MTU Aero Engines AG

Reiner Winkler - CEO Michael Schreyoegg - CPO Michael Roeger - VP, IR

Christian Laughlin - Bernstein Ben Fidler - Deutsche Bank Alexander Hauenstein - DZ Bank Norbert Kretlow - Commerzbank Christophe Menard - Kepler Cheuvreux Antoine Boivin - Natixis James Zaremba - Barclays Miroslav Zuzak - JMS Investment AG

Good morning, everybody. Welcome also from my side.

We will have four parts of this call. Firstly, Reiner Winkler will give you some highlights of Q1.

Michael Schreyoegg will give you an update about GTF and more details about the business segments. Lastly, Reiner Winkler will close with our current guidance.

Afterwards we will have plenty of time for your questions. Let me hand over to Reiner Winkler now.

Yes, thank you, Michael. And now from my side of world, let me start with some business highlights of the first quarter 2017.

First of all, have two strategic surprise with a very good start. In the first two months we saw growth of about 7%.

Continuous high load sectors of 80% and historical or park rates are also supportive for our industry. These market indicators keep us confident where the positive momentum will continue in 2017.

And to know we are currently in the middle of the GTF ramp up and we see our internal production facilities right on track. Or final assembly line for the A320neo engine has started operations in October last year and we have delivered the first GTF engines assembled at MTU 2 Airbus.

Our blisks manufacturing center in Munich is also in full operation. The facility in Hannover achieved the MRO readiness for the GTF and we are now ready to support customers within the IE's network.

In February, we finalized the JV agreement with Lufthansa Technik to establish a new best cost MRO shop for the GTF engines. According to our plans, this new 50/50 JV will be up and running by 2020.

Workforce of 500 employees will perform 300 shop visits per year. The total investment of around a €150 million will be shared equally between both partners.

High volumes and best cost environment will result in benefits for both parties. And our target is to build the most competitive MRO shop for GTF engines.

The strong growth momentum in our MRO business has continued into 2017. In the first quarter we want new contact of around US$1 billion for our independent MRO business mainly for regional and narrow-body engines.

And we also secured OEM MRO contracts especially for the GTF engines. In Q1, we have achieved new MRO record sales in the sixth consecutive quarter.

Last but not least, we will propose a dividend of €1.90 per share at our upcoming AGM on May 4th. Compared to last year, this is an increase of 12%.

And the total dividend payment will be around a €100 million. First of all, let me give you a brief overview about the financial highlight of the first quarter.

Our group revenues increased by 15% to €1.3 billion mainly driven by firm MRO revenues. Group EBIT increased by 20% to a €157 million resulting in margin of 12.4%.

Net income adjusted increased slightly higher by 21% to a €111 million resulting in earnings per share of €2.16. A free cash flow at €61 million shows a good start into the year 2017.

And now we have a quick look on our US dollar hedge book. We continued with our hedging with the following results.

For 2017, roughly 80% is hedged at a rate of 118, for next year, roughly 50% is hedged at a rate of 113 and for 2019 roughly 20% is hedged at a rate of 112. Let me now hand over to Michael for details on our OEM and MRO business segments.

Michael, please.

Thank you, Reiner. And good morning, everybody.

As we have received quite a lot of questions about the geared turbofan engine in the last few weeks. I would like to give you an update on the current status of this program.

Since the entrant of service in January last year, now over 50 A320neo aircraft equipped with geared turbofan engines has been delivered to 11 custom airlines. A320neo was followed by a flawless market entry of the Bombardier CSeries also powered by GTF engine.

Up to now, 10 CSeries aircraft buying operation with two customer. Until now the GTF engines have performed over 150,000 flied hour, with the dispatch reliability of much more than 99%.

The in-service performance of the GTF engine has showed a reduction of fuel burn by about 16% which is a buff our expectation and the noise per footprint is reduced by 75%. This is underpinned by the strong order backs spoke of 8000 geared turbofan engines which has been ordered by over 80 airline customers for more than 30 countries.

