MTU Aero Engines AG

Michael Roeger – Vice President, Investor Relations Reiner Winkler – Chief Executive Officer Michael Schreyoegg – Chief Program Officer

Christian Laughlin – Bernstein Benjamin P. Fidler – Deutsche Bank Norbert Kretlow – Commerzbank Christophe Menard – Kepler Cheuvreux Cristian Nedelcu – UBS James Zaremba – Barclays Christian Cohrs – Warburg Research Harry Breach – Raymond James Marco Ricci – Sam Lam

Hello, and welcome to our Preliminary 2016 Results Call. The agenda of today’s call is as follows, Reiner Winkler will give some highlights of 2016, and then Michael Schreyoegg will walk you through our OEM and MRO business segments a little bit more in detail.

Afterwards, Reiner Winkler will come back and present our guidance for 2017. At the end, we will have enough time to answer your questions.

Let me hand over to Reiner Winkler now.

Okay. Thank you, Michael.

Hello from my side as well. I would like to start at first to address the business highlights of 2016.

Overall, the market environment remained strong, passenger traffic increased by more than 6%, which is well above the 10-year average growth rate of about 5%. The low oil price at around $40 to $50 per barrel had also a positive impact on our customer base.

Lower ticket prices stimulated passenger traffic, and we saw another positive development from the oil price. Park and retirement rates came down quite a little bit, as it is still economical to operate old aircraft.

Airlines increased their capacities. However, load factors remained high at a peak levels at around 80%.

The engine order book remained at a very high level, covering eight years of production. The strong passenger traffic growth of 8% at the end of 2016 keeps us confident that the positive momentum will continue also in 2017.

2016 was a very successful year for MTU. Sales and EBIT were again at record levels.

At the Singapore and Farnborough Airshow we secured order wins of about $1.7 billion, lifting the commercial OE order book up to more than $7 billion. The geared turbofan engine family scored the highest order intake, followed by the V2500, and also the GEnx.

In the MRO business, we won contracts totaling more than $3 billion, mainly for CF34, V2500, and also geared turbofan engines, so the order books of both segments are at their record level today. Highlights of the year were definitely the entry into service of the A320neo with large customer Lufthansa in January, then followed by the entry into service of Bombardier CSeries with Swiss in July.

Both are equipped with the geared turbofan technology. A few days ago we signed an agreement with Lufthansa Technik to establish a new best-cost MRO shop for their turbofan engines.

Lufthansa is one of the major future operators of geared turbofan engines, and MTU will combine volumes and share the investments. Both parties will benefit from high volumes and a best-cost environment, targeting to make the new MRO shop the most competitive maintenance facility for narrow-body engines.

Good news as well from the military side. In December 2016, the final agreement for the Kuwait export order of 28 Eurofighter aircraft was signed.

Following our dividend policy, we intend to pay out an attractive dividend to our shareholders which will be announced on March 14. Let me now give you a brief overview about the financial highlights of 2016.

Our revenues increased by 7% to €4.7 billion, based on the strong aftermarket business. The Group EBIT adjusted increased by 14% to €503 million, resulting in an EBIT margin of 10.6%.

The net income adjusted increased by 13% to €345 million, resulting in earnings per share of €6.74. And the free cash flow increased by €10 million to €82 million.

Let’s now have a look what these numbers mean in the context of our latest guidance. We achieved our revenue guidance with €4.7 billion, despite weaker OE sales.

The stronger MRO sales compensated for the decline in new engine sales. As you know, we upgraded our earnings guidance twice last year.

The EBIT adjusted improved to €503 million, slightly above our latest full-year expectation, and consequently, the net income resulted in €345 million. The free cash flow was at €82 million, exceeding our guidance by €12 million.

So let’s have a quick look on our U.S. dollar hedge book.

We continued with our hedging with the following results. For 2016, more than 90% were hedged at a rate of $1.22.

