Earnings Transcript for MTX.DE - Q2 Fiscal Year 2024

Thomas Franz: Good morning, ladies and gentlemen. Welcome to our conference call for MTU's H1 2024 results. As usual, we start with a review and some key messages presented by Lars. Peter will start with the financial overview and a more detailed look into our OEM and MRO segment. After that, Lars takes over, and walks you through the guidance for 2024. This will then end the presentation, and we will open the call for questions. Let me now hand over to Lars for the review.

Lars Wagner: All right. Thank you, Thomas. So welcome from my side. Good morning, everyone. Good that you are on board. Let me start with the regular view on the market environment. Worldwide passenger traffic continued its path and grew 9.1% in June. Within that domestic traffic grew 4.3%, while international traffic rose 12.3% in total, with double-digit growth in most regions. Strong ticket sales and consistently high load factors indicate ongoing high demand for air travel. For 2024, IATA adjusted its passenger traffic expectations from a 10% growth to a nearly 12% growth. Over the next 20 years, IATA expects worldwide passenger traffic to increase in average, by 3.8% per year. Cargo flights also remained on a high level. The disruptions in maritime transport, combined with the tensions in the Red Sea, the drought in the Panama Canal, and the accident at the Baltimore Bridge led to an increased demand for airfreight. Aircraft movements in the cargo segments were 30.5% higher, compared to 2019. The strength in flying activity fuels the demand in the aviation sector. The strong market demand remained encouraging in the second quarter, due to continued strong passenger traffic, while supply chain challenges continued to limit production. Beyond the demand outlook, the announcement by Airbus to postpone the increase of the production rates, illustrates the challenges in the aerospace supply chain. While our own MTU supply chain is performing well, and is working in line with our expectations, this situation continues to limit production of new aircraft. This results in lower new aircraft deliveries, and slower retirements of older aircraft. And yes, there are first positive trends in spare parts provisioning, which means that we do see better availability of spare parts in the MRO. This allows us to improve turnaround time, and translates into more inductions into the shops. As described already at our Q1 call, this has a knock-on effect on spare parts order momentum. These trends are already visible in our Q2 results. Spare parts sales have improved and the progress makes us confident to achieve our full year guidance. However, supply still can't keep pace with the demand. A higher portion of spare and lease engines as part of the OE sales, continued in the second quarter and supports our customers. As a side effect, the tight market brings strong opportunities on the leasing market, where we are well placed with our subsidiary, MLS. All in all, we see positive developments, and we feel confident that we're moving in the right direction, with an acceleration expected in the second half. Let me now move on to the status of the GTF's fleet management plan. Since the announcement of the GTF fleet financial plan program in September last year, we made a lot of progress. Our efforts to improve turnaround times for GTF MRO shop visits, are beginning to bear first fruits. With our three MRO shops MTU Hannover; EME Aero, Poland; and MTU Zhuhai we not only have the necessary capacity, to tackle additional MRO work, but we also benefit from the excellent knowhow to optimize turnaround time. A dedicated task force has been set up to focus on benchmark turnaround times, and to identify cost saving potentials. Identified measurements are shared among all MRO network partners. Our partner, Pratt & Whitney, makes further progress with its production ramp-up of powder metal parts. Since end of last year, GTF engines with clean powder metal parts are being delivered to Airbus, whereas in the MRO delivery of clean powder metal parts, we see the ramp to continue through the course of this year. With sufficient MRO capacity and secured parts availability, we were able to execute heavy GTF - of shop visits even below 100 days. While this is not the current standard TAT, it shows what can already be done and we're heading into the right direction. In the meantime, the peak number of aircraft on ground was reached in Q2 and stands well below the initially expected 650 aircraft. This is partly due to the airlines good fleet management, and the deliveries of additional spare engines to the market. And finally, further progress has been made, with respect to airline compensation. 20 agreements have been signed with airlines so far, covering roughly 65% of the GTF engine fleet affected. Let's move to some other positive news, from the commercial and military business. July was a great month for our commercial business. For the largest engine in our portfolio, we saw the delivery of the first production version of the GE9X engine to Boeing, where the official flight test campaign for certification of the Boeing 777X has started. Entry-into-service is targeted for 2025. Earlier in the month, Cebu Pacific, announced an agreement with Airbus to firmly order 102 A321neo aircraft, with purchase rights for another 50 aircraft. This fleet will be equipped with GTF engines. And finally, on the commercial programs, this year's Farnborough Airshow was a great success for MTU, with orders placed worth roughly US$800 million. Further orders and options for hundreds of GTF engines were collected, bringing the total backlog for that engine family beyond 11,000. The GE9X for the Boeing 777X and the GEnx powering the Boeing 787 also scored particularly well. In addition to that, we received orders for the V25 powering 9 C-390 military transport aircraft. This great success demonstrates again that we do have the right future-oriented engines in our portfolio. Let's move to military, very good news also on our military business. As you're all aware, the Eurofighter engine is our key revenue contributor in military business. Due to the current political situation, we see increasing interest from European customers to place additional orders for the Eurofighter aircraft. Germany, Italy and Spain are expected to order additional aircraft. Further potential comes in export markets, resulting in opportunities to market a low three-digit number of Eurofighters over the next 10 years. In June, we signed with Safran Helicopter Engines, a cooperation agreement to create a 50-50 joint venture called EURA, which is short for a European Military Rotorcraft Engine Alliance. This newly created company will form the core of a larger program, which will collaborate with industrial and technology partners from several other European nations. Focus on the joint venture is the development of a new heavy helicopter engine, to power the next generation of European military helicopters, scheduled to enter into service by 2040. From our ongoing efforts to improve our production facilities, we can finally announce the official opening of our new turbine disk manufacturing hall. With this facility and its unique level of automation, we can realize significant process improvements, shorter processing times by up to 50% and savings up to a third of the previous cost. Let me now hand over to Peter for the financials.

