versus time material?

That's not a flexibility. It's a fixed formula how that works.

But you cannot increase the pricing. I mean in the -- as in the time of material contract where you increase the price list every year.

So you cannot react in this 10 years contract as flexible as in the time material environment. Sure.

All right. Thank you.

Hi, Reiner. Hi, Peter.

Hi.

Thanks for taking my question. I have two actually.

The first one is just a kind of follow-up on the pricing comment. I was just wondering earlier in the week Raytheon said that they put their pricing up for this year by about 6%, which wasn't going to cover all of their kind of costs on some of those spare parts coming through this year.

I was just wondering if -- and they said they were expecting there might be a bit of a headwind to margin from that. I was just wondering if that was a sort of similar price that you've increased by and whether there's any kind of risk on that price hike that was put through in the fourth quarter of last year, sort of wasn't enough to cover some of the cost inflation that you might be seeing?

And my second question was just sort of around China and in traffic and just kind of what percentage of your fleet is exposed to China. And it would be good to kind of hear, if your factories are still open there again Raytheon other in the week were saying that one of their factories in Shanghai was closed currently.

So I just would be good to kind of hear your thoughts on that? Thanks very much.

We are not in Shanghai. We are in Zhuhai.

Yes, just more generally on China.

First, I mean I think 15% of the world narrowbody fleet is located in China. So 50% of the fleet so 5%, 15% of the CFM56.

Traffic has declined sharply due to the lockdowns definitely. So, you can see that in the daily flight figures or in the RPK numbers.

But typically, these lockdowns are yes released after 30 to 60 days if you look in the past. So, there is a certain risks for V2500 and CF680 shop visits in our shop in Zhuhai.

But up till now as Reiner mentioned earlier, I mean the shop is full due to the fact that especially in Q4, we had very strong deliveries to the Zhuhai. So that is -- I mean that is a certain kind of risk which we have to monitor closely.

Spare parts, price increases I mean we are -- let's say a shareholder or a risk and revenue share part in the program. So, we participate the price increases in Pratt & Whitney so the engine subsidiary operation vessel.

So, we have the same price increases on the program we are on with Pratt & Whitney as Pratt & Whitney has. So there's no other price increase from our side.

But they have -- also have in mind there is a time lag. I mean it's not -- if we see actually let's say increases of material cost or labor of some whatever number that's not automatically transferred into the contracts because in some cases, we have long-term contracts with pricing.

So it's not that the actual number exactly impacts your profitability in the contracts. So that's what you have also to have in mind.

Okay. Thank you.

that’s very helpful

Yes. Good morning.

Thanks for taking my question. A few quick questions.

The first one I understand you had longer turnaround times in MRO in Q1. Is it the same across the industry?

I mean does it mean that you could lose some market share around this, or it is just the norm at the moment? So that's the first question.

The second question is related to your Russian exposure in terms of MRO. Is it negligible, or do you have actually some V2500 or a little bit of to V2500 there or you used to maintain them?

And the third question is, around German defense. I think in the past we discussed Tornado replacement program around 2024.

Do you think chances that this could move forward and it could positively impact your 2024 kind of guidance or vision or plan you presented to us in the past in terms of military revenues?

Let me start with the turnaround time in the MRO division. I mean I do not expect to lose market shares from that because as Peter said, a lot of these issues are not caused by our own facilities.

It's more that we have outside vendors for example, having some issues. And I would guess that also the competitors use the same or similar outside vendors.

So I think everybody in the industry is faced with the same -- with similar issues regarding that issue. Defense budget, with the defense situation, yes another replacement.

I would not guess that it would be put forward. Our expectation is from 2025 and then for the next whatever three to four years the replacement will take place.

It's our guesses of today yes.

And regarding Russia I mean we have roughly 60 aircraft with our engines operating in Russia, so 20 with the V2500 40 with the PW1100. So it's a very low number as a percentage of our fleet.

So I wouldn't expect a lot from Russia.

Okay. Thank you very much.

Understood. Thank you.

Good morning, Reiner. Good morning, Peter.

Good morning.

I got one question. It's a bit more detail than I normally ask on a call.

But in your annual report which came out of you I noticed you've got a lot of cash a lot more than normal out of your associates in terms of the dividends you received. And then in your press release today you make a short comment about strong cash coming out of the associates.

Has something changed in your relationship there that's allowing you to pull more cash out? Is there any guidance for this year how much cash we'll get out of that business and that's ongoing?

No, I mean, what we meant regarding the associated the companies the dividend out of the lease cost of the company, which operates the lease pool of the PW1100G and that entity distributed a dividend in the magnitude of EUR 40 million this year. And...

You mean in 2021?

In 2022. I meant in Q1 2022.

