MTU Aero Engines AG

Michael Röger - VP, IR Reiner Winkler - CEO Peter Kameritsch - CFO

Rami Myerson - Investec Milene Kerner - Deutsche Bank Christian Laughlin - Bernstein David Perry - JP Morgan Christophe Menard - Kepler Cheuvreux Harry Breach - Raymond James Andrew Humphrey - Morgan Stanley Zafar Khan - Societe General Richard Schramm - HSBC Jaime Rowbotham - Deutsche Bank Timm Schulze-Melander - JP Morgan Chloe Lemarie - Exane

Hello, everybody. And welcome also from my side to our Preliminary Full-Year Results Call.

Firstly, Reiner Winkler, will start with some business highlights and afterwards will present you our 2017 numbers. Peter Kameritsch, our new CFO, will give you some more details on the business segments and then we will give you an explanation about the new accounting standard, IFRS 15.

Before we start with Q&A, Reiner Winkler then will close the presentation session with the guidance for 2018.

Okay. Thank you.

And welcome to our call for the financial year 2017. 2017 was another successful year for MTU, and I’m very happy to report new record sales and earnings today.

Again, we exceeded our targets for EBIT adjusted and also free cash flow. Excellent market conditions served as a basis for the continued strong performance of our Company.

Passenger traffic remained on peak levels of 7%, mainly driven by lower oil price. Airlines also benefited from the situation and achieved profits in the range of $35 billion.

The backlog of Airbus and Boeing includes over 30,000 aircraft, covering production of around nine years. In general, we expect the key indicators to remain encouraging also in 2018.

Let me now first give you some updates on our business segments followed by an update on the GTF engine situation. 2017 was a very successful year for our MRO business segment.

We were able to attract many new customers, resulting in strong order wins of around $3 billion or independent MRO business. For the second year in a row, our organic MRO revenues in U.S.

dollar increased by about 20%. In December, we signed joint venture agreement with Lufthansa Technik to establish a new MRO shop for GTF engines with a capacity of over 400 shop visits per year.

This new greenfield MRO shop will be based in Poland and is expected to start operation in 2020. Today, MTU Maintenance in Hannover and China service 35% of the world’s V2500 fleet.

By adding further V200 MRO capabilities to our MTU Canadian engine portfolio, we will strengthen our leading position in V2500 MRO. There are also good news for our military business segment.

For the Eurofighter Typhoon, an expert campaign was signed with Qatar. This new export order for 24 Eurofighter has a revenue potential of around €100 million for MTU.

The engine deliveries I expected to start in 2022. As you know, as of January 1st, the composition of the executive board has changed.

Our long-standing Chief Operating Officer, Rainer Martens left the Company at his own request. I would like to express my sincere thanks for his significant contribution to the development of the GTF and his efforts to modernize our sites in Germany and Abroad.

And I’m very happy to welcome Lars Wagner as new Chief Operating Officer and Peter Kameritsch, as Chief Financial Officer. Both are acknowledged experts who are very familiar with our Company and our industry.

Based on the good results, we’ll propose a dividend of €2.30 at this year’s AGM on April 11th. Of course, subject to the approval by the supervisory board, this reflects an increase of €0.40 compared to last year.

Let me now give you an update about the GTF. First of all, we achieved our delivery targets for 2017.

In Q4, a 120 GTF engines were shipped. In total, 374 GTF engines were shipped in 2017.

In the meantime, 21 operators are flying a 135 aircraft equipped with the GTF engine. Since its entry into service in 2016, the GTF engine has performed over 500,000 flight hours.

It fully meets the performance targets regarding fuel burn, noise and emissions. Some of our GTF customers even indicate that they see better fuel consumption than originally anticipated.

The fixes for the carbon oil seal and the combustor liner are certified and in production as planned. Let me give you an update on the latest issue concerning the HPC knife edge seal.

Pratt & Whitney has identified the potentially affected engines and communicated with the customers, Airbus and the flight authorities. Engine deliveries will be continued after recovery plan is accepted by Airbus and the flight authorities.

The engine fleet is closely monitored to ensure continued, safe and reliable operations. Please note that the respective feed is not part of our work share.

We are in close contact with Pratt & Whitney and our common initial assessment is that the recovery plan will lead to an achievement of our delivery targets. The recent issues seemed only to affect A320neo engines.