This year roughly 80% are hedged at a rate of $1.18. For 2018, roughly 50% are hedged at a rate of $1.13.

And also for 2019, now roughly 17% are hedged at a rate of $1.12. So that’s from my side.

I would like to hand over to Michael for more details of our OEM and MRO businesses. Michael, please.

Yes. Thank you, Reiner.

Yes. Hello, everybody, also from my side, and let’s get started with the geared turbofan family of engines.

The entry into service of the A320neo in January, and then followed by the Bombardier CSeries in July, marked important milestones in the success story of our geared turbofan engines. Today, 50 A320neo’s and CSeries aircrafts are in service with 13 operators worldwide.

Roughly 130 GTF engines were delivered in 2016, and for 2017, 350 to 400 engines are expected. The geared turbofan engine program will be a key product for MTU over the coming years and decades.

The geared turbofan engines in service successfully performed over 100,000 flight hours by now. Despite some teething issues, all performance indicators, such as fuel consumption, noise, and CO2 emission reductions, have been met.

The GTF production at MTU is on track, and we are in the middle of the ramp up. In 2016, we have achieved another important milestone.

Our final assembly line for the A320neo engines started operations in October, and we have shipped the first engines assembled at MTU to Airbus. As one of the three final assembly lines worldwide, we will assemble about one-third of all the A320neo engines.

Important milestones have been achieved for the other GTF engine programs as well. The geared turbofan engine which will power the Russian Irkut MS-21 aircraft received its FAA certification.

The aircraft itself celebrated its rollout in June. The Embraer E2-Jet successfully completed its first flight in May.

In the meantime, Embraer has three test aircraft in operation, and they are on track for their entry into service in the first half of 2018. Mitsubishi has started its flight test program in the U.S.

Three prototypes participated in the certification program. Considering the recently announced delay, aircraft deliveries are scheduled to start in 2020.

In the wide-body segment, we have made good progress of the GE9X engine which will be the exclusive engine option for the new Boeing 777X. The initial ground testing, of the first development engines was successfully completed, and showed a flawless performance.

With delivering of the turbine center frame a couple of days ago for the second test engine, the development process is fully on track. GE intends to start flight testing within 2017.

As Reiner already mentioned in the beginning of the presentation, we were successful in winning additional orders in 2016. Right now, the order book for GTF stands at 8,000 engines, including auctions, which is a 20% increase compared to one year ago.

Let’s move to the military business segment. The final agreement regarding the Eurofighter engines for Kuwait has been signed in December 2016.

The agreement covers 28 Eurofighter aircraft, and MTU expects roughly about €100 million revenue, plus further aftermarket revenues out of this contract. With this new customer, the EJ200 engine production is secured for another five years.

Further export campaigns for the Eurofighter Typhoon are ongoing, and we see the aircraft and its engines very well positioned. The TP400, the engine for the A400M, received the expected improvement of the propeller gearbox last year.

The enhanced version was provided in summer, supporting operators to resume normal flight operations with the A400M. Up to now, about 40 aircraft are in operation by six different customers.

Embraer’s KC-390 equipped with V2500 engine made its international debut at the Farnborough Airshow. The flight test program is in full swing.

Two prototypes have already accumulated over 500 flight hours of the total 2,500 flight hours programmed. The aircraft certification is expected for 2017, and the first aircraft delivery to the Brazilian Air Force is scheduled for the first half of 2018.

Good news also from the CH-53 Kilo heavy transport helicopter built by Sikorsky. This flight test program includes four test aircraft which will cover about 2,000 flight test hours over time.

Up to now, the program has logged more than 300 flight test hours. The engine performance is flawless.

The entry into service for these helicopters is expected for 2019; and you know our program share is roughly about 18%. Let me now give you an overview about the financials of the OEM segment.

The total order book in euro increased by 6% to €7.2 billion. The commercial order book in million U.S.

dollar increased by 3% to $7.1 billion. In Q4, we recorded new orders for the GTF in the value of about $1 billion, and for the GEnx engine of around $300 million.