So you see it also in the in the cash flow statement in the other slide that 40 million increase compared to Q1 2021 is the dividend which we received out of the LeaseCo company where we are at 18% shareholder as which is our program participation on the PW1100 engine. I mean in the past we contributed a lot to the building up of the lease pool.

So we injected equity there. And now I mean the lease rate is operated generates EBIT generates cash.

And we receive as a shareholder a dividend out of that entity. But there's no real detailed guidance for that one.

That's a bit of a volatile number.

So I mean in your accounts actually you had 85 million dividends received so about one-third of your cash flow.

Yes. We also received, for example, dividends out of Zhuhai it's accounted equity.

There's a policy that 50% to 60% of the net income is distributed by dividends and so on. So obviously, Zhuhai, the EBIT or net income of Zhuhai increases in the course of the year and we get more and more dividends out of Zhuhai.

Yes. Is that -- sort of stabilized in the forecast.

So this full number [Technical Difficulty]

The line is very bad. David.

I can't hear you.

Sorry. Just the Zhuhai bit I think it's fairly easy for us to model a standard payout.

But this cash coming out of the lease pool is that a sort of temporary issue, or is there a lot more to come?

Not a lot more to come. But that is a permanent thing but not always in that magnitude yes.

It will always be there but not always, let's say, 40 million -- 50 million per year.

Okay. Thank you very much.

Appreciate it.

Welcome.

Yes. Thank you.

I have a few. First one is, I think, I missed the comments you made on the spares momentum.

So could you tell us what it was organically in Q1 again? Second, is actually on the shop visit level in China at the moment.

How does it compare to the low point of 2020 so that we have a sense of the downside risk there? And finally just coming back on the cost inflation questions that were already asked.

I mean can you quantify roughly the impact that you've been seeing so far on margin and what potential measures you've taken, or if it's just purely offset by the escalation clauses that you have? Thank you.

Organic spare part sales in US dollars were up 19%. So -- and up until now we haven't seen really impact from cost inflation.

Because I mean in Germany we have regarding labor cost inflation we will see the next round of negotiations with the unions..

End of the year.

End of the year. So we're going to see probably the increase rather in 2023.

And the -- as Reiner commented on the supplier side I mean we have long-term contracts. So the pricing for 2022 is more or less more or less fixed I would say.

So that's true for the raw material for the semifinished goods here in the OEM division, but also obviously for the spare parts in the MRO division there's a fixed pricing. So price increase is rather something which we're going to see in 2023.

And the China shop visit, yes?

China shop visits. I mean that is currently I would say down something like 30%, but rather sequentially.

So, we had a very strong we had very strong deliveries in Q4 so incoming shop visits. So, the induction by pipeline in front of the shop was quite full.

So, the shop also is quite full. But now I mean due to the fact that on the one hand side the 737 fleet is grounded in China and flight activity has been reduced, so sequentially the deliveries to the shop is on a lower level.

Yes. And compared to the low point of 2020 roughly how--

I don't know. I can't say that.

You don’t know, okay. thank you anyway.

Yes, hello Reiner and hello Peter.

Hey.

Hi. Maybe just a few hopefully quite easy ones.

Maybe just to start with commercial MRO can you -- I think Peter, you might have said that the mix of GTF versus legacy engine revenues in the first quarter was maybe a little bit lower than you expected. Can you share a number with us at all of that and what you're expecting now that the full year will turn out like?

And then also thinking about commercial MRO I think back in February on the last call you said that demand has been very strong. There were a number of engines outside Hannover and perhaps other facilities as well.

Can you give us any idea about how you're seeing sort of current demand for commercial MRO? And then moving over just a little bit in terms of sort of supplier purchasing and long-term contracts.

Clearly, you have a large supplier base and a number of contracts. Is there any feeling you can give for us about the sort of average contract length you have with your suppliers, anything like that that sort of -- and effectively should we think about supplier cost increases as sort of fading in over a number of years, or do you have a large proportion of your contracts that would be renegotiated around at the same time?

And then very last question if I can just -- so turning over to the issue of defense spending again just in Germany. For you guys, is there any opportunity in terms of work to prove availability beyond what you do with your cooperative model contracts at the moment?

Are there -- is there any sort of if you will, opportunity on that sort of support or availability side to help the Defense Ministry? And beyond that, sort of, what do you think maybe the most promising opportunities are for additional revenue for MTU possibly in the coming years?

Okay. Maybe I'll start with the first two questions.

So, PW1100 share that is -- that was in Q1 in the 30% range. So, it was a bit lower.

I mean for the full year we expect something in the range of 40%. So, it was currently as I said a bit lower.

Market demand is -- I mean the picture is a bit more diverse. I mean I mentioned earlier the situation in China where deliveries to Zhuhai are currently -- I mean coming out of the base business V2500 CF6 is a little bit weaker.