And we have not seen any cancellations. Let me give you now something about the issues which we have seen since the entrant to service last year.

Pratt & Whitney provided combined software and hardware fixes to serve the early teething issue. The motor to start time for the GTF engine now in service is at a comparable level to a V2500 engine.

The new soft messages of the software has been forced and well the further cost of fixes. Pratt has also achieved significant progress in the ramping up the template production now.

Currently, there are only two durability issue with the cuts in the brush, the carbon seal, and the issues of the combustion chamber which mainly occur on the geared turbofan engine operated in very harsh environment. On the carbon seal, Pratt has received certification for a more durable solution just this month, the rest of the program has already started and can be carried out on wing.

Roughly 25% of the excess engine fleet has already been retrofitted and the remaining should be completed within the next two weeks. For the combustor, we expect a further upgrade which will extend the durability extent the fleet.

To avoid disruption of operation for the airline customer, during sections and upgrades, the number of geared engines have been increased. Pratt & Whitney reconfirmed to meet delivery target of 350 to 400 geared turbofan engine during this year.

Regarding our GTF applications, we see very good progress since light testing. The Embraer E195 successfully completed its first flight on March 29, just three months ahead of the schedule of our team.

It was added a fifth test aircraft to the flight as a fifth aircraft to the flight test program. Embraer therefore well on track for engine to service of its reed in 2018.

Mitsubishi is currently evaluating their flight test program and has added a fourth flight test aircraft. They are also in track for engine to service by 2020.

Let me now get you an overview of all the financials of the OEM segment. The total OEM order book decreased by 4% to €6.9 billion, the commercial order book decreased by 2% to US$6.9 billion.

The military order book decreased by 12% to €440 million due to the execution of contract. And the total OEM revenues increased by about 2% to €694 million.

Commercial revenues increased by 10% to €611 million. We conduct new engine sales in US dollar was on by 10% improved GTF delivers could not compensate for the significant decline of the TP7000 series program and slightly lower V2500 deliveries.

Spare parts US revenues increased by a high-single digit number which is slightly ahead of our full-year expectation. The main driver of our strong step-up growth was again the V2500 program.

Military revenues were down this quarter by 33% to €83 million but mainly due to facing effects in our contracts. We continue therefore to expect revenues above €450 million for the entire year 2017.

EBIT adjusted increased by 18% to €104 million with passing an aided margin of 15%. Let me now switch to the financials of the commercial MRO business.

The MRO contract volume increased to a new record level of US$7.9 billion mainly driven by campaign wins of our independent MRO business of around US$1 billion in the first quarter. Revenue increased by 37% to €588 million which is above our growth expectation for our 2017 driven by a very strong induction growth regional and narrow-body engines in the first quarter, has developed strong ramp-up of our lease and asset management business.

We expect lower growth rates in the following quarter of the SE comparison base naturally get power. EBIT adjusted improved by 23% to €52 million with passing an overall EBIT margin of 8.9%.

Thank you, very much for your attention and let's now hand over back to Reiner for the outlook of 2017.

Yes, thank you Michael. Based on the Q1 results, we confirm our guidance 2017.

We expect group revenues in the range of €5.1 billion to €5.2 billion. Within that, we expect military business to decline by a high-single digit percent number due to lower Eurofighter engine deliveries.

New engine sales are expected to be up high-single digit and spare parts should grow a mid-single digit. For commercial MRO, we expect an increase of around 10%, in 2020 the EBIT adjusted margin should remain stable in the level of around 10.5%.

Net income should grow a bit higher than EBIT as we expect lower interest expenses. We expect this year's free cash flow to be slightly above €100 million resulting in the cash conversion rate in a low double digit range.

So, thank you very much for your attention, and we are now ready to answer your questions.

Thank you, and good morning gentlemen. Two questions from me relating to the commercial OEM aftermarket please.

