MTU Aero Engines AG

Good morning, ladies and gentlemen. Welcome to the Conference Call for MTU’s Q3 2021 Results.

We will start with a business review presented by Reiner. Peter will provide the financial overview and a more detailed look into our OEM and MRO segment.

A walk through our guidance update by Reiner concludes the presentation. After that we will open the call for questions.

Let me now hand over to Reiner for a deep review.

Yes. Thank you, Thomas, and welcome also from my side.

The passenger traffic further improved in the third quarter, but the trend is still volatile with regional setbacks. With the national traffic air travel remains the weak spot while domestic traffic is developing positively.

And cargo traffic remained strong above pre-COVID levels throughout the crisis. In October, IATA lowered its 2021 outlook for passenger traffic.

The expectation now is to reach 40% of pre-COVID level at an estimate of 52% in June. For 2022, global passenger traffic is forecasted to improve to 61% of 2019 levels.

In our own network, this already translates into an acceleration in MRO activity. We saw a strong increase in V2500 induction lately.

The deliveries of engines from freight operators to our shops are continuously strong. So, basically, all of our MRO shops see a steep increase in workload and on some engines we are already having long induction buffers.

In addition to these volumes work scopes also start to increase and this is a clear indicator that airlines are preparing for an increase in flight activity. In the commercial segment, we saw a large order for the GTF in October.

Spirit Airlines selected the PW1100 for its order of 100 firm and 50 option A320neo family aircraft. On the smaller GTF version, we are also pleased to see the first of 60 A220 delivered to air force.

This plane extends its customer base and within our footprint in the regional jet markets. In the business jet segment, we welcome a new airplane powered by one of the entrance in the portfolio.

The PW812 has been selected for the new Gulfstream G400. In our MRO division, we are progressing our expansions.

In early October, MTU Zhuhai inducted its first GTF engine, which marks a key milestone in the facilities history and sets the base for future growth. MTU Zhuhai is besides MTU Hannover and EME Aero, the third GTF MRO shop in our network.

End of September, we celebrated the groundbreaking of our second facility in China. The new site will have an initial capacity of 260 shop visits focusing on GTF and V2500 engines and will enter operations in 2024.

In August, we sold our marine and industrial gas turbines facility, Vericor Power Systems to CSL capital management. By divesting Vericor, we focused our activities on our core business.

The divestment will have no impact on our revenue and earnings forecast in 2021. Let me now hand over to Peter for the financials.

Yes, thank you and also good morning for my side. For nine month, total group revenues increased 2% to €3 billion.

The average exchange rate in 2021 of 120 compared to 112 in 2020 was a headwind for our sales. In U.S.

dollar terms, revenues were up 8%. EBIT adjusted was almost stable at €307 million resulting in an EBIT adjusted margin of 10.2%.

In the third quarter 2021, we saw as expected a sequential improvement from 10.2% in Q2 to 11.7% in Q3. Respectively, net income adjusted was stable at €220 million.

Please have in mind that for calculating net income adjusted, we applied a reduced normalized tax rate of 26% effective from January 1, 2021 onwards. Free cash flow remains strong with €205 million.

This number was significantly driven by a strong increase in MRO inventory in Q3 to meet the strong demand. A solid cash collection partly compensated that impact.

Let me now provide some details in our business segments and turning to our OEM division. Total OEM revenues decreased 6% to €1,075 million.

Within that military revenues increased 4% to €310 million. Commercial business revenues declined 10% to €765 million and within that organic OE sales decreased in the low teens range.

On a quarterly basis, Q3 2021 OE sales were up 20% compared to Q3 2020. And this was mainly driven by an uptick of deliveries of GTF and business jet engines.

Organic spare parts sales in the U.S. dollars were down low single-digit.

In Q3 2021, spare parts revenues were up in the low teens compared to Q3 2020. Please keep in mind that 2020 saw a pre-crisis Q1, which makes comparisons still difficult.

EBIT adjusted at €202 million resulting in a margin of 18.8% due to a favorable business mix and improved cost base. Let’s now move to the commercial MRO segment.

Reported MRO revenues in euros increased 8% to €2 billion. In U.S.

dollar MRO revenues were up 15%. The mix between core MRO and GTF remained roughly stable at sixty-forty.