But also I mean we could divert some engines PW1100 also to Zhuhai to be done because we introduced the PW1100 in Zhuhai last year. So, there's more capacity for doing PW1100 shop is down in China.

But generally speaking, I mean the market demand is strong in the MRO. So, we have a full induction pipeline in Hannover.

So, also I mean North American carriers, European carriers preparing for a strong summer season, continued strong demand from the freight operators from the customer base in Hannover. CF34 business in Berlin has recovered strongly.

So, overall, we see a very healthy demand in the global MRO business I would say, with the a little bit of the exemption of China due to the lockdown situation.

Regarding supplier contracts, I don't have the exact number in mind but I would guess that the typical let's say, range is about three to five years contract we signed. And I mean, there's not a clear strategy.

But I would also expect that every contract has to be negotiated at the same time. I mean it's an ongoing -- I would say maybe similar is our hedging policy, it's an ongoing process to extend the contracts and not every contract that as I said at the same time.

So it's -- so therefore not a specific risk in a specific point of time. In the military business, I would say the short term maybe for -- especially for next year is more the let's say increasing spare parts level for the Air Force and some additional service business in that area maybe also some spare engines.

But it's a limited I would say, it's another €50 million chunk or something like that. And mid- to long term it's the replacement of the Tornado, as we discussed before where we see high probability that the Eurofighter will get a huge portion of that existing Tornado fleet.

It's then the heavy helicopter program where we have seen some announces this week, that this selection has already been decided. On the other side, we have heard signals that the decision will be prepared in May between Sikorsky and Boeing.

If it's Sikorsky, it's the engine we are participating in. And last but not least it's the FCAS program the new European fighter program.

And after the election in France, we see high probability that this contract will be signed let's say in the second half of this year mid to the end of the year.

Great. Thank you very much

Yes. Hello, gentlemen.

Thank you for taking my questions. I have actually a couple of them.

I'd like to take them one by one, if okay for you.

Sure.

The first one is regarding the impairment that you took I think on the R&D expenses. Could you just comment a bit on what that was and whether we basically can think of a normalized gross profit margins.

So if I add back the €40 million that you booked into the COGS that you had basically an underlying gross profit margin of 16% and 16.4%. Whether this would be like a base gross profit margin going forward, that would be the first question.

I mean what we did -- I mean the PW1400 which goes on the Irkut MS-21 aircraft I mean there is a dual engine choice. There's one engine as I said the PW4000 which are very close to the PW1100, which goes on the A220neo family.

So there was -- you had to do some adoption work to fit the engine on the MS-21 Irkut aircraft. It's not in our work shape.

It's not in our work share. But we have obviously, to share according to our program share of 18%, the adoption R&D which Pratt & Whitney did.

So we paid for the deduction work according to our program share. that payments were capitalized, which is obligatory under IFRS.

And now obviously, due to the fact that on the one hand side we have the sanctions so that does not allow us to deliver the PW1400G-JM to Russia; on the other hand side the Russia communicated actively that they only rely on their domestic engine the PD14. So there's obviously, no market for that product anymore and we had to write down the PW1400 fully.

Okay. Thank you.

So you have two impairment numbers in your presentation. One is on Page 13, which is on R&D.

The other one is on Page 11 it's €52 million under the adjustments.

The €39 million is for the PW1400 so that's the impairment on the R&D. But as we also pointed out in the press release and so on the total impairment regarding Russia is €52 million.

So there were some write-downs also on receivables out of the MRO market that were beyond the PW1400.

Okay. And also booked in the COGS so the underlying margin would even have been even higher 17.5%.

Yes.

And this is like the baseline that you expect now going forward should it increase from here? And you mentioned something that the MRO margin should increase from this point on.

So that would also be the case for the gross profit margin?

Well we don't guide for gross profit margin. But I mean we expect – I mean the EMO margin to be in the area of 5% to 6%.

I mean it's always a question the extra customer mix, what is the exact work scope, what is the spare parts content, what is the labor content. So that can be a bit volatile in that range I mean the Q1 was extraordinary high as pointed out due to the fact that PW1100 share was in the area of 30%.

And these are shop visits which are – we have a very high material content in it and material does not generate EBIT in the MRO division. So that we have lower PW1100, higher independent MRO market, so the margin is a bit more favorable in Q1.

Okay. Then the shop utilization in MRO at the moment, so in Q2 versus Q1 is it – and what's the level right now?

And what is basically the capacity that you still have to increase?

Maybe I'll talk about Q2. So in Q1 the utilization was very high actually.

So the shops are more or less – they were all full also Zhuhai was full. I mean what we – what is currently a little bit our problem are a bit longer turnaround times to the fact that outside vendors.