The first question is in thinking about the main components of the aftermarket in Q1 around scope pricing and unit growth that is the units or engines coming through the shop networks and stuff. How do the trends in Q1 look compared to what you expect for the full-year inline or any differences that you could discuss, please.

That would be great. And then the second question, it's actually related to MRO division.

What sort of trends are you seeing, pricing trends that you are seeing for GE engines that you're not in RRSP on. So, specifically I guess that mainly capture the CFM56 and GE90's.

Are you seeing any increased difficulty in the pricing environment in that or is it still pretty solid? Thanks.

Hi Christian, it's Michael here. Maybe to start with your second question, I think the pricing is sort of unchanged compared to 20, 2016.

We see a high demand, this is true, but not something which maybe we already see different effect on pricing. In terms of the MRO division, on the first question, what is might be slightly above our expectation in the scope areas, not so much in unit but also the scope where we see more mature content which we have to build into this engine.

So, this is an upside which we extend now. Will continue for the entire year here, I mean what we sometimes with a conservative on this one but channel change in trend is not something which I expect.

I mean, maybe we have now five or six quarters in a row. There is the growing MRO business and in the first quarter of 2017 we especially have to concentrate on this rough content.

This is what's the news, no generation change in trends.

Okay, great. Thanks.

Yes, good morning. I had too many three questions please.

Firstly, on expense on the EA in Q1, I see R&D expense was down around 20% year-over-year. Does that change your view of the full-year or I think your price with your guidance was that expense R&D will be marginally up year-over-year.

Is that something you still see or how does it change your view of saying this is just a quarterly facing effect. The second question is on, thanks for the update on GTF, Michael, all the detail you've given us there.

I just wanted if you were able to give it a little bit more color a picture where you are at in terms of unit costs, unit losses, the learning curve, are you now pretty much dumb with the learning curve, any data that you're able or willing to share with us on the progress and change that you've seen as of last three or six months in the average loss per engine. That'll be very interesting.

The third question is we've seen the phases much stronger than expected. Growth, MRO, and spares relative to your full-year guidance.

You really haven’t changed your full-year guidance that is obvious. Is that just your natural conservatism or is it reflective in any way of concerns you may have on GTF warranty provision costs associated with the retrofit program that maybe higher than you earlier expected or am I misreading things and I shouldn’t draw that conclusion about the lack of any full-year guidance increase at this stage.

Thank you.

Maybe then we start with the first question, regarding R&D's. the full-year guidance is unchanged, I mean, the first quarter was a little bit weaker and the full-year guidance just some phasing effect that be in the different quarters, but for the full-year still slightly we expect to climb the upper R&D as well for company expense but also capitalization and consequently all the P&L effect.

So, no change to the guidance. Coming to your last question.

I mean the main reason why we haven’t changed now the guidance is, we had expressed in one quarter raised to one MRO performance as Michael explained, very high material content was in the shop visits. We had let's say order book from but that's update the guidance, a bit of the year that we nominate will come to that after Q1 and there is nothing to do with any potential whatever payments or amenity something like that.

I mean, all we expect for that has been included already in our guidance as we explained in February already. Also no change to that.

On production target cost I think we explained this in the last capital market day also, we have achieved now meanwhile our target cost levels and the geared turbofan family of engines is new. We do not see a significant change or impact to our guidance.

So, we are absolutely in line of our plans there.

Great. Thank you, very much.

Yes, hello. Thanks for taking my question.

Alex Hauenstein here, DZ Bank. I have to come back to the MRO and to the GTF obviously.

So, I'm on MRO. I mean, by the strong results, you're above the 50s.

Is the level of let's say in the low 50s, is this the new normal EBIT contribution we may see for MRO for the coming quarters here. I think that is the reed one might have or is there a risk that you fall back on over the cost of the next couple of two there quarters below the 50s maybe due to low utilization, lower content coming up in the new contract feeding into the results or any other effects here or should we think about the 50s plus going forward?

