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Edited Transcript of MTX.DE earnings conference call or presentation 25-Jul-19 9:00am GMT

Q2 2019 MTU Aero Engines AG Earnings Call

Munich Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of MTU Aero Engines AG earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Röger

MTU Aero Engines AG - VP of IR

* Peter Kameritsch

MTU Aero Engines AG - CFO, Chief Information Officer & Member of the Executive Board

* Reiner Winkler

MTU Aero Engines AG - CEO & Member of the Executive Board

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Conference Call Participants

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* Alexander Hauenstein

DZ Bank AG, Research Division - Analyst

* Andrew Edward Humphrey

Morgan Stanley, Research Division - VP

* Charles J Armitage

Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director

* Chloe Lemarie

Exane BNP Paribas, Research Division - Research Analyst

* Harry William Freeman Breach

MainFirst Bank AG, Research Division - Research Analyst

* Norbert Kretlow

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Robert Alan Stallard

Vertical Research Partners, LLC - Partner

* Romain Gourvil

BofA Merrill Lynch, Research Division - Associate

* Zafar Khan

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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Operator [1]

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Welcome to the conference call on MTU Aero Engines First Half Year Results 2019. The speakers of today's conference call are Mr. Reiner Winkler, Chief Executive Officer; and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Michael Röger, Vice President, Investor Relations for some introductory words.

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Michael Röger, MTU Aero Engines AG - VP of IR [2]

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Good morning, ladies and gentlemen. Welcome to our conference call for the H1 2019 results. As always, we will start with business and financial highlights presented by Reiner Winkler. Peter Kameritsch will give more details on our OEM and MRO segment. Before we will open the call for questions, Reiner will give some more explanation on our updated 2019 guidance. Last but not least, you will have time to answer -- to ask questions. Let me now hand over to Reiner for the business highlights.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [3]

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Yes. Thank you, Michael, and welcome also from my side. Let us start with some business highlights. First of all, passenger traffic demand was up about 5% in May year-to-date. This is a solid growth and in line with the long-term trend. Load factor remained on the record level above 80%. So all in all, we see a robust market environment for the Aviation industry despite some economic challenges.

At the Paris Air Show, we have seen a strong order boost. In total, we collected orders worth more than $1.3 billion. Most of the orders were for GTF engines, bringing the GTF order book to more than 10,000 engines. This confirms the outstanding market success of the GTF. There was also a commitment for GEnx engines to power 30 Boeing 787 aircraft. The GTF deliveries in 2019 will increase by another 30%, and we are on track to meet our commitments.

In the MRO segment, we see continued strong campaign wins for independent business. As announced on Tuesday, we signed one of our biggest MRO contracts ever with JetBlue. The contract covers the V2500 pre-select fleet from 2020 until complete all phasing in 2033. Total campaign wins year-to-date have reached now a volume of $4.5 billion, which is as much as we have won in the full year 2018.

All of our extension projects are on track. In Berlin, recently inaugurated our new logistics center. The new GTF MRO shop in Poland makes further progress and should be ready for operation by year-end. A few weeks ago, we announced to establish a new parts repair shop in Serbia, which will be located close to the Belgrade airport. The repair shop will have a capacity of 400,000 repair hours and is expected to start its operation in 2022. Also in Munich, we started with the extension of our logistics center. And last but not least, MTU-Polska reached an important milestone regarding its second shop expansion in June.

We have also good news on the new next European fighter in the past weeks. During the Paris Air Show, France and Germany signed an MoU to launch the second phase of its joint concept study, which is focused on elaborating the detailed specifications for the fighter and the engine. An initial funding of EUR 33 million was approved. Also at the Paris Air Show, we signed a letter of intent with e.SAT. We will take a stake in the development of a hybrid electric small aircraft called Silent Air Taxi that perfectly fits in our technology road map, which focuses on evolutionary and revolutionary concepts to make engines more eco-friendly. I think these are quite good news for the first half year.

Let's now have a look on our financial key figures. Revenues increased by 4% to EUR 2.2 billion driven mainly by strong OEM business. Without the change in the contracting and invoicing process at MTU Zhuhai, group revenues would have been up by 5% in U.S. dollar terms. The group EBIT adjusted increased by 9% to EUR 365 million, resulting in a margin of 16.3%. Net income was also up by 10%, reaching EUR 261 million. And the free cash flow increased by 77% to EUR 235 million, mainly driven by both better cash flow from operating activities and lower cash flow from investing activities.