The military order book stands at roughly €500 million, including the Kuwait export. Total OEM revenues remain stable at €2.9 billion.

Commercial revenues were almost stable at €2.4 billion. New engine sales in U.S.

dollar were down by a mid single-digit number. Although GTF deliveries increased in Q4, they could not fully compensate the decrease of sales for the GP7000, PW2000, and V2500 engines, as expected in our full-year guidance.

Spare part U.S. dollar revenues increased by a mid single-digit number, fully in line with our expectations.

Again, the main driver of our spare parts growth was the V2500 engine. Military revenues were up by 4% to €504 million, just slightly better than expected.

EBIT adjusted increased by 13% to €322 million, resulting in EBIT margin of 11.1%. The margin improvement was supported by the above-mentioned business mix effects.

Let’s now move to our MRO business. In 2016, we were very successful in winning new engine campaigns for our MRO business.

In Q4, we secured additional $600 million with airline customers, which increased the total contract wins for 2016 to a number of $2.2 billion for the independent MRO business. The campaigns mainly – or these campaigns cover mainly CF34, industrial gas turbines, CFM56, and, of course, V2500 engines.

To give you a few examples, Sky Regional, Air Europa, and Garuda Indonesia, we could secure three long term contracts for the CF34 engine program with a total value of around $500 million. Statoil and Rojana Power were campaigns which we won for our IGT business, again amounting to almost $500 million.

On top of that, we gained new OEM flight hour agreement contracts as new engines, especially the geared turbofan engine family, are sold with long-term service agreements. Through our OEM program participation in these engine programs, we could secure additional MRO work share.

And just a few days ago we signed a joint venture agreement with Lufthansa Technik to establish a best-cost MRO shop for the geared turbofan engines. It will be a 50/50 joint venture starting its operation in 2020 and employing more than 500 people.

Around 300 shop visits are expected to be performed every year. With this joint venture, we continue our successful partnership strategy.

Both partners benefit from synergies of shared investment costs and economies of scale. It is our goal to build up the most efficient MRO shop for narrow-body engines in the world.

In 2016, we achieved another important milestone with the MRO readiness of the PW1100 engine. MTU Hanover already received its MRO certification from the relevant authorities in 2015, and we are now ready to support customers within the IAE network.

An important key success factor, hence enabler for future growth in the MRO business, is our engine lease business. The MTU maintenance lease services was founded in 2013.

For 2017, we plan to achieve revenues of almost €100 million, earlier than assumed in the original business plan. As already mentioned at our Capital Markets Day in December, we still see high workloads in all of our MRO shops, which are operated at full capacity.

This strong performance is also reflected in our revenues. We achieved new record sales in the fifth consecutive quarter.

For 2017, we expect another year of strong growth in the range of 10%. This is slightly lower what we have said in our Capital Markets Day in December, which again is a result of the stronger than expected Q4 2016.

The expectation for our MRO segment in absolute terms has further improved. Let me now switch to the financials of the commercial MRO business.

The MRO contract volume is now at a record level of $7.3 billion, and confirms our strong position in the growing MRO market and sets also the basis for ongoing growth in 2017. Revenues increased by 21% to €1.9 billion, which is above our expectations for 2016.

The growth was driven by high workloads for V2500, GE90, CF34, GEnx engines, and industrial gas turbines. EBIT adjusted improved by 17% to €181 million, resulting in an EBIT margin of 9.5%.

Thank you very much for your attention, and may I hand now back to Reiner for the outlook 2017?

Yes. Thank you, Michael.

I would like to conclude with our guidance for 2017. Starting with the military business, our military business will remain in the range of €450 million to €500 million, and after we have seen a couple of years at the upper end, we expect in 2017 sales to be more at the lower end.