And on the GTF deliveries, I understand that there have been a few deliveries left on GTF during Q1 than initially expected. Is that correct, then if yes, whether be a catch up effect in Q2 or will there be a catch up effect in Q3 or Q4.

I mean, is the full-year target stands still at 350 to 400 GTF overall. I'm wondering when this potential catch up effect is coming and yes maybe some color on that.

Thanks.

That, I think on MRO we do not see a significant risk or change, but really let's wait until the mid of the year to get one improved plans on the guidance. I think it's partly related to make any speculation here, but there's just another two or three months to go there.

On the geared turbofan there's no change, we can confirm that a 300 to 350 to 400 geared turbofans will be delivered this year, backend loaded as always planned. So, no change also in this program.

So, there haven’t been any kind of postponements or deliveries in Q1, so that was completely inline or was it a bit less than initially targeted and if yes what will there be a catch up in Q2?

So, I think and totally it was about seven engine deliveries in Q1 and the remaining is backend loaded, I don’t have the detail here but it's one or two engines more-or-less but that’s it didn’t in this margin, pretty marginal.

Thank you.

Good morning, ladies and gentlemen. I have one, looking at the OEM sales.

I get the impression that in particular, spares have been very strong in Q1, 2017. I would assume that the growth rate in spare parts even surpassed the quiet strong one in MRO.

And my question would be can you confirm this and if so, could you give us an idea about particular drivers here. And you mentioned that again the V2500 has been the major driver stepped up growth.

But maybe can you give us an idea about underlying trends like for example the historically low grounding rates you named?

Yes. And maybe let's go through the part guidance for 2017 which is basically what we can confirm here on the V2500, we expect low to mid-teens for the entire year.

Maybe first quarter was a bit better than expected on the min-teens range. CF6, PW2000 stable also in the first quarter, so in line of our expectations.

The wipeout is PW4000, GP7000, will be up by about mid-single digit compared to last year of Airbus slightly up with growth so it's now driven by the GP7000 spare parts. So, in total, the spare parts sales we expect to be up by about mid-single digits for the entire year.

This is not a significant change to our guidance and therefore I would recommend to go ahead and that to plan also with this numbers.

Thanks.

Yes, good morning. I have two question.

The first one is on the operational leverage in MRO. The margin's up 8.9%, last year 9.9%.

My understanding is that this may be linked to the increasing long term service agreements in the mix. I mean, first is it the case or is it the case of you mentioned in the core lease and asset management.

So, just more color on that would be helpful. Any if that's long term service agreement, how has the proportion changed year-on-year I would say.

It will imply that it has increased quite significantly in your mix. The second question, it's more just to double check.

Your free cash flow is good again and is it directly linked to the fact that you have a decrease in military activity. Are you less prepayment outflow or is it a combination of all the factors?

Maybe we'll start with the second question on free cash flow. It's the second point you mentioned.

So, not impacted by the military business, it's mainly other factors like changes with the capital and other issues. And as you know, cash flow is always much more tight than we than the year.

So, 60 million for the first quarter, I mean, last year we had around 90 million. For the full-year we can confirm a free cash flow of about 100 million or in the range, 30+100 million but it's not nothing to do with the credibility of business.

And on the first question on the MRO, you're right, it's actually some mix effect and actually two effect there. The first one is that this saw a significant amount of actions of a quite high material consumption which is naturally decreasing, then our margins since we purchased all these material.

And secondly, I think we think way MRO business which is ramping up, was that something which we presented during the capital market there. So, the mix of the two elements here was driving the slightly lower margin in Q1.

And thank you. And the question is, is it the new norm for MRO margins or should we expect to feel between 9% and 10% as a margin over the next years?

Now, but I think as we communicated in our forums already, to achieve in MRO margin well above 8% is a good achievement, it's a challenge sometimes. In the past we showed margin also between 8% and 10% in our MRO business and this is something for us which is the norm.