As you all know, we have increased the spare engine pool last year which will support the retrofit program for the GTF engines. End of January, we achieved another important milestone for our GTF engines.

The first GTF engine was shipped to Embraer for the E2-Jet, which is on track to enter service in April this year. With Embraer E-Jets, we will have the third aircraft platform equipped with the GTF engines in operations then.

MRJ also makes good process with its flight test program. In the meantime for flight tests aircraft completed over 1,500 flight hours, half way to achieve certification in late 2019.

A highlight in December 2017 was that Delta Air Lines ordered GTF for 100 firm and 100 options A321 neo aircraft. This makes us confident that the GTF engine will continue its success story in the coming years.

The current GTF order book consists of over 8,000 engines. For 2018, we expect GTF engines deliveries to almost double.

We feel very well prepared for the ramp up in new engine production and also in MRO. Let’s now have a look on the key financials.

Our revenues increased by 6% to more than €5 billion, driven by a strong aftermarket business. Group EBIT increased by 21% to €607 million, resulting in an EBIT margin of 12%.

Net income adjusted increased by 24% to €429 million, resulting in earnings per share of €8.34. And the free cash flow was a €151 million, showed a strong increase by 84% compared to last year.

What does it mean in the context of our guidance for 2017? Group revenues were slightly below our guidance of €5.1 billion due to a little bit weaker U.S.

dollar in Q4, and changes in the business mix for GTF engines. EBIT adjusted improved to €607 million, which is slightly above our latest full-year expectations.

Guidance was upgraded twice throughout 2017. Consequently, net income resulted in €429 million.

Free cash flow, as I said, was €151 million, exceeding our guidance slightly. Let me now handover to Peter for an update on our business segments.

Yes. Thank you, Reiner, and hello, everybody.

So, let me give you an overview of our business segment numbers, starting with our OEM segment. Our total OEM order book decreased by 20% to €5.8 billion, mainly due to the execution of contracts and U.S.

dollar revaluation. Especially, the latter point had a strong impact in Q4, with the U.S.

dollar moving to 1.20. Recently announced order wins for GTF engines for example Delta’s order for 100 A321neo aircraft or the Eurofighter order from Qatar, are not included yet.

OEM revenues remained almost stable at €2.9 billion. Commercial revenues increased by 3% to €2.5 billion.

And within that, new engine sales in U.S. dollars were slightly up, which is a bit below our own expectations, mainly a higher number of diesel engines, which generate lower revenues, caused that slackness.

As you know, overall, we have delivered 374 GTF engines, in full-year 2017, which is the point of our delivery target of 350 to 400 engines in 2017. Spare parts, based on U.S.

dollars, increased by 10%, in line with our own guidance. The main driver still is the V2500 engine.

Additionally, mature engine programs such as the CF6 and the PW2000 have generated a stronger demand for spare parts, than expected. Military revenues were down 20% to €404 million, mainly due to the phasing of EJ200 deliveries and the delay of an MRO contract for RB199.

EBIT adjusted increased by 28% to €412 million, resulting in EBIT margin of 14.3% for the OEM segment. So, let’s now switch to the commercial MRO business.

Our MRO contract volume increased by 22%, mainly to campaign wins in the value of roughly $3 billion for our independent MRO business. That includes contracts, mainly for V2500, CFM66 and CF34 engines.

Revenues increased 19% to €2.3 billion. Almost half of that was driven by a higher number of shop visits, the rest were higher material consumption and product mix.

Main growth drivers here were the V2500 and the CF34, as well as our engine leasing business. EBIT adjusted was up 7% to €194 million, resulting in an EBIT margin of 8.5%.

So, switching to IFRS 15. Many of you know, the next chart from our Capital Markets Day, where I presented changes to our accounts, coming from IFRS 15.

So, I won’t go over the chart in detail again now. But for the ones who could not join our Capital Markets Day, I would like to refer to our Capital Markets Day presentation and the audio webcast, which you will find on our Investor Relations website.

As a reminder, the biggest change here is item number one, payments to customers, for example our sales concessions, which are no longer booked as cost of sales but will reduce our revenue line going forward. The impact on EBIT from IFRS 15 is minor and only related to phasing of revenue recognition and the respective profits.