Peter Kameritsch: Yes. Thanks, Lars, and also a warm welcome from my side. In the first half year 2024, adjusted group revenues were up 10% to €3.4 billion. And in U.S. dollar terms, revenues were up 11%. EBIT adjusted increased 16% to €470 million, reaching a margin of 13.7%. This high profitability was supported by all segments, with a strong contribution from a healthy product mix in commercial OEM, as well as in commercial MRO. Net income adjusted was up 14% to €342 million. And finally, free cash flow stood at EUR 105 million. Ongoing supply chain issues kept working capital high. Within these numbers, there has not been yet any cash outflow for customer support payments, regarding the GTF fleet inspection program. Now let's look at the details of our business segments. And let me start with the OEM segment. Total OEM revenues increased 8% to €1.176 million. Military revenues were up 19% to €272 million, mainly due to TP400 and next-generation fighter engine. Commercial business revenues in euro rose 5% to €903 million. And within that, organic OE revenues in dollars were up in the high 30% range, mainly driven by higher GTF and business jet deliveries. As in Q1, we saw a healthy mix supporting profitability. On a quarterly basis, OE revenues were up in the low 30% range. Organic spare part sales in U.S. dollars were up mid-single-digit. Main driver were wide-body platforms, B-25 and business jet engines. On a quarterly basis, spare parts revenues were up in the low teens. EBIT adjusted in absolute numbers increased 10% to €288 million, resulting in an increase in the margin to 24.5%. EBIT was supported by higher military revenues, a more favorable business mix in the new engine sales, and increased spare part sales. So now let's turn to the commercial MRO segment. Reported MRO revenues and organic revenues were up 11% to €2.3 billion. Main drivers were the GE90 GEnx and our lease engine business. GTF MRO share was at 30%, which is below our previous expectation for the full year, mainly due to a lower material content in the shop business. EBIT adjusted increased 29% to €183 million, resulting in a margin of 7.9%. The higher EBIT adjusted margin was the result of a better mix in independent business, while the share and material intensity of GTF MRO was lower. At this point, I would like to hand back to Lars, for some words on our guidance 2024.

Lars Wagner: Thank you, Peter. As you see in the H1, 2024 actuals, the ongoing encouraging market demand and the improvement in supply, were visible in our results and are underpinning our expectations for the year. The strong performance in all areas and the progress we are making, as we speak, allows us to not only confirm our guidance, but to increase our profitability outlook. Group revenue outlook remains unchanged at €7.3 billion to €7.5 billion. Underlying U.S. dollar FX rate assumption is US$1.10 per euro. Growth expectations in each business segment remain unchanged with the exception of the buildup of the revenues in the MRO segment. The share of GTF work there is expected to end at roughly 35%, versus previous expectation at 40% to 45%. This mainly reflects the lower revenues year-to-date, as we had lower material intensity in the executed shop visits. EBIT adjusted margin is expected to remain higher than initially anticipated, and we see it at 13%, mainly based on a more favorable business mix. Free cash flow guidance of low triple-digit million euro number, remains unchanged as the volatility in this area remains high. To wrap it up, coming back from a very successful air show, we are experiencing very strong demand, and we are well positioned with our engine programs on both commercial and military, as well as with our reputation as the number one independent MRO provider. Further, we experienced a strong request for our company from all our partners, to support the dynamics that are visible in the market. We are facing challenges, as everybody knows, but we feel extremely well prepared to tackle these, as well as seizing the opportunities that are ahead. With this, we end the presentation, and we're now happy to answer your questions. Thank you.