And the main reason for the high single-digit percentage decrease is the reduction of the EG of the Eurofighter engine production. The new engine sales will increase by a high single-digit percentage driven by the growing GTF engine deliveries.

Spare parts sales growth remains at a strong mid single-digit percentage, and the main driver will be again the V2500 program. Our commercial MRO business continues to be one of the growth drivers in 2017.

It is expected to grow around 10%. All the above-mentioned effects will result in total revenues in the range of €5.1 billion to €5.2 billion.

The improved hedge rate will over-compensate the slight headwind coming from business mix effects within the OE and MRO business, so we target to keep the elevated margin of around 10.5% we achieved last year coming from below 10% in 2015. Net income should grow slightly stronger than the EBIT as we expect lower interest expenses.

For the free cash flow, we expect a low double-digit cash conversion, with free cash flow to further improve to a low €100 million number. 2017 will be the last year of our investment phase.

So starting from 2018, we continue to expect additional momentum in EBIT and free cash flow growth, as discussed at our Capital Markets Day. So thank you very much, and we are now ready to answer your questions.

Yes, thank you. Good afternoon everyone.

Two questions from me. One is around GTF, and the other is around the commercial aftermarket.

So starting with GTF, and as you think about the ramp up into 2017, what areas of the production process are you focused on most in terms of risk areas and factors? Is it around the supply chain or something else?

So if you could just comment on that. And then the second question will be just – well, it’s really around the spares growth.

So you said mid single-digit overall, largely driven by V2500 on that side. If you could just talk to – about some of the other big pieces, particularly PW2000 and CF6, what those growth contributions were, that would be helpful.

Hello, Christian. It’s Michael.

Totally unexpected question on the sales, I have to say.

Yes, I know. I never ask it.

No. Just to give you a flavor, growth comes obviously from the V2500 in the low to mid-teens area, which we’ll expect in 2017.

On the other programs like CF6, I would say stable also throughout 2017; same for PW2000. And some of the other programs like GP7000, Pratt & Whitney Canada, we would expect an increase up to mid single-digit.

So in total, if you sum this up, a mid single-digit upturn is well expected. On your question on the risk side, we started the ramp up actually not this year and last year; we were preparing for this ramp up in the last five years, actually, with the investments which we did here in the Munich facility but also the Polish facility.

And I think you have seen also our facilities in Poland. This is something which needed long-term preparation.

The production process has been qualified already years ago and we are proud to say that we have achieved a stable production rate. And, therefore, I do not really see risks on our workshop for geared turbofan engines for 2017, and also for the ongoing ramp up in the following years.

Okay. Thank you.

Yes. Hi, there.

I’m impressed with the middle initial I’ve been given as well. I had three questions, actually.

The first one was just around the TP400, where yesterday, Airbus seemed to be talking of the still ongoing nags and problems with the propeller gearbox, which seems slightly at odds with what I’d sensed is your confidence that the PGB issue is behind you. I’m a bit confused as to what’s really going on there, and if you can help me understand whether there are still issues there; whether there’s still a permanent fix that you need to develop, and at whose cost that will be.

The second question was just on the free cash flow guidance, where if I’ve read your statement correctly, the implication is we should think about a similar percentage to that which you delivered in terms of conversion from net income in 2016, repeating in 2017; i.e., around about 20% or 25%. That was less than I was expecting.

Are you being cautious there, or are there some investment drags; the new MRO JV with Lufthansa, for example, that you’re now capturing in that, that I’m maybe ignoring? The third question, another one just on GTF ramp-up.

Not so much from your perspective, I’ve actually got good confidence that you can deliver what you need to deliver, I guess it’s looking across the entire GTF manufacturing system, without naming any names of any of your other partners, as to your confidence that the partners and the other guys involved in the program will be able to support the 350 to 400 modules that you would hope to deliver this year. Thank you.

Maybe I’ll start with the free cash flow number, Ben. Yes, you are right.