Obviously, free cash flow remains unchanged. Let me now show you a bridge to 2017, post-IFRS 15 numbers.

So, first item reduces revenues by roughly €1.3 billion, which is driven by sales concessions. Item no two and three have only a very limited impact.

So, revenues based on IFRS 15 for 2017 should be around €3.65 billion. For the only item in the chart, which has an impact on EBIT is item number four.

Under IFRS 15, our EBIT is reduced by €35 million. This is slightly higher compared to the impact in 2016 as in 2017 it includes onetime effect from FX revaluation on a newly created receivables coming from the treatment of our consignment stock under IFRS 15.

Remember, the U.S. dollar moved very strongly in 2017 from 1.05 to 1.20.

EBIT adjusted for 2017 post IFRS will be in the range of €570 million. The total IFRS 15 impact on earnings for 2018 should be very small, as obviously we cannot anticipate the negative effect from FX from today’s standpoint.

From Q1 2018 onwards, we will report only under IFRS 15. We will give you all necessary prior your figures under IFRS 15 in April when we will present Q1 2018 results.

So, now, let me now hand over to Reiner again for the guidance for 2018.

Thank you, Peter. As already announced at our Capital Markets Day, our assumptions for our business revenues remain unchanged.

Military revenues are expected to remain stable at around €400 million. New engine sales remain to be up by about 30%, mainly driven by the doubling of the GTF production.

Spare part sales will grow by a mid single digit number with a continued front growth of the V2500 platform. CF6 PW2000 spares are expected to be stable.

For new engine programs, like GP7000 or the GEnx, we expect an increase in spare part business. And commercial MRO business is expected to grow strongly in the high teens.

We expect our Group revenues in euro to be around €5.7 billion. Post IFRS 15, we forecast revenues of around $4 billion, assuming U.S.

dollar exchange rate of 1.20 an average. Based on the above mentioned business effects, we expect a moderate is EBIT adjusted.

Under IFRS 15 that means an EBIT in the range of €600 million to €620 million. Net income should grow in line with EBIT adjusted.

And for the free cash flow, we expect the cash conversion rate of low to mid double-digit, which is in the range of 40% to 50%. This implies the further improvement compared to 2017.

With regard to the latest technical issue on the GTF, as you know, there is a recovery plan, which has been proposed to Airbus and the flight authorities. Based on that, we’re hopeful that we can continue with deliveries very soon.

Therefore, the underlying assumption for the guidance is that we can keep our delivery commitments to airbus and the operators. But we made always clear that the ramp up in 2018 is very challenging for new engine production and MRO, and obviously the latest issue does not make this task any easier.

In case, the turnaround cannot be achieved within the next couple of months, we might need to consider review of our guidance. So, thank you very much for your attention.

And we are now ready to answer your questions.

Good morning, gentlemen.

Good morning, Rami.

Yes. Welcome back, Reiner.

We missed you at Capital Markets Day. Just, on the profit bridge between 2016 and 2017, and then 2017 to 2018, is it fair to assume that there was a positive mix effect in commercial OE that actually turns the negative in 2017 to 2018, as ramp up the Geared Turbofan?

Rami, from 2016 to 2017, obviously, I mean, as you know spare parts grew by roughly 10% and OE was up moderately, so, maybe 1% to 2%. Obviously that is the positive impact on the business mix.

And the U.S. dollar helped also.

I mean, we had achieved rate of 1.21 last year in 2016 and in 2017 something like 1.17, in that range. So, overall, it was obviously also a tailwind to earnings.

And going to 2018, do you expect it to also be -- why is that tone not recurring?

I mean, for 2018, we expect no major tailwind from U.S. dollar anymore.

I mean, given the rates that you see today, spot rates are there definitely above the level, which we saw last year, so we had the spot rate was on average in 2017 something like 1.13, and even the underlying assumption in our guidance is 1.20, but the hedge rate is obviously better. So, the achieved rates 2017 to 2018 are more or less on the same level.

Okay.

Business mix, I mean, as you know, the business mix -- I mean, we anticipate a 30% growth in OE and spare parts growth of 5%, and that is definitely a drag on the margin.

And, on CapEx, it seems like, there has been a step up in CapEx in 2017 relative to 2016, I was a little bit surprised by that because I was expecting that to step down.