EBITDA adjusted decreased by 9% to €105 million, resulting in a margin of 5.2%. The lower EBITDA adjusted margin results from a higher share of GTF work compared to 2020, as already mentioned in previous calls.

The quarterly profitability in core MRO was a bit lower than usual coming from customer and work scope mix effects in Q3. At this point, I would like to hand back to Reiner for some words in our guidance 2021.

Thank you, Peter. Based on the Q3 results we can further specify our guidance.

For total group revenues, we narrowed our expectations to €4.3 billion to €4.4 billion. Our previous expectation was in the range of €4.3 billion to €4.5 billion.

And this is based on a slightly lower sales expectations in the military and MRO business. Military revenues are now expected to be up mid-single digit, mainly driven by some shifts of deliveries into next year due to some minor delays on the supply chain.

The previous outlook was up mid-to-high single digit. We slightly lowered our expectations for commercial MRO revenues to be up in the mid-teens range, mainly driven by slightly lower content on some engines.

Our previous outlook was up 15% to 20%. The outlook for the commercial OE and spare parts business remains unchanged at up low- to mid-single digit.

Based on the resulting business mix, we expect EBIT adjusted margin on the upper end of our previous guidance at 10.5%. The cash conversion rate is expected to reach the upper end of our previous guidance range with higher double-digit percentage.

One reason is certainly the strong performance of the free cash flow in the first nine months. And on the other hand, we now have a better view on the inventory growth in the fourth quarter, as well as, better visibility on airline payment behavior.

This guidance update largely confirms our expectations for the year issued with our guidance on November, 2020. So even in the volatile environment, as we experience it right now, we are in a position to deliver.

Furthermore, we remain very positive about recovery of the aviation sector. Our confidence is confirmed by the expectations for the fourth quarter.

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

Hi. Good morning, everyone.

Good morning.

So, on the engine program seeing slightly lower MRO content, what’s going on there? I mean, are you seeing less work scope compared to prior quarters, any color on which programs drove the lower content?

And I guess related to that in the last quarter, you talked about working capital consuming cash as MRO picks up, given that the ramp up seems to be slower than maybe what had expected, did that positively affect cashflow this quarter? And is this high double digit cash conversion, for this year, do you think that’s a good measure to think about conversion in future years, or do you think this year benefited from any one-timers?

I mean regarding revenue out of MRO, I mean that’s focusing on GTF. So, the work scope is we built in – so we use less materials.

So, the works scope per shop there is a little bit lower on average, which is – I mean basically it’s a good message because that means that the parts are more durable and you have a longer on-wing time really to exchange less parts in the engine. But that translates in our way of accounting that work in lower revenues.

But there’s nothing more behind it, that’s not a market issue or so not, not less demand. I mean, on the working capital side, I mean, you saw that in Q3 working capital has picked up significantly and that really has to do with a lot of engines, as Reiner mentioned standing in front of our shops and are inducted, so you have more work in progress, you have also to provision obviously more parts, more spare parts to do that work.

And that will go on definitely in Q4. So we’re going to see a further higher working capital at the end of the year, compared to end of Q3.

That high double digit cash conversion is always our mid- to long-term target will be reached. Each and every year we have to see that.

And we have also – I mean you know that we have a lot of things, which we want to do. We extend our shop in Zhuhai, we invest in our new repair facility in Serbia, and so on, also in a new manufacturing plant here in Munich.

So there might be the one or the other year where we have a lower cash conversion, but overall, as an average for next year, a high double-digit cash conversion is definitely the target.

Okay. Thank you.

Yes. Morning, guys.

Thanks for taking the question. So a couple of questions on aftermarket, the low teen growth in terms of spares that you saw in Q3 really stands out versus peers this quarter.

So was that a sequential improvement versus what you saw in Q2 and keen to understand and any color you have around that. And then how are you seeing exit rates?

So in terms of the end of September and into early October, what are you seeing in terms of growth and are you seeing a pickup there? And then my second question would be on margins, obviously OEM margins were very strong and MRO margins were quite weak in the quarter.

Was there anything specific in either of those numbers and can we see those margins and should we see those margins are sustainable? Thank you.

Hey, Ben. It’s Peter.

So the low teens, I mean, we really saw in Q3 a really strong increase in V2500 spare parts demand. So if you really compare that Q3 versus Q3 2020 year-on-year, then the V25 has doubled down.