We are expecting a cash conversion rate similar than last year, so something between 20% and 30%. As we said already during the Capital Markets Day, it will be the last year with that lower number, and from 2018, we expect an increase.

And there’s no impact from additional investments like the JV with Lufthansa. I think it’s more related to the still, let’s say, high number of R&D spending and CapEx spending, but it will be the last year for that, definitely.

TP400?

Hi, Ben. I think, on TP400, we have completed our homework.

We have developed last year already a fix for the propeller gearbox, also in a very close relationship and working relationship with GE Avio but also with the involvement of Airbus gearbox helicopter – or helicopter gearbox experts. So there was a good teamwork, and this led to the qualification of an enhanced gearbox and delivery of this enhanced system starting in August last year already.

So with this gearbox, we are meeting the specification and the customer needs. In October last year, we have then further thought about additional ideas, a couple of handful of improvement measures which we will bring to the field in September this year.

But this is over and above the specification, I have to clearly say. We have supported the final assembly line of the A400M built in Seville last year, and just to give you a number, by end of December even six engines have been stored in Seville.

So I think from a supporting point, supporting the assembly line, we did a good job last year. On your question on the geared turbofan, I have full confidence in the ability of our partnership to deliver the committed number of engines.

Very thorough industrial reviews have been performed, capacity increases have been initiated where necessary, and I am very confident that we can meet the 350 to 400 geared turbofan versions for the various customers.

Thank you very much.

Good afternoon, ladies and gentlemen. A question on the segmental earnings, if I may.

When looking at the margins, I understand that in Q4, OEM margins have been somewhat weak, or surprisingly weak I would say from my perspective; and it looks like also for the consensus while MRO has been surprisingly strong. And my interpretation would be, also looking at your guidance, that for 2017 the headwinds from the mix in commercial OE should be buffered by still strong MRO sales and strong MRO margins.

So in this respect, can you maybe comment on the drivers of the margin development in the segments in Q4? And maybe also with regards in particular to commercial OE and the impact of the GTF on the margins in Q4, you indicated on the Capital Markets Day that we are getting close to the target cost for the manufacturing of the GTF components, which still leaves it interesting to learn more about the quantification about the margin impact from the GTF in Q4.

Maybe you can shed some light on that too.

You are right with the comments you made. The main driver for the lower margin in Q4 was the delivery, the number of deliveries for GTF engines.

Roughly, 50% of the full-year volume has been delivered in the last quarter, so consequently, that put some pressure on the margin within the Q4 in the OEM segment. On the other side, the MRO segment performed quite well due to the high volume we still saw in that business.

Yes. We are achieving our manufacture target costs.

That’s right. But on the other side, you know in the beginning there are special launch customer conditions, and so on, so that there is some margin pressure when you introduce this new product into the market.

But going forward, we have all that mixed up in our guidance. Yes, there is a negative impact from the business mix in 2017 due to the strong increase in these numbers.

On the other side, we still see a very healthy aftermarket business; and we also see some tailwinds coming from currency due to the better mix between the hedge book and the expected effective spot rate.

Thanks.

Yes, good afternoon. I have three questions, the first one on geared turbofan.

You say that you’re confident in the target of 350 to 400 deliveries in the year 2017. Just wanting to understand why only 130 engines were delivered in 2016 – the target was 150 engines – and why you’re confident in the jump.

Because I think 350 to 400 engines was the target back in September, as spelled out by Pratt & Whitney. They are still sticking to this but, of course, there is a bigger gap to fill.

So that was the first question. The second was, following on the question on the TP400, yesterday my understanding is that Airbus on the press conference, not on the analysts call but on the press conference, said that they would be seeking financial contribution from the engine partners on the A400M program.

Have you started negotiations with Airbus on that, or is it just Airbus saying – wishing some negotiation on this? And the last question is on the Lufthansa joint venture.

You said in the press release that it’s €150 million of investment by 2020. I understand that the fact that you share the cost with Lufthansa minimizes or reduces the investment for you.