Operator: Thank you. [Operator Instructions] And now we're going to take our first question, and it comes from the line of Robert Stallard from Vertical Research. Your line is open. Please ask your question.

Robert Stallard: Thanks so much. Good morning.

Lars Wagner: Good morning.

Peter Kameritsch: Good morning, Robert.

Robert Stallard: A couple from me. First of all, Lars, you made several comments there about the strength of the market. But we have seen a number of airlines around the world start to comment about revenue pressures. And I was wondering if this is having any flow through at all to your business, particularly on the shorter cycle aftermarket? And then secondly, on the defense side of things, you mentioned Eurofighter being your biggest program, and some of the orders that are in the pipeline there. If these orders come to pass, do you expect this to extend your current Eurofighter volumes, or will you have to increase them? And what sort of investment might that take? Thank you.

Lars Wagner: All right. Maybe let's start with the second one, defense. Like I said, if all the orders are coming in, we talk about the low triple-digit number of Eurofighters that usually translates into a double amount of engines. And as a matter of fact, all these nations and customers, they're asking us to pull forward the production, because they don't want the aircraft in 2035 or later. They want it somehow earlier, which probably means we have to increase our engine output over the next years. We are currently investigating on the investment. But I'm looking at Peter right now, right now we don't see a lot of investments. We have seen these kind of rates before. So, we just make sure that the equipment will last way into the next decade. On the commercial side, obviously, I've seen these comments as well. But as for now, we don't see an impact for our business right now, neither short-term, nor mid-term.

Peter Kameritsch: I would add - that currently, if you look at the MRO market, there's a dramatic shortage in capacity. So even if demand goes a little bit down, that's not really impacting our business.

Robert Stallard: That's great. Thank you very much.

Operator: Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from line of George Zhao from Bernstein. Your line is open. Please ask your question.

George Zhao: Hi, good morning, everyone.

Lars Wagner: Good morning.

George Zhao: My first question is the OEM margins, over 25% in Q2, quite strong. You mentioned military and spare parts sales driving this, but I was wondering, was there any positive contribution from your elevated GTFs spare engine sales driving that? And second one, the V2500 growth that seems to have recovered well after Q1. And given the underlying demand for V2500 should be quite strong given the continued OE delays, I guess, what's your thinking now around peak shop visits for the V2500? Your peer CFM has been talking extensively about peak, and then plateauing from '25. I guess, do you share some of their views right now on the V2500? Thanks.

Peter Kameritsch: I mean, you received quite detailed numbers on the RTX call. So I mean, they gave 369 inductions of V2500 in the first half year. They said for the full year 2024, they expect something like 800 inductions. And that's probably the level we're going to see also in the next year. I wouldn't - give longer term guidance. But yes, it's more or less the same pattern probably as the CFM56 on the Safran - on G side [ph]. On the GTF sure, I mean, we said that, I mean, we have a healthy mix in the commercial OE business, and that means we ship a higher number of spare engines, compared to a normal situation. I mean RTX said the same thing. They have a - in the commercial OEM business, more spare engines compared to installed engines, yes.

George Zhao: Right. Thanks.

Operator: Thank you. Now we're going to take our next question. And the question comes from the line of Christophe Menard from Deutsche Bank. Your line is open. Please ask your question.

Christophe Menard: Thank you very much. I have three quick questions. The first one is, I mean, the first two are related to cash. The performance was very strong in Q2. Can you say anything about whether you've paid in any compensation to airlines? I mean I've seen the number of settlements with airlines, which I understand has doubled since Q1. So 20 - so is it for H2, or already in Q2? Did you receive any extra potential competition from other parties also in Q2? That's what's for the cash. And the guidance revision on MRO, the fact that only 35% will be from GTF. Can you - I mean, I may have missed it, I'm sorry, but can you explain a little bit more, because I was expecting some sort of a surge, as you previously explained. So why such a change, and apologies if you already explained?