So that is really the momentum we see currently, based obviously on a weak Q3 in last year. While the CF6, PW2000s while we are rather stable.

So that was, I mean, that was not so down in 2020, compared to pre-crisis levels, as you know, that PW2000 and CF6, having part of military application in case of the PW2000 and are very popular on freight and that business didn’t go away that much throughout the crisis. So but I think the very high growth rate of the V25 is the driver for the low teens growth in Q3.

I mean, in Q4, as I said, I mean, we see a really strong momentum. So a lot of, especially V25 engines are standing in front of our shops and that will ultimately also trigger spare parts sales in Q4.

So what the exact growth rate will be in Q4, obviously, I don’t know exactly, but it’s going to be some somewhere in the 30s. So for the whole portfolio, the segmental margins in MRO and I mean, MRO was a bit weaker as you see.

I mean, it was a little bit above 4% and that has to do. There’s not really a lot behind that.

So we have a typical mix of between GTF and core MRO, and we have a more and more spare parts content compared to labor and repairs. And also a little bit engine customer mix on it.

Not every engine program is as profitable as another engine program. And so on, it’s really a small mix effect.

And you going to see a stronger margin in the MRO division, definitely in Q4. So we know that already, we know quite well what the customer mix will be and what the engine mix will be.

So that was really rather an exception than rather going forward the basis for calculating Q4 but for the year, I mean, in the MRO division we going to be between 5% and 6% for the year. OEM division, there were some things on the one hand side, obviously we have our cost savings program so which we launched as a reaction on the crisis.

So that sets us in the position where we have a lower cost base and effectively in 2021 compared to last year. We have in the military, we have a stronger military business in Q3 compared to Q2 and in the military segment, we saw a very high share of aftermarket revenues in the quarter, so less new engine deliveries.

And Reiner mentioned that, we have some issues in the – some minor issues in the supply chain. So we delivered less new engines that had a very high aftermarket portion that drove also the military business to a rather high margin contribution in the specific quarter.

I mean, that will revert a little bit in Q4 when we think that – when we have a pickup in engine deliveries in the military field. And then we had also in the – and then so we have the V2500 spare parts business accelerating in Q3.

And I mean, you know that V2500 spare parts are due to the maturity of the program, the most profitable spare parts business, which we have in our portfolio and the new engine business in the commercial field on the other hand side was awesome. Not as loss making, as in other quarters, we are progressing in bringing the GTF margin upwards.

Sequentially, we try obviously to bring our manufacturing cost down. The engine gets more and more durable.

So in Q3, we were able to reduce also the warranty provision, which we book for the engines. And I think that is – these are the main reasons for the margin in the third quarter, in the OEM division.

That’s very clear. Can I just follow up, were you surprised by the flat growth on the CF6 and the PW2000 in the quarter, or was that kind of in line with what you were expecting?

No, that was our expectation. I mean we have, maybe you might know that we have also DMO provider for a lot of freighter operators in the world.

And as we speak, I mean the induction pipeline also in an office, its quite long for the CF6-80 engine, not so much for the commercial operators – commercial airlines, but a lot of freight operators sending, I mean the – you just have to look on the freight rates, which they can charge currently. So they are really trying to bring everything in the air, which they have here.

So that is a very, very healthy business.

Okay, cool. All right.

I’ll get back in the queue. Thank you.

Thank you.

Yes. Hello, hello, Reiner.

Hello, Peter.

Hello.

And guys, can I just maybe touch on a couple of questions, maybe just first, when we think in about commercial MRO and we think about the mix of the core business and GTF. And I think earlier on page, I think you said in the court, it was still around that 60 to 40 ratio.

Can you guys maybe help us to understand how we should think about that ratio changing maybe next year in 2022 and 2023, give us a feeling about how that might evolve going forward, please. And just quickly on supply chain as you know, it’s sort of pretty well top of the list of market concerns, how would you say your supply chain is performing?

You talked about military and some small issues there, but I’m also thinking about commercial OEM in terms of on time on quality delivery. How is that going and how are you managing through any issue?

So maybe I’ll start with the supply chain and we – actually we see no major impact. The delays in the military business are not caused by supply chain issues coming from raw materials.

I think that it’s more parts from partners in the consortia where we have some smaller delays. So it’s not a significant issue.