Can you quantify when it actually improves in a way your free cash versus your expectation a year ago or two years ago when you were not looking at that joint venture?

Okay, Christophe. Let’s start on the geared turbofan.

If you compare the delivery rate, the amount of geared turbofan engine deliveries in the fourth quarter, this is exactly the run rate which we need also in December. This is exactly also the run rate which we need in the months to come.

So it’s proven, in our view, that the consortium can meet the expected numbers. I think a lot of effort and additional capacity has been put up into this program, and also a lot of management focus.

I can assure you, we’ll make this happen. In terms of engine contribution I think you said it very nicely that there’s a wish in the air.

I’m not confronted by the wish, to be honest, and I do not see a reason to follow such wishes of a renegotiation. We have a global deal with Airbus achieved a couple of years ago where the technical configuration of the engine has been agreed, the production delivery plan has been agreed, and it’s our target to execute this contract.

On Lufthansa joint venture, yes, you are right. We plan to share the investment also 50/50, but without an impact on our free cash flow guidance because this is anticipated in the guidance already.

Okay. Thank you very much.

Thank you.

Hello. Thank you very much for taking my question.

Two questions from my side, first of all, on the GTF. Could you give us more color in terms of the dispatch reliability of the A320neo in operation powered by the GTF?

And secondly on the aftermarket, on your spares revenues in 2016, could you quantify which was the support you received in your spares revenue growth in 2016 from the V2500 service repair bulletin? And also, if you can comment when this service repair bulletin will be finalized.

And my understanding is it still continues at the beginning of 2017. Thank you.

Hello, Cristian. Difficult question to answer.

On the geared turbofan, dispatch reliability is well above 99%. I think it’s performing as expected.

In terms of spares growth of V2500, I think this is not only driven obviously by certain service bulletins or directives – such service bulletins are very common for all engine programs – I think the real trigger also for the spares growth and the V2500 is the fleet mix in this product. There are now more than 6,000 engines in the field.

They have reached now an age where these engines come back to the shops where large numbers of parts have to be exchanged. And I think this is the real dynamic in the spares growth also, not just in 2016, but also in the next eight to nine years until the middle of the next decade where we still expect a continuously rising aftermarket on the V program.

So there was this one service bulletin, but I think we cannot really link these two such single events.

Okay. Thank you.

Hello. I’ve got two questions, please, firstly, on tax.

Most companies have a cash tax rate lower than the accounting rate due to things like capital allowances, but you have been paying more tax than you report, both for the IFRS and the adjusted level for the last few years. Is this a temporary thing, or should we expect this to change?

And on provisions, there’s been a high level of increase for the past two years. What are the key drivers for provisions?

Do they decline as new engine programs mature? Thank you.

Maybe I’ll start with the first question regarding taxes. It’s more related to deferred taxes.

So there were some, I would say, one-offs, one-time issues in 2016 with deferred taxes in terms of our foreign subsidiaries. Going forward, we can still – or you can still calculate with an average tax rate of 28% to 29%.

Okay. Thank you.

And regarding the increase of provisions, the increase in provision is mainly related to the accrual of missing incoming invoices for the engine programs like the PW1000, the GEnx, or the GP7000, or the V2500. And as we discussed in previous calls, there’s a strong internal dependency between accruals and liabilities.

So for example, you’ll see that provisions increased in 2016, but at the same time, the liability decreased significantly. So we are in a phase where we build up these accruals, but sooner or later they will come down again.

Okay. Thank you very much.

Yes. Good afternoon, thanks for taking my questions.

Maybe first on working capital, according to my calculation, this has gone up €300 million year over year and €100 million in the last quarter. Should we expect a reversal in trend?

And maybe you can also shed some light when can we expect the working capital trend. And maybe you can also put some color why working capital has gone up so much last year and also in the final quarter.