Yes. I mean, what we have had -- significant investment in lease pull engine.

So, the classical PPE CapEx was on the level of something like 100 to 150. And you have obviously also some investments in MRO capacity, I mean test sale equipment for tooling, for GTF -- GTF MRO capabilities, which will become very important over the next year or so.

Yes. And what are your expectations for CapEx including lease engines in 2018?

At a similar levels, or should we see a step down?

I would say a flat development in 2018 versus 2017. This is always a little bit unsure how lease engines are treated.

I mean we have -- sometimes it’s CapEx, sometimes when we buy them for a shot period, is working capital. So, there’s always a little bit the uncertainty around the accounting of the lease engine.

So, I would rather prefer to give you guidance before lease engine that is a flattish development.

Three questions, please. My first question is how quickly can Pratt get the old version seal?

My second question was around your working capital and your cash. In your 2018 guidance, can you give us an idea of what you think about working capital?

I mean, you had €151 million free cash flow in 2017. If I add the military advances, that’s €50 million on top.

So, you are already at €200 million. I mean, how much caution are you building around your working capital requirement and the GTF?

And then, my last question is, what sort of timing should we think about you getting to a 100% cash flow conversion, please? Thank you.

Milne, maybe I start with the first question. I mean, it’s always difficult at that point of time to make a precise, let’s say date when we will ship engines again.

But, if you look on the Embraer, statement, they expect -- or they said they expect aircraft deliveries latest in April, again, and that will mean with some let’s say timing issues that we will ship the engines within the next couple of weeks, I would say.

I mean regarding working capital, I mean, we had over the last two years, we had a quite significant working capital ramp up, as you know looking on our cash flow statements. And going for 2018, we expect a slight increase and slight increase of working capital but not on the levels which we saw in 2017 and 2016.

Regarding cash conversion to 100%, I would say, it’s a bit early to say when we can reach exactly 100%, but we will be at high double-digit at the end of the decade.

So, couple of questions for me, one of course on the aftermarket. If I’m just understanding correctly your guidance for ‘18, 5% growth in that CF6 and TW2000 permanently will be flat.

So, does that apply that V2500 is only up single digit or so? And then, and as a follow-on to that, if you could talk a little bit about kind what’s behind that and if you are seeing slowing dynamics in narrow bodies, and is it one-off on the supporting PW2000s and CF6X or actually just underlying demand for those engines?

In our guidance, what we have baked in, in our guidance is something like 15% to 20% growth on the V2500 and a slight decrease on the CF6-80s, slight decrease on the PW2000 and growth from other platforms, like GEnx and GP7000. So, overall, if you figure that out, you come to a level of mid single digit growth for the whole spare parts portfolio.

Okay. That’s clear.

And then, unrelated, so just switching out to the military side and EJ200. I was wondering if you had any comments to follow on about recent press reports on pending Eurofighter deals from not only existing customers but potentially new launched customers and whether any of these follow-on orders could be from European customers.

There a lot of campaigns, actually it’s too early, making the effective statement, when we will expect which customer will come, but we said military business will be flat this year. But I think to Capital Markets Day, we said, in the beginning of next decade, we expect it to grow in the range of upto €500 million and that includes additional export campaigns.

But you cannot say, it’s exactly this campaign, which will come first, followed by the next one. There were a couple of campaigns actually running and we are confident that we will see within the next whatever, couple of quarters, some announcement on that.

So, I am intrigued by something on slide 19 on your cash flow statement. There is very large change in provisions number.

And I know, in recent years, you were asked about this numbers and you’ve said some of it is accruals that you take as the business grows. But, I would imagine, given how large that number is, there is something in that for GTF, some cushion.

I mean, are you able to share with us, I mean in 2017, what provision did you utilize on GTF and what did you charge as new provisions? And do you think you are covered for your best guess of what the future problems might be in terms of retrofits and so forth?

Thank you.

Some of the answers are still true. I mean, still the provisions grow with the business.

That’s clear. Then, the second point is you have to look on the provision in correlation with the liabilities.

Liabilities went down 100 million or 110 million, you see that in the working capital side of the presentation, while the provisions went up 190, [ph] so net, it’s an 80 million increase. And obviously, we also provide -- for we booked warranty provisions for the GTF engines.