It’s really a small issue. And in the commercial business, we have typically long-term contracts with the major suppliers we follow with dual source strategy, and we have also long-term contracts regarding pricing.

So actually, we have no – let’s say, I would say no bigger concerns about that. But it’s – I would say overall, as in every industry, it’s becoming a little bit more, let’s say stronger than it was more difficult than it was in the past, but still for the next, let’s say couple of years, we feel comfortable with that.

Great.

So the 60-40 share, I mean that will at least for 2022, that will stay more or less in that ballpark. I mean long-term, I mean in the last one, two years, we did a lot of warranty work on the GTFs.

So rather high material content because that warranty work typically is you exchange parts. And so that is the shop is obviously quite large.

And so going forward, over the next years, obviously that warranty portion comes down and we have more regular work scope in the shop visits. And the core business grows obviously also.

So I wouldn’t say that we go far away from the 60, 40 split here in the next one, two years or so.

And Peter, just following-up a little bit, I think in previously on calls, you said that the warranty work, the retrofit visits had finished in the summer. That’s correct.

Is it?

Yeah. I mean, it’s almost not completely black and white.

I mean, when you do things on an engine, then you have maybe a warranty portion, then you have regular work and under these flight hour contracts, what you obviously also do because the customer pays the bill via the flight hour payment. So it doesn’t pay every spare part.

So what we do is obviously when we insert, so a more durable part, so that the engine as a whole can stay longer on wing and maybe you safe even though a whole shop visit over the contract time. So we do proactive things to really improve the profitability of the flight hour contract.

So that is the – these are the three fields which we do. And so the shop visit bill is always a mixture between those, but you don’t have the 100% warranty shop visit and so on.

So that is it’s in that was the case at the beginning, at the very early phase of the engine lifetime. But now we have typically a mixture for all these three things now.

That’s helpful. Thank you very much.

And just, sorry, Peter, sorry to keep talking about GTF and warranty provision, but I think in answer maybe to Ben, just now, I think you touched on the warranty provision, and I think in the third quarter, you said that you reduced that. And Peter, I just wanted to clarify, was that a reversal of the provision that you had on the balance sheet at the end of the second quarter?

Or was it a reduction in the rate at which you are accruing upon every delivery made?

Exactly. The second is the case.

Right. So there was nothing unusual in margin to reversal that provision I’ve got it, I clear.

Thank you, Peter. Thank you, Reiner.

Thank you.

Yes. Hi, there.

Thanks very much. Couple quick questions for me.

First of all, one of your peers in engine man said that they had very good order intake. So I was wondering if you’d seen something similar on that.

And then secondly, also on the aftermarket, have you seen any changes in the trends for surplus parts, particularly on older engines? Thank you.

I mean, we have the order book in the appendix of our presentation, now we standards something like €20.7 billion of orders. I mean, in the MRO division, I think, we signed for nine months – we signed new contracts, that was US$3.7 billion for nine months.

So we expect some more to come. You saw in our presentation that we have secured Spirit Airlines with the A320neo, so 150 – like 100 firm, 50 options orders, but typically we don’t book that into our order book at the time when we do the announcement.

So typically, it lacks them maybe six months or so until the contract is signed upon contract signature. We then book it into our order book.

So there’s always a time lag.

Regarding surplus materials, I think, there’s no significant change compared to previous quarters.

Yes. Sorry, Peter.

I don’t think I was being clear. I was specifically referring to spare parts on the OE division, whether you were expecting strong deliveries in November, sorry.

Yes. I mean, what we see is that Q4, that is our expectations that we – that Q4 will be a strong – quite strong spare parts quarter.

So we see the auto momentum is already transparent. Yes.

Especially on the narrow body engines.

Very much.

Yes, good morning.

Good morning.

Good morning. I had one question left.

It’s on the MRO margin and the recovery of the MRO margin into the next years. I understand you said, the Spirit will remain at 60%-40%.

Should we expect on both sides, core MRO and GTF, an improvement of the profitability of shop visits. Is the Q3 EBIT margin representative of what you should expect in 2022?

Or is it the 5% to 6% that we should adopt for next year? And how do you see that trend evolving?

Christophe, I know you had speaking, now Q3 is not the normal level of profitability we expect in the MRO division. So going forward, we expect more as we said before between 5% to 6%, depending on the mix.