So the backflow of outsourced repair parts is longer than usual due to the fact that I mean the US, especially the US shops have cut workforce aggressively and now struggle with their turnaround times which impacts us.

Okay. And you guide for a – there you guide for an increase in revenues in mid- to high 2020s.

Now you had 20.80% in Q1. So it should increase from now on you still have enough capacity for that.

And is that very much back-end loaded, or is it very linear?

No. It's I mean you do not forget that we have a lot of the MRO revenues come from the PW1100 and we have the joint venture in Poland with Lufthansa [ph], which is ramping up.

I mean now we – so that will ramp up throughout the year. And so the MO growth definitely will be back-end loaded.

So it grows quarter-over-quarter.

Okay. And then the next question sorry that might be a bit the basic question.

But your guidance, you talked about organic revenue in your guidance. And what do you mean exactly about it?

So this is before FX changes? And is it also before pricing changes, or is it including price FX?

FX. Including pricing, before FX.

Okay. And then the last one if still may.

You talked about the military potential for the privatization of MRO?

No.

In the beginning of the presentation you said that that's being discussed with the German Ministry that potentially the MRO of the fighter jets or the engines of the fighter jets are being privatized. Or didn't I get it correctly?

No that's not correct. We have for two engines, we have a so-called cooperative model which is now running for 15 years or more.

But it's not the potential to increase that.

Okay. Cool.

Thanks a lot. Thanks for taking my question.

You’re welcome.

Drop out, yes. Can we take next caller?

Yes. Good morning guys.

Thanks for taking my question. I have just a couple.

I wanted to follow-up a bit on the theme of cost inflation. I understand that cost inflation will be limited this year for you, because you have long-term supply contracts and labor cost renegotiation that will happen in the back end of the year, which mean that -- I understand that it's going to be more an issue for 2023.

It's a bit early to talk about this, but do you have a feel for if the labor inflation continues and the raw material prices do not go down, what is the type of pressure that you will feel by then? And you provided at the end of last year with this ambition to exceed in 2024, the 2019 EBIT adjusted.

Do you see a scenario where raw material prices and labor inflation would require you to put in place any additional cost-saving initiatives to achieve that target? And in that case, what is the typical type of cost saving initiatives that you could put in place quickly in order to protect the bottom line?

Thank you.

I mean, it's a bit difficult, because I mean on the one hand side, yes, there are -- we have that inflationary pressure. On the other hand side, we have the ability to pass part of that inflationary pressure on to customers with a certain time.

Like, I mean, you can -- if labor costs are increased, you can adjust obviously your labor in the MRO contracts. You have also that CPI basket, which is used to increase the pricing for new engines.

Obviously, as Greg [ph] has two days ago mentioned in his call, if the inflationary pressure is high, they could also use the spare parts price list and the increased spare parts pricing for one, two years may be above the typical 5% to 6%. So there are also measures on the revenue side to counter part of that.

On the other hand side, we have currently an FX rate of 105, which is obviously also benefiting our business. So that's the flip side of the call it maybe not near term, because as you know we have our hedging scheme in place.

But that allows us also to secure mid to long-term hedges, which are very favorable. So there are a lot of gives and takes.

But I wouldn't walk away from our -- from the picture that we in 2024 can achieve or exceed the 2019 levels regarding EBIT.

Yes. Just to maybe phrase it another way.

Do you -- are you today at group level contemplating the possibility of putting in place new cost-saving initiatives just as a contingency plan in case it's required, or you don't feel you need -- you're not at a level where you need to prepare for this?

I think we are not on the level where it's necessary. Look on the other side, we expect the ramp-up in the production.

And the mean to implement a cost reduction program at the same time when we ramp up the facilities, I mean, it would be very, very tough. And we do everything to as Peter said, to counter these issues, but I wouldn't see it as such a big issue as you discussed today.

I mean, yes, it's a headwind. On the other side, we have currency being a tailwind.

And therefore, let's wait and see. But I wouldn't expect too much for this year and even for next year.

That's very useful color.

Many thanks.

Yep. Thanks for taking the follow-up.

Just one last the selling cost of €68 million or SG&A basically sorry what's that the €6 million to €12 million difference between the €52 million and the €39 million are the €13 million difference booked in this line for the Russian impairment, or what is…

The depreciation on the receivables is typically booked into the SG&A line yes.

Okay. So there an underlying figure would not be €68 million, but something like €55 million?

Yeah, you're right.

Thank you. Good bye and good luck.

Thank you.

Second try. We cannot hear him.

So I think given that we don't get a connection, I just can offer that you connect to the IR team and we'll get things done. Other than that, we have no additional questions, and I think this marks the end of our call.

Thank you for participating and for asking the questions. And yes, stay safe and have a good rest of the day.

Bye-bye.