So, not a significant change overall but also not something where we have a difference here. What about quarter, we will see some circulation.

Thank you, very much.

Hi, good morning everybody. This is Antoine Boivin-Champeux from Natixis.

I got three questions, please. On the spares activity, can we just saying to us is the rate of V25 among all spares.

I have an estimate of 40%, four zero, is it about right? My second question is on the MRO business JV with Lufthansa.

Have you already decided on the location of this shop, is it factory. And my third question is on GTF penalties, I think you had some of them in '16.

Is it again the case in the Q1 '17 profit numbers? Thank you.

Maybe we'll start with the V2500. It's in the range of 40%, you're right with your assumption.

Little patience on the JV, has not been decided but will be shortly decided, will be no surprise I think at the end of the day. And regarding the penalties, we explained already to the full-year call that we had done some vision in our statement and also in our guidance, but therefore you're understanding that we cannot disclose any details here because it's contracted between two parties and we are not allowed to give more details on that.

That is included in our guidance and unchanged.

Okay, thank you. And very last question very quickly.

How many GTF modules have you delivered in Q1 and how does it compare to Q4, '16? Thank you.

Just a second please here. -- So, it's about 60 last year in the Q4 and now about 70 or up to 70 in Q1, so that should be around the number, for mainly but the best, that's approximately the numbers.

Okay, thank you.

Hi, good morning. And I got a couple of questions, please.

One, just on the free cash flow and that seems to be about 20 million and from next investments and financial assets. So, I was just wondering if you could explain what that is.

And then and secondly, there is very strong growth in the JV income this quarter and what if you could just explain it very positive that's continue and also what was the driver? Thank you.

First question, it's mainly investments in the GTF engine this pool, that's roughly 90% to 95% obviously is a 20 million.

And the second question is I'd take that second question? What was the second question, can you repeat it?

Please.

The second question was to do with stronger growth in JV incumbent, just whether this is expected to continue and also what was the driver in the first quarter? Thanks.

The driver for that part the JV in China, so OEM or MTU's while joint venture of Lufthansa airlines were the main driver. And then secondly we all saw some positive impact from the new leasing company for the GTF engines.

So, there is so.

Okay, thanks.

Yes, good morning. I've one question with regards to the strong MRO growth rate that you had.

There were three more working days in Q1 due to the late Easter this year. Now, this is going to be reversed in Q2, going to be three less working days compared to Q2 last year.

What is the sensitivity of this business with regards to working days and what will be the effect in Q2 versus Q1, that's the first question. Second one would be with regards to the depreciation, whether the rather high depreciation in Q1, is the new flight level or what we should expect going forward there.

And the third question actually is a follow-up on the one that has been asked before. The equity results in Q1 that was very strong.

Is it the new flight level also going forward, so it's off 10 million let's say, 11 million or so, maybe you could give some guidance there as well.

Maybe we start with the last question. I think we just answered that question before.

It was mainly driven by the strong performance of MTU is why the 50/50 transaction and then your leasing company but we cannot give a guidance on specific accent in P&L for the entire year. But this two issues where what driving this interest this results.

Sector depreciation, yes, it's increasing and it's I think normal and shouldn’t be high investments we did in the last years and new programs but also for PPE and consequential there depreciation will decrease over time. I'm not sure that I get the last question.

That was on, so for?

Okay. No, this was not really.

It's to our business, I mean, the throughput is dependent when we get the engine, what is our performance in terms of operational lead time and when we can get the material from the internal to external supply chain. Again we are therefore working with extremely flexible shipment working system which can balance such calendar effect but which has not really impact our quantified quarter on the revenue.

Okay. Thank you.

Yes. Thank you very much for your attention.

If you have further questions, please do not hesitate. Call us, we are available, our team is available today.

So, otherwise I wish you a good weekend and see you next time. Bye-bye.