But we’ll give more, let’s say, a little bit more clarity on our cable markets stay mid of November, I think,

But I mean, currently, I mean, if you look at the profitability of GTF MRO, I mean, it’s the case that you obviously do a lot of exchange of new material, so where you don’t have a margin in MRO division, obviously. So but over the next years, you will see more repairs and so on.

So there might – and we obviously will have some efficiencies and so on. So I think we can – we will be in the position at least to increase the margin on the GTF side also.

But that’s not something what, which happens overnight.

Okay. And if I may follow-up question not necessarily on MRO, but in – I mean, some of your peers have mentioned rehiring and you obviously kept back on workforce last year.

When are you planning to rehire and in terms of group cost, incremental group cost, when do you think that could impact your EBIT margin?

So we are starting already to rehiring people, it’s mainly in the MRO business, because we see, as Peter mentioned, we see a lot of inductions coming in the next quarters starting with, let’s say, with high flexibility, that means in the beginning more temporaries, so least workers and things like that. And especially in the OE business, in the OEM business, we are more hiring engineers, especially, for R&D activities for the FCAS, the next FCAS project military program is France and Spain together.

So we hiring two, three hundreds engineers in the next two years.

Okay. Thank you very much.

Yes. Good morning, Reiner, Peter and Thomas.

Thank you for taking my question. Hi, I have a follow-up on aftermarket, just asking maybe another way.

So you mentioned that your inventory have increased at MRO at the end of Q3, and that you have a lot of engine that are standing in front of your shop. So could you comment on what you’re seeing in terms of activity in your shop in October so far?

Is it at the similar pace or it’s increasing versus what you had at the same time in September? And my second is what that implies for your spare sales in Q4 versus what you have seen in Q3?

Thank you.

Yes. I mean, I would say that the activity is really accelerating.

So I wouldn’t say in the shop, but in front of the shop because the pipeline gets longer and longer and it’s really, I mean, we are really trying to hire more people as Reiner said. So on a short-term, rather obviously, list workers to be able to do all that work.

So it’s especially around V2500 and also the CF6 for freight customers and also in part the GTF and that will trigger on a short term basis also spare parts demand. So we are – I mean, we have a market share of 35% in the work of the V25.

And we order obviously a lot of V25 spare parts. So that we have a quite good transparency of what will happen on the spare part side of the V2500 as well.

And I mean, Q4 definitely will be a lot above Q3. So as I said before, we think Q4 will be a growth rate in the 30’s year-on-year compared to 2020.

Very helpful. Thank you, Peter.

And just maybe a follow-up. Given that I mean, the shop visit on a V25, I mean, usually it’s between 60 to 90 days.

Does it also mean that your Q1 for next year will be very strong given all this V25 that are queuing in front of your shop.

Yes. Sure, that’s the consequence.

So we see a lot of momentum currently what that means for the full year as maybe we’re going to do a comment on our Capital Market Day, but obviously we cannot do that all in Q4. So there’s a very good momentum going into 2022.

Great. Thank you.

Thank you.

Thank you. A couple if I may.

One was just clarifying the answer to an earlier question that I think Ben asked my – what I heard was that you said V25 spares demand had double year-on-year and CF6 and PW2000 was sort of flattish. I’m kind of scratching my head about how that translates into overall spares revenue growth in the low teens, which I think was what you mentioned.

So just a clarification on that. And the second one was on GTF work in particular clearly that has kind of cushioned some of the impact of the downturn the whole industry has seen over the last year.

I think as we’ve seen on Q3, that becomes a bit of a headwind as the industry starts to recover. You’ve talked about the mixed between normal course business and proactive work, but I wonder could you give any more granularity say on, what the year-on-year figure would’ve been this year, had no proactive work being undertaken in 2020 or 2021?

And also talk about how that mix this year of normal course versus proactive effects growth prospects looking into 2022?

Well, I can give you – I don’t want to scratch your head about our CapEx growth. I give you the solution to the riddle?

I mean, the GTF spare were down. So last year we had a lot of very material intensive quantity shop visits.

So that in Q3 we had a lot of provisioning of GTF spare parts for that – for something like hot section replacements and so that is not – to that extent not the case anymore and so that translates and if you take all pieces of the puzzle together to that growth rate. So we don’t do that analytically.