So, we do that on an engine by engine basis. We accrue for future warranty work.

And you know we expect in 2018 or 2019 all the ETR shop visits for the PW1100 and we have provided or we have baked our best guess of the cost structure of the ETR shop visits into our provision. So, that is our current view on that.

Yes. So, if -- I mean, in each of the last two years, I think, the market and we as well have worried that you might not meet guidance because of GTF issues and I think in both years you did and actually raised guidance.

I mean, do you think you have enough contingency, if we get a more severe GTF delay this year?

What we did is we baked up our current view of the situation, our guidance. Any new information which comes on the plate in the course of the year, we cannot anticipate that.

If you assume what I said before that this issue will be fixed in the next couple of weeks. I think that is all covered in our guidance.

So, we always -- I think we explained that several times that especially in the first couple of years of new engine programs, there are higher provisions for warranties and guarantees. And therefore, I think it should be covered.

And sorry, just one more I may. If it’s a more serious delay, I mean, because you’ve tended to be more conservative I think than your senior partner.

So, just trying to gauge, because these are like very big numbers, on this slide 19.

But that’s related to 2017, I mean, this issue which we are now discussing came up in the recent week. But, as I said, within our guidance, 2018, I think, we feel confident that we will have covered these issues and I think as of today everybody is confident that we will see a fixed coming in the next couple of weeks and we will fulfill our commitment of the production number of engines deliveries for 2018.

So, we’re optimistic to achieve that target.

Yes. Good afternoon.

I had one question, but I think you answered it on the -- I was on the warranty claim, so I understand from what you just said that your guidance for ‘18 is sticking to account some -- probably a bit more warrant claims but only if the delay is for two additional weeks. This is what I understand from what you said.

Right now, what’s the first question was can you just validate this? The two auto questions quickly are, given the new issues, we have [indiscernible], are you planning to increase the number of spare engine deliveries versus the initial plan or is it stable versus what you said or what you anticipated back in December?

And the other question is about -- you talked about the 5% guidance growth in terms of parts. And what is the trend since the beginning of the year on the mature engines because you said, you have probably lower expectations.

But, I mean the environment is still quite supportive. And are you seeing continuous demand for those mature engine spares?

Regarding the mature engine spares, I mean, what we see is development, which supports our guidance, I would say. Lease pool, there is reason to deviate from the old plans to increase the lease pool also in 2018.

And your first -- I didn’t get your first -- could you repeat the first question?

The first question was this morning you said, I think that your guidance is taking into accounts on warranty claims, I mean the cost of the warranty claims, which I assume was already the case back in December. But, you haven’t changes much to this, I guess in the light of recent issues on the recent Geared Turbofan.

And I understand from what you said before that it is recovering potential delays or issues, if it only lasts two weeks, I would say if in the next two weeks this is addressed. This is the way I should understand it.

Yes.

First question was just a very simple one. I didn’t quite hear, I think Reiner, when you gave the guidance on the revenues for the businesses, did you give some numbers in billions of euros as well?

Can you just repeat those?

We expect under IFRS 15, it will be around €4 billion.

Group revenues?

Group revenues. Yes.

I understand. And under IFRS 15, did you also talk about the segment revenues as well or just at group level?

Just at group level piece.

Got it, great. And guys, just moving on from that, can you help us to understand?

So, sorry about coming back to GTF. Last year, we had a significant increase in the size of lease pool.

Can you help us -- just one thing I am worried about is that of that lease pool, there is only going to be a certain proportion that do not have the configuration or the part numbers that have been linked to the recent issue. And therefore, effectively, a lot of the spare engine pool is now unusable, because it has the problematic configuration.

Can you help us to understand.

On the major shares to lease pool is the old configuration.

Okay, major share of lease pool is -- okay. So, there won’t be a need to divert a lot of new production engines with these to fix to the lease pool?

Right.

Okay. That’s good news, guys.

That’s very reassuring. Okay.

And then, just another one was just moving on in a way over to think about commercial MRO, just for a minute. And it’s had a fantastic couple of years in revenue growth terms, the expansion of business.

And we’re looking the guidance for the high teens growth this year. Can you sort of help us to sort of understand, when do we start coming up against capacity limit at the network before you get the expansion as your high and the Lufthansa joint venture on stream?