Secondly, sticking to cash flow, can you maybe give us a bit of an idea regarding your planned CapEx spending in 2017 and 2018? And coming to your guidance, you are guiding for a mid single-digit – sorry; high single-digit increase for engine interior sales.

Is this going to be again very back-end loaded, or what should we pencil in timing-wise in the course of the quarters in 2017? And lastly, your business is quite much – quite strongly exposed to U.S.

where the President has announced that he will come up with ideas about a major U.S. tax reform.

Have you spent any thought already about the impact on MTU? Would you be a beneficiary, or do you think you might suffer?

So maybe we’ll start with working capital. The main reason for the increase last year was – if we start with the inventories, they maybe increased due to the higher workload in our MRO facilities, and also due to some delay, as you know, from the GTF engine deliveries.

So that caused some additional inventory in our Company. Secondly, we saw a decrease in prepayments, as you know, maybe due to the consumption of military prepayments.

Part of that could be compensated by some MRO prepayments, but overall, we saw that – declines of some €30 million in total. Receivables again increased mainly through the high workload.

The MRO business grew by more than 20%, so consequently also receivables increased. And payables, as I discussed previously, they decreased, but at the same time, we saw an increase on the provision side for that, as explained.

Going forward, trend for working capital for 2017 can assume to be more or less flat for 2017. So no further – no major increase again.

The second question was regarding CapEx?

CapEx.

CapEx spending for – if we focus on the property, plant and equipment, so we spent last year of around €150 million, and you can assume a similar number for 2017 also. There were some, whatever, €10 million up and down; and what you should also have in mind, there is also some – sometimes we – in the last year out of the €150 million, roughly €20 million were related to lease engines in our MLS business.

So depending on the timeframe of these activities, sometimes you see them in the assets and sometimes you see them in the working capital and so they will also have an impact on the PPL a little bit. But without these engines, you can say that the PPA spending this year will be in a similar level than last year.

For tax, also for the U.S. impact, actually, we do not see really a big impact for MTU.

We have a long and strong relationship with our partners there; we have long-term contracts. And it’s really very difficult, actually, to see any significant impact on our business from all the discussions.

But on the other side, we have to admit that there’s actually high uncertainty how these potential changes could really exactly look like. So I think it’s too early, but I wouldn’t assume it will be bad for us.

Okay. Thank you.

I also have to remind that a lot of these modules we deliver to the partners in the U.S. will be exported again later on.

So 70%/80% of these are exported then from the U.S. to the final customers.

And then there was just one question left regarding timing in the new engine serial sales in the course of 2017, whether it’s more back-end loaded again, or do you expect a more stable pattern?

It will be a little bit more – it will grow month by month, as we discussed previously. So we saw in December already the run rate which we expect for the first quarter this year.

And consequently, the second half will be – the volume in the second half will be higher than in the first half, so growing month by month, but not with a significant jump in the second half or in the last quarter.

Okay. Thank you very much.

Yes. Good morning.

Hello, Reiner and Michael. Can I ask you three questions?

Guys, I must say I thought the OEM margin in the fourth quarter was very good given the combination of customer concessions and unit costs on your GTF modules and the impact that would have had. And I suppose that leads me to two GTF questions.

The first, basically, I was wondering can you guys share a little bit about how your cost curve achievement is looking like on the GTF modules? You were roughly 90%.

Is it a bit better than that, or a bit higher, or a bit lower, I should ask? Second question is when we think about your partner on that program and the customer settlements that they will be negotiating, I understand that they have been asking partners to contribute to those customer settlements.

Can you share with us the degree to which you have clarity from your partner about the customer settlements and what your contribution to those might be in 2017, or if that’s still to be decided? And then the final question is, again, your partner in the U.S.

announced I think recently that they were booking a $200 million charge related to a part durability issue on the V2500, and that’s an adjustment on the through life cost of engine flying hour contracts. I’m just wondering, for you guys, is this particular part durability issue on V2500, is that going to be any cost issue for you, or potentially any benefit due to higher shop visits?