I mean, we have a mixture of that, but you cannot always say that shop is 20% of that 10% of that or 30% of that, so that we don’t calculate that. That was rather a qualitative answer to that question.

But I cannot say what would’ve been the rate without that proactive work. So I have no answer to the question, frankly.

Maybe just a different angle on GTF. I mean, you’ve highlighted, lower spares consumption there as being something of a positive, given that it suggests higher durability on the part of the engine and lower spares consumption going forward.

Can I ask a kind of slightly provocative question on that, which is if the end engine is more durable and spare parts consumption is lower given program accounting rules and IFRS 15, does that not lead to a higher margin for that program overall at some stage? And have you already started to take some of the benefits of that?

I mean, we do assess all flight contracts on a regular basis. But if you do some shop visits with a lower step up, that’s not – the next day, you have a higher margin on this business.

So it takes some time until that translates into the margin contract. But I mean, in theory, you are completely right.

So once you can take out cost of a flight agreement that translates into a higher margin. In our accounting world, that would lead to a higher step up margin.

On the OEM side of the business for [indiscernible].

Understood. Thank you for the answers.

Yes. Good morning.

Thanks for taking my question. I have couple of questions, I would like to take them all on by one, if I may.

The first one is again about Q4 and your top-line development, you mentioned before, again, that you expect growth rates of 30%. I mean, that’s mathematically necessary to reach your guidance.

How sure are you actually, that you are going to reach that especially referring to the military business where you see a big jump in revenues, basically say plugging your guidance into my model.

We have high visibility on that. And we are quite confident that we will achieve our guidance.

So, I mean, we have now end of October already, so we see the momentum going forward. So there’s a very, very high, let’s say confidence that we will achieve in the military, but also in the commercial MRO business our guidance.

As Peter said, the engines waiting for induction in the MRO facilities, on the military business we see the progress, we know exactly which engines will be delivered until year end, which let’s say other activities we can invoice for, and so as I said, very high visibility and confident level.

And I mean the military spacing you see that each and every year. So you typically have week Q1, week Q2, that Q3 accelerates and Q4 us typically the strongest quarter.

It was also in the last years, it was the case to more or less extent because don’t forget that we do a lot of milestone booking. So when you reach our milestone, you can really send the bill to the customer so to say So and there we are quite sure that we’re going to reach all these technical milestones.

And then finally you can book revenues and the respective profits.

Okay. And I same aside for the margin guidance, I assume despite the really high, let’s say seasonality aspect this year.

So if I just plug in your guidance I get a huge jump in adjusted EBIT in Q4 also there you are super confident if I get it correct.

The high margin comes from a high share of military business, obviously, and a very strong step up business in the commercial business. And that both things are very transparent and tangible to us.

So we are very, very confident to reach the guidance.

Okay. Cool.

Regard that, but there are not a question regarding your MRO margin, which has now you been disappointing now in Q3. You are a little bit more confident for Q4, can you give us and basically some form of guidance there for the upcoming years, because you’re coming from 9% or almost 10% in 2019.

You’re now at 5%, you mentioned structurally higher share of labor work versus spare parts. How fast if at all, are you going to jump back to the 8%, 9% that you achieved in the past?

I mean, to achieve the 8% or 9%, as we have seen in the past, not in the next, let’s say one or two years, because of that mix between, let’s say, I would say a traditional business, like service for V2500, CF6 and PW2000, and then the high portion of GTF work. And as we explained several times, if you do these service on GTF engines, it’s a very low margin business.

And if you assume 60% of the classic MRO work and roughly 40% on, on GTF that you in consequence will reduce the margin to a level of whatever let’s say over on 6% or something like that. So to achieve the level of 8%, 9%, or 10%, I would say not in the next years.

But if you look just into that core MRO business, so providing engines like, like CF6, PW2000 V2500 in this business, we have 10% or more margin.

Okay, cool. Thank you.

And two more smaller ones are actually three, three more questions smaller ones. The first one is, you did the great job on the cost development versus last year, to expect this cost to snap back in 2022, or do you feel that you basically, with a structural measure that you put in place this year that you will have a lower cost base in percentage of revenues going forward as well?

Well, I think that is rather the basis for the next year or so. I mean, where we won’t hire a lot of white collars, what I mean, as Reiner mentioned, we do a lot of, we got to hire a lot of engineers but they will show up in the R&D line, not so much in SG&A.