As you know we already increased capacity last year, by adding staff, so 150 people, especially in [indiscernible] facility. We will have additional capacity as we said when we have established the JV with Lufthansa, and also around I would say end of the decade, we will extend our Chinese JV again.

And I think then we will have enough capacity for the next couple of years, and let’s say mid of next decade, we will have to make another decision of the expansion. And there is ongoing investment in tooling and so on, also in the existing facilities to added capacity.

And as we told you before, I mean added V2500 capabilities also in our Vancouver facility. So now, we have three locations where we can do shop visits for V2500.

Got it. So, there is no shop visit capacity constraint on revenue growth to commercial MRO in the next several years?

No.

Hello. Thanks for taking my questions.

Just a couple, actually not related to GTF. One is on the bridge to IFRS 15 that the impact on profit this year was I think double it was last year on the timing issue side.

There looked to be a share of similar quality. Talk maybe in a little more detail what the -- what the drivers are there and how we should expect those to evolve?

And the second question is just on FX. There you’ve got a relatively low level of coverage on hedges in 2020.

At the moment, how should we expect that to develop in the next 12 months?

I mean, regarding hedging, we have a rolling forward hedging model in place for typically the next 12 quarters, which we typically execute on a regular basis. I mean -- but that models leaves us a certain kind of flexibility.

I mean, we currently use of the flexibility this model gives. We hedge more at the lower end of the bandwidth, especially 2020, the reason is because the markups for 2020 are very, very high.

So, you pay a very high premium for the certainty FX rates. So, currently you get -- if you do hedges for 2020, you good 1.30, 1.32 [ph] in that range, which is a little bit prohibitive, but typically we follow them all.

So, when we move forward in the year 2018 with step up coverage, hedge coverage for 2020, definitely. Regarding IFRS earnings impact, I mean, we gave you the bridge for 2016 at our Capital Markets Day.

And that was something like mid teens negative impact, 18 million. And as I said, 2017 was a bit higher due to the FX effect, which we have on the receivables.

And that is only happening because the spot rate moved significantly in 2017 from 1.05 to 1.20 and that is just to look at that as a onetime item. In 2018, the impact will be something in the range of minus 10 million or so.

So, more in the range as in 2016.

Couple of questions on IFRS 15, please, and then I had a question on the provisions. On the IFRS 15, are you able to help us a little bit with the impact divisionally?

Should we think most of the revenue impact is in the commercial OE?

Yes, all in commercial OE.

And the EBIT impact is also in the commercial OE.

Yes.

And then, am I correct in thinking that in answer to earlier question, the big impact was 35 million was effectively a one-off on ForEx effect.

Yes, right.

Okay. That’s excellent.

How would the order book look under the IFRS 15?

We have given an explanation on that on our Capital Markets Day presentation also. I mean, basically IFRS 15 reduces the order book for sure because we again -- we have to take out or we have to consider the net pricing in the order book, but we also changed the definition of our order book.

So, we will include all the aftermarket business coming from our contracted FHA business with the programs, the PW1100 for example and that decreases the order book again overall. The order book is on the same level before IFRS 15.

So, there won’t be a major change.

Yes. I think you had a slide in the…

Yes, there is one.

In the presentation, you guys did back in December. On the provisions, what you’re showing in that slide is actually is a change in provision through the cash flow line.

So, that’s clearly netting off provisions taken in that less provisions utilized, which would have been cash. So, what was the kind of the gross level you’ve taken in 2017 in terms of provisions against the P&L?

192 is obviously the net number.

The change in provisions -- but in that you have to...

So, what is the gross number, what would you...

I don’t have the numbers here in front. But, you have to call, Michael, can explain that to you.

I mean, Peter, what it means is, if we do get a year where hopefully we’re free of these GTF issues, then the EBIT number could be a step change. Couldn’t it?

I mean these, provisions you’ve taken in 2016, even though there’s a change in provision number, I guess, the gross number is going to be a lot bigger. So, how I should I think about that this going forward?

Because I am having the forecast out to 2020?

Part of the accrues obviously are for costs which you have to -- when you do shop visits for example, you have costs, when you get the bill later, you have to accrue for the cost of a shop visit, for example. That is -- they don’t go away in the future.