Thank you.

Your first question on the OEM cost curve, and I think we typically achieve our production cost targets after producing about 250 modules or part sets, and this is something which we can achieve in Q1. So we are well on track on the production cost side here.

The settlement –

Coming to the potential payments or settlements, we already gave you some indication during the Capital Markets Day, and also our partners did. So we do expect some late engine delivery payments or penalties, and we can reconfirm that also today.

Our assumption, or what we expect as potential expenses, we have considered in our 2016 results already, and also in our 2017 guidance, but I really would like to ask you for your understanding that we cannot comment on any numbers in detail. Regarding the €200 million adjustment credit, so we do, as Pratt do, regularly review the expected profitability of the flight hour agreements, and in the case of substantial deviations to the previous review, as seen, you might need to book an adjustment.

But at MTU, we do our own completion reviews and might come to different conclusions that Pratt did. And, therefore, the number you mentioned, we cannot really comment or confirm from our side.

Can I just ask on that point, guys, have you reflected that parts durability issues in your updated cost at completion estimates on those engine flight hour contracts?

Yes, we did.

Okay, perfect. Okay.

So it’s an issue that is already absorbed into your estimates?

Yes.

Great. Thank you very much, guys.

Welcome.

Thank you Good afternoon. I’ve just got one question about the MRO division.

Your revenues were up 21%, which is clearly a huge improvement in shop loading in all your shops. I was slightly surprised actually that your margins didn’t increase because of that extra volume and I wonder whether you could just talk about what the relationship is or indeed isn’t between volume and profitability in the MRO business.

What are the other things that we should think about that can actually affect margins there? Thanks.

Okay. I think it’s mainly two elements.

First of all, as on the OE side of the business, we have to have a look on the product mix and where we book the margins for. All the engine MRO which we do out of the network has a lower profitability compared to the independent business, but the margins we register and keep on the OE side of the business.

So with the increase of work, for example, on the GEnx, this has an impact there in terms of product mix. The second thing is the impact of the material content of those engines, you know that we buy material from the OEM, and although this not reflected in a big increase of margin, this is also something why the margins are more on the stable side.

But to achieve in this engine MRO business a margin of 8% to 9%, and now we exceed even the 9%, is something which we in the past always tried to do when we operated this business at a margin of 6%. So we are actually very happy with what we have achieved last year.

Thank you.

Yes. Good afternoon.

I’d like to look at the contribution from associates, if possible. This line was about €30.7 million in last year, and the same number in 2015.

However, after the third quarter, it was a nicely growing business. Could you please explain the decline in the contribution in the fourth quarter from €9.4 million to €6 million, and also what’s going on this year to that line?

I think we understand it’s China’s Southern joint venture. As a side question to that, is the new joint venture with Lufthansa and the MRO business going to be consolidated in full, or is that going to go into the associates line as well?

Thank you.

It’s going into that line again, so it comes at equity, consolidated equity. And you are right.

The 2016 numbers were impacted mainly by the MTU Zhuhai’s net income. We saw in the year a very strong growth with a stable EBIT margin in that JV, but onto the net income level we saw some negative FX from a weaker renminbi, which led to a stable net income only.

Going forward for 2017, we expect that number to be slightly up again.

Thank you. And, sorry.

I misunderstood. Did you say earlier the Lufthansa MRO will be in that line as well?

Yes, for sure.

And what do you expect the contribution to be in 2017?

Nothing in 2017. We will start the construction work in 2017 so there’s no effect on the P&L this year from that.

But will there be a negative number as you’re investing to build up the workshop? I think it was mentioned in an earlier question.

You will have some CapEx related to that.

There will be some CapEx spending for that, yes, but nothing in the P&L.

Okay. Thank you.

Yes. Thank you very much for your attendance, and if there are any further questions, please do not hesitate to give us a call.

And thank you and bye-bye, see you next time.