So SG&A will be, I mean, you have a certain wage increase overly year-over-year. So, and that’s, so the growth rate would rather be in that range for 2%, 3% per year or so.

So we try to do all of our jobs here in the SG&A department with the same workforce. Although regulatory and IFRS things get more and more complex, but still we try to counter that with some more efficiencies.

Okay, cool. Just one, a technical €30 million one of gain in the quarter on which P&L line was it booked, was it the other line?

You mean the €30 million?

Yes.

The €30 million that was, I think, that was of cost of goods sold.

Okay. Thank you.

And the last question. The industry, I mean, the financial industry is talking a lot about ESG now.

We are talking about classification of funds and so on. I have seen MTU popping up now on some exclusion lists, because of the more than 10% share of that military business, and there are also some exclusive lists where you see 5% as a threshold to be on exclusive list because of military business.

Are there any thoughts on your side regarding this development? Is this a topic in the management of MTU and are you considering measures to basically make sure that you are going to be an ESG champion going forward?

It’s actually not on our top priority. I mean, we are working on this ESG topics, yes.

But I mean, we are not thinking about selling the military business just to be then on every list. I mean, that could not be the consequence, but as I said, it’s not the top one priority.

I mean the 10% threshold we got to highlight, though the military, this has got to be diluted anyway. I mean, this – the commercial business will go strongly over the next years.

So the military business, I mean, in the next years, won’t be about 10% of our sales. But we are focusing on things like CO2 and things like that, that is obviously important, but there’s no plan; as Rainer said to sell the military division to comply with something like 10% threshold or so.

Okay. But that’s going to be 2023, right, not next year?

Yes. Sure, latest, I would say.

Thank you. Good bye.

Bye.

Yes. Hi.

Hi.

Good morning. Thank you for taking my question.

Hi. It would be very quickly.

It would be just if you could provide a little bit of color on the Zhuhai operation and how that has performed in Q3 given the slowdown in China and how you’re seeing the outlook there for Q4 and 2022, also the behavior of your partner there in terms of shop visit content? Thank you.

Celine, Zhuhai the same is true. What I just said for our Honavar facility.

So they’re also – we had a weaker Q2 there, and Q3 now we see also huge momentum. So the induction buffer is strong.

Insurers are getting longer and longer for their portfolio. So V2500 and CFM56 both engine types and also not only the number of engines, but also the work scope.

Work scopes are increasing, so – and they will also buy a lot of spare parts in Q4. So that’s quite transparent to us in Q4.

Q4 we are going to also as we’re going to see a very strong quarter – very strong quarter in Zhuhai there. I mean, what we did, I mean, sales will increase their strongly because they do have also started now doing GTF work.

So the first engine was inducted, I think some weeks ago. So they will also do GTF work ongoing.

So I think that is more or less the other two questions. Do you have any follow-ups?

No, that’s good. Thank you, Peter.

Thanks.

Yes. Hi, gentleman.

Hope you’re well.

Hi, David.

Just a couple on the aftermarket. The first one – sorry, it is a bit boring.

The spares growth on Q4, I know you’ve been asked a few times just that 30% seems to me to be very strong compared to what you are guiding for the full year. I just wondered if you could try and reconcile that.

Maybe I’ve got my waitings wrong, but if I popped in 30% for Q4 year-on-year, I think you’d be more like 7% for the full year. So sorry if my math is wrong, just wanted to check that.

The second question is, I don’t want to steal your funder, hope for the Capital Markets Day, but, Reiner, you did say in your intro that I also was expecting global air traffic in 2022 to be 61% of 19. But six months ago, they were probably expecting it to be about 75% and that was certainly something Raytheon had back in its – CMD slides back in May as a working assumption.

So everything has slipped a bit to the right. I just wonder if that’s changed your thinking about some of the aftermarket trends, I’m just asking high level for 2022.

And then lastly, if I can – can you just give me a feel for the V2500 sort of activity? So where is it today versus the peak?

And do you think you can get back to the peak or is that unrealistic? Thank you very much.

Maybe I start with the last two questions. Yes, you are, right.

The after forecast six months ago was more positive than the actual one even for the next year. But as saw already this year, I think due to our business, due to our portfolio, we are, let’s say, not totally depending on that, let’s say, general trend.