Doesn’t that go through the working capital line?

No, that’s what we always explain. I mean, if you know exactly the timing of a bill and the amount of a bill, then it’s a liability.

And if you are not sure how high the amount is around the timing of a bill, then it’s a provision. So, you have to look on liabilities and provision together.

Maybe it’s something I need to do a bit more work on and perhaps I could chat offline on this one.

And the end report will be available next week, and I think there is more detail also in what’s the gross number has been and the net numbers as well.

Once I have done a bit of work on that, maybe I can have an offline discussion. Just on the sale issue, this nice hedge seal as it’s called, since we ended the case with the engine for the A320, the Sales series seems to be fine.

So, should I assume that this is not a design issue, the engine, but rather material issue, in terms of the material that’s being used? What is the problem, why is it not prevalent on the C series engine?

It’s not in our workshop but maybe the change has been done only in the A320neo engine and not the other engines. But, I am not really sure about that, but we have seen no impact on other engines just on the A320s.

Aren’t you curious, as to why in particular the A320 seems to be bugged by all these issues? C series engine seems to be perfectly good.

Is somebody sabotaging Airbus here?

That’s a good question.

Okay, I’ll speak to you in person. Thank you very much.

There is a conference today with [indiscernible]. You can ask him a question.

Will do. Thank you.

Thank you.

Yes. Good afternoon, gentlemen.

Just come back to your outlook statement. I think, you mentioned also that the IFRS 15 number for adjusted EBIT this year would be then 600 million to 620 million, which if I calculate this correct, you would then at the top end at least mean that there is more or less in line growth versus the sales.

So, no margin dilution at all, which I found a bit surprising because, due to the strong ramp up in GTF, I would have expected here pressure on margins. So, can you elaborate a bit more on the compensating effect, which quite obviously supplied here this margin and will lead to [indiscernible] stable or hardly development.

That would be interesting to hear. And another question is also concerning this confined this GTF ramp up phase.

I think, you only mentioned that there is some downside risk if the delays would stretch longer than currently expected. But, is there some upside risk as well or do you think that at the moment it’s just more on the downside of where we should focus on here, but the upside is covered by the stumbling of volumes you have scheduled for the current year.

Thank you.

I mean starting with the last question, I mean, there is as always upside potential, especially the aftermarket. I mean, in the last couple of years, the aftermarket always performed better than originally expected.

Our forecast now is based on a 5% growth rate. If the market continues to grow in the couple of years, yes, then there is upside potential, sure.

And the first question was regarding IFRS.

back in our Capital Markets Day, I mean the expectation was we will be at €600 million EBIT for 2017; based on the €600 million, we expected a moderate growth in EBIT. So, that was a starting point and now we had to look into IFRS 15, what does it mean to our 2017 number and we detected that negative FX impact in 2017, which was a drag obviously.

So, it is expected that 2017 will be at 570, and now it looks like, we move from 570 to 600, that is obviously a bigger step, caused by the onetime negative effect in 2017 under IFRS 15. T hat’s the whole story.

So, the underlying expectation for the business is still the same as in our Capital Markets Day in December.

So, in short, view this, 570 more as a kind of depressed figure here and just on a normalized level, which has been more or less flat development here?

Yes.

Just a quick follow-up from Deutsche Bank, relating to the GTF situation and I apologize because this is a probably a major oversimplification. But if we thought that Pratt and Whitney paid Airbus that say around €300 million in compensation, Geared Turbofan delayed in 2017, would it be reasonable to assume that around 20% of that, so 60 million came from MTU due to the risk and revenue sharing partnerships and therefore, were it not for that payment, MTU’s, free cash flow would have been over €200 million in 2017, or is that not a sensible way to think about it, then, can you set me straight on why not please?

Thanks.

It’s a good question. If the numbers are right we mentioned, then you’re right in as a consequences.

But we cannot comment any payment which was made to Airbus, either by Pratt or by us.

Hi. It’s Timm Schulze-Melander on the spec sales desk.

Thank you for taking my question. I just had two very quick simple questions, please.

The first is on the majority curve. Just as you think about the GTF, could you talk about how much of the cost efficiencies are behind you?

Are they materially behind you? Is there still plenty to go?