Peter Kameritsch: So I'll take the first one. I mean, payments to airlines. I said it in my presentation, that until H1, so until at the end of June, we have not paid anything for airline support. So that - will come in H2. And there was also no extra compensation in Q2. I mean the cash flow in Q2, I mean we improved it from €16 million at the end of Q1 to €105 million. So roughly a €90 million inflow. That was a complete organic free cash flow. So there's no unusual part in that. I mean we have to work, obviously, we have to work, obviously, on our working capitalization, but we are quite optimistic. I mean we see the first signs that supply chains improve. So spare parts availability in the MO business gets better. Turnaround times gets lower. So, we are quite optimistic that we can, let's say, keep working capital under control in the second half of the year.

Christophe Menard: If I can ask, so why are you not a bit more ambitious on your guidance of free cash, if this is all organic?

Peter Kameritsch: I mean we have a broad range for the guidance, a low triple-digit, obviously a broad range, because we have obviously a lot of volatile elements in our cash flow guidance. We have on the one hand side, the payments to the airlines. So the timing is also currently not completely clear and also the working capital thing. So how fast we're going to see the improvement in the second half of the year. That's also not really, let's say, 100% transparent. So, we stick to the very broad guidance range for the free cash flow. But I mean, H1 supports that.

Christophe Menard: Okay. Yes.

Operator: Thank you. My apologies, Christophe, would you like to ask another question?

Christophe Menard: Yes, I was just - you may have addressed it, but the GTF MRO portion, the underlying reason for the adjustment for the guidance?

Peter Kameritsch: The MRO share - the GTF share and the MRO I mean, the average, I think - we mentioned that, I think, Lars mentioned that in his presentation [ph] that the average material intensity, there has not so much to do with the number of shop visits we do, but the average material content per shop visit is a little bit lower. So that's the whole thing behind that.

Christophe Menard: Okay. Okay. So it's rather good. Okay.

Operator: Thank you. [Operator Instructions] Now we're going to take our next question. And the question comes from the line of David Perry from JPMorgan. Your line is open. Please ask your question.

David Perry: Yes, thank you. Good morning.

Lars Wagner: Good morning.

Peter Kameritsch: Hi, David.

David Perry: A couple of questions. One is just the OEM margin, nearly 25% in H1. Do you think you can hit the 25% margin? I mean, there's been an aspiration for the OEMs. Do you think you can be close to the 25% this year, would be my first question? The second one is, I think the midpoint of your guidance implies about €960 million of EBIT, which actually is very close to your well-known €1 billion target to '25. Is there anything one-off in '24 that might not repeat in '25? Or does it look like the '25 target now looks quite conservative. And the last one, maybe for Lars, is any idea what sort of price increases you might see on spare parts in 2025? I know you don't set them, but have you got any hints from the OEMs? Thank you very much.

Peter Kameritsch: I'll take the first one regarding the OEM margin. I mean if you look in the second quarter of 2024, we have - I mean we had 25.5% margin in the OEM business, and 8% in the MRO business. So if you would think that the OEM margin - would end the year with an OEM margin of 25%. So probably we would have to increase, our margin guidance to 14%. No, I think rather in the second half of the year, we're going to see a little bit lower - spare engine shipments on the one hand side. On the other hand side, also the revenue mix. I mean - we have guided for an 18%, or high-teens growth in the MRO business. So you're going to see acceleration in MRO sales in the second half of the year, and that will bring the average margin also down a little bit. So on average, the OEM margin will drop a little bit while we are quite optimistic that the MRO margin maybe will stay at the current level at 8% plus/minus some basis points. So that's, I would say, the outlook. So that will bring us to the 13% roughly for the full year. So, I think the guidance is something, which Lars has to comment on.

Lars Wagner: Well, I'm smiling a bit, David, because we came up with it 8.125 [ph] at the end of November '22, I guess. And back then, it was not really conservative. But environment has improved. Obviously, GTF came in between, but the market looks bullish going forward, and we have done our homework. And that's - I don't know, Peter, of any one-off. We have in that guidance for the year end. So we're close. We're close already in year '24, and we'll give further communication on our Capital Market Day in November '24, for the new mid-term targets.

David Perry: Thank you. And just on price….

Lars Wagner: Price increase. We don't have yet anything to communicate. I mean inflation is going down a little bit, compared to the previous years, but we will announce it September, October-ish, Q3-ish yes.

David Perry: Okay. Thank you.

Operator: Thank you. [Operator Instructions]. There are no further questions. I would now like to hand the conference over to Thomas Franz for any closing remarks.

Thomas Franz: Yes. Thank you, Nadia. So I guess the busy A&E schedule today, limits the number of questions you can ask for the moment, but the IR team is certainly available. And yes, thank you Lars. Thank you, Peter. Thank you, all participants. And yes, enjoy the rest of the day. Bye-bye.