We have a high exposure to narrowbodies, and I think everybody expects narrowbody in market to recover earlier than the widebody market will recover. So that’s one piece why we, let’s say, a little bit not independent from the overall trend, but we can, let’s say, meet our targets.

Secondly, it’s the freighter exposure we have, which is more or less independent from the overall traffic development. And then it’s a military business.

So yes, you are right. But I think beside that, we are still, let’s say, we feel comfortable with our outlook for just this year, but also for next year.

Good.

Yes. Sorry.

No, no. I said thank you.

And the other question was the quarterly growth. I think we – I mean in our model, if you take something like 30%, you come up to something like a mid-single digit percentage.

If you want to clarify that completely then I think Thomas welcomes to your call and you can go through that calculation quarter by quarter. I can’t do that here right now.

Okay.

And the third question was?

We have – in two weeks, we have the next Board meeting with our partners. I think the expectation is that we will not fully recover to the old level of shop visits.

Is it 10% less? Is it 15% less or 20%?

I don’t know, but it will not be exactly. We will not reach again the level of what we have seen in the peak in 2019.

So the – so would be a little bit less than it. It’s for sure.

I mean it’s – and it’s not a surprise. I mean some of the mature aircraft and engines will be out phased or will be parked and will not come back into the market.

But V2500 will be still a very important program for us. And the fleet is not very old, it’s average eight to nine years.

11.

11 years. Sorry, now it’s 11 years.

But it’s still let’s say another whatever 10, 15 years to fly.

All right. That’s very helpful.

Thank you.

Hey guys, thanks for letting me back in. So we heard this morning from Safran they were seeing a price increase in November and that would be returning to a similar trajectory of what you saw pre-COVID.

Is that something that you guys would expect for the portfolio that you have, that you are seeing pricing returning to those pre-COVID levels? And then supply chain has obviously been a key focus of the results season in general.

Are there any I think you talked a little bit about labor, but there any pressure points that you are seeing at the moment? Thank you.

Regarding price increases I would agree, what Stefan told this morning? So we see it in a similar way and regarding supply chain.

As I said in the beginning, it’s not a big issue actually, because we have typically, as I said to source strategy we have long-term contracts including also pricing conditions. So as I said, actually, it’s not a – not the main concern we have now.

Okay. Clear.

Thank you.

Yes, Reiner, Peter apologies, just a quick follow up. Just can you help us to think about capacity utilization at Commercial MRO across the network, sort of roughly your best idea of that this year and how you think that will trend maybe next year and beyond?

And then second question was, and please forgive me if you answer with this on the last call, I don’t quite remember but with Airbus intentions on A320 production rate increases in coming years, clearly higher volume in theory helps to bring forward, breakeven point on GTF. Can you give us any idea of when you expect that to go through great breakeven for you guys?

And also I mean, you have also heard also some critical words from lessors obviously. So if we go to 75 it’s, I think it’s still not yet clear, breakeven point of the GTF engine it’s always a question, I mean, on what you look, I mean cash breakeven or earnings breakeven because as I mean, a high number of manufacturing costs in GTF is depreciation because it’s a very automated production.

So not so you don’t need a lot of blue collars for doing that. So on a cash basis, you’re going to be there middle of the but if you take depreciation into accounts or capitalized R&D all the depreciation coming from the machines and buildings and so on, then it’s, going to take a bit longer.

The first question was.

Yes, right. It was just whether you could give us some idea of the capacity utilization overall yes, this year and then how you see that maybe next year and then the year after?

I mean, now as I said, I mean, the Nova for example, and Zhuhai are quite full, I would say, is it 90% to 95% or so? I don’t know.

I mean there we have really, to I think the bottleneck is still really the workforce. That was currently Berlin it’s a bit more difficult to get there.

The regional jet market hasn’t picked up. So compared to the narrow-body market, and also the small engine business is a bit weak up that we rather speak about, I would say, 70%, 80% or so capacity utilization.

So that’s, I would say Vancouver, Vancouver is also full.

But if you add it up and say, number of shop visits, we are, would say latest next year on the level, what we have seen in 2019.

Yes. Great.

Thank you. Thank you both.

Okay. I think this ends today’s session, thanks for participating and your questions and watch out for our CMD on the 18 of November.

Have a good remaining day and yes stay tuned. Bye-bye.