Could you just give us some sense of how far through that cost efficiency process we’re on the [TGF], given some of the program issues? And the second question, again just keeping it very high level and sorry to go back to this.

Just way that you have caveated the 2018 guidance, I’m still not sure that I entirely understand. We had [TGF] issues last year, and when we came into 2017, you chose not to caveat the guidance; this year you have chosen to caveat it.

And yet as you sort of flag the commentary from Airbus and others suggest that this is just an issue for a few weeks. So, those two things seem slightly in congress, if you could help clarify that; that would be great.

Thank you.

I mean, we are -- regarding cost efficiency, I would say on a unit cost basis, we are 80% through our learning curve. I mean, what we are still going to see is the scale effect of GTF.

I mean, today we deliver -- or 2017, we delivered roughly 400 and at the end of the decade or beginning of next decade that will be, figure above 1,000 engines. And obviously, we have some fixed costs like depreciation on tooling, on machines, and we have capitalized R&D, which needs to be amortized and capitalized entry fees needs to be amortized, and that’s all the bigger volumes.

So, the margin will get better more from the later point.

Regarding the guidance, I mean, I think we are actually in line with the statement coming from Airbus. I mean, this issue came up, as I said, a couple of days before.

And everybody, as of today is convinced that we can fix that issue shortly. And the only remark in our guidance was that in case that it’s not happening, then we have to look again on our guidance.

But as of today, we see no need for that. That was the only reason we made the statement.

Very clear.

As of today we feel comfortable that aircraft deliveries will start in April again. But as I said, in case that is not going to happen, then we have to look again on the guidance.

Yes. Good morning, everyone.

I had a question actually on clarification on the guidance. So, you mentioned net income adjusted in line, growth in line with the EBIT adjusted.

But, those are also applied to the IFRS 15 number. So, should we assume 430 to 445 maybe under IFRS 15 and does the free cash flow conversion rate applied to that IFRS 15 number, or is it to the pre-IFRS 15 number?

Post IFRS 15.

All right. And…

Related to post IFRS 15, but it makes not that big difference anyway.

Okay. And just to be absolutely clear, you did not in that free cash flow any potential payment to Airbus, in terms of -- if you under-deliver on your commitment to that?

I think we cannot disclose what we have covered and what we have not covered. I mean, as I said, we have always included in our guidance, especially in the first years of a new program additional, higher warranty costs, something like that that is covered.

But I cannot add anything to that. Sorry.

Okay, thank you. Then, I just have a small precision question on the intangible CapEx because they seem to be running a bit above the level of capitalized R&D that you disclosed.

So, I was wondering what else drives them and if you could give…

You mean cash flow investing?

Yes.

The investment in intangible assets?

Exactly.

Yes. That is capitalized R&D for the work we do ourselves but what is in the cash flow from the intangible asset is really the payments, for the imbalance payments which we paid to the OEMs for example for R&D work which is done at Pratt & Whitney or achieved for example and we have to share that kind of -- like, according to our program share.

And in the cash flow, you really see the payment, not the capitalized value.

Okay. And can you give a rough guidance of the trend for the cash flow line in 2018, please?

No, we don’t. I mean, we give guidance for cash conversion but not for line items in the cash flow statement.

Sorry for a lot of JP Morgan question s. Just one.

Peter, I’ve got a little bit confused with your answer to I think it was Richard Schramm earlier, on the bridge from ‘17 to ‘18. So, 570 starting point guidance, call it 610, take the midpoint, is that a 40 million improvement that all comes from the operating issues in your business and FX or is it we add back the 35 one-off and then we just get five improvement from everything else including the ‘18 FX effect.

Look for example, look for example on our pre IFRS 15 number that was €607 million of EBIT to back something like our 2016 number, the impact on EBIT like €15 million…

One five. Sorry.

15, one five?

One five, exactly, 15. That is a level which we also had in 2016, coming from IFRS 15, that normalized impact under IFRS 15 would have been something like 590 or something like that.

And from 590, we moved to 600 to 620, and that is a slight improvement.

Okay. So, a 20 million to 30 million improvement from everything that’s trading?

Yes, correct.

Thank you very much for participating in our conference call. If there are any questions left, then, please don’t hesitate to contact the IR team during the afternoon.