Let me now hand over to Peter for more details on the business segments.

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Peter Kameritsch, MTU Aero Engines AG - CFO, Chief Information Officer & Member of the Executive Board [4]

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Yes. Thank you, Reiner, and good morning, everyone, also from my side.

Let me start with the OEM segment. Total revenues were up by 12% to almost EUR 1 billion. Military revenues increased by 9% to more than EUR 200 million. Commercial business was up 13% to EUR 770 million. And within that, organic OE sales were up by 20%, mainly driven by higher GTF, business jet and GEnx deliveries. Organic spare part sales were up by a mid-to-high single-digit number. Main driver here, as in the quarters before was the V25 (sic) [V2500] engine with a high-teens growth. EBIT adjusted increased by 6% to EUR 243 million, resulting in a margin of 24.5%, mainly driven by the business mix effect, as mentioned before.

Let's have a look on the commercial MRO segment on the next page. Total revenues in that segment remained stable at roughly EUR 1.3 billion. As already explained in Q1 results, we report less MRO revenues due to the change in the contract and invoicing process at Zhuhai. Organic MRO revenues in dollars would have been up 7%. In the quarter, we saw organic revenues being up mid-single digit, which is a bit softer compared to our full year guidance. Main reasons were smaller work scopes in the quarter and the delay in the ramp-up of new programs at MTU Canada. Both are expected to recover in the second half. Therefore, we confirm our full year guidance for our MRO segment. EBIT adjusted increased by 16% to more than EUR 120 million, mainly due to a better at equity contribution from MTU Zhuhai, and the margin improved to 9.5%.

Now let me hand back to Reiner for a look on our revised guidance.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [5]

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Yes. Thank you, Peter.

Based on the good first half year results, we are happy to announce an increase of our EBIT adjusted margin and also free cash flow expectation, whereas revenue expectations remain unchanged. We confirm group revenues at around EUR 4.7 billion, based on an average U.S. FX rate of $1.15. Within that, military revenues are expected to be up by 10%, commercial OE business will be up in the low teens, mainly driven by the GTF deliveries. The commercial spare parts are expected to grow by a mid-to-high single-digit number, and the commercial MRO business will be up high single digits.

The EBIT adjusted margin is now expected at around 16%, an improvement compared to our previous guidance of 15.5%, driven by a better-than-expected performance at MTU Zhuhai and a better product mix. Net income will grow in line with the EBIT adjusted number. And for the cash conversion rate, we increased our expectation to 65% to 70% based on the strong free cash flow performance in the first half year 2019, better-than-expected profitability, improved working capital performance and lower cash flow from investing activities contributed to this increase. So thank you very much for your attention, and we are now ready to answer your questions.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions) Mr. Romain Gourvil from Bank of America, may we have your question?

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Romain Gourvil, BofA Merrill Lynch, Research Division - Associate [2]

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I have got 2, please. The first one is on spares. So can you give us what was the exact spare growth for the quarter? And what dynamics you've been seeing in the portfolio with regards to -- I mean, you said V25 -- V2500, sorry, but also in regards to major engine and your freight exposure? And the second one is on the strength of your MRO activity in Zhuhai, so what has been the driver of that? Was that volumes or better mix?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [3]

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Okay. I mean, regarding spare parts growth in the quarter. I mean, we have seen a spare parts growth roughly mid-single digit in the quarter, around 5%. And I mean, the growing platform was the V2500, which was in the quarter up in the mid-teens, and we saw CF680 being slightly down, something like 1% to 2%. And PW2000, something like down mid-single digits. So overall, I mean, if you're looking on the -- that was the quarter. If you look on the full year, we still expect, I mean, to reach our guidance, which is meaning for the V2500 being up mid-teens, CF680 and PW2000 being more or less stable. So all together, the portfolio should grow up mid- to high single digit as given in the guidance. I mean, that equity effect in Zhuhai or the debt, which is really coming out of the EBIT of the location is more profitable shop visits definitely on both platforms, V2500 and the CFM56-5, but also volumes. So volume grew stronger compared to expectations. So aftermarket in China is still very strong.

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Operator [4]

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Mr. Robert Stallard from Vertical Research, may we have your question?

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [5]

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I just wanted to follow-up on the last question regarding the aftermarket on the older Pratt & Whitney engines. Did you see a similar issue in the second quarter to what your partner, Pratt & Whitney reported a few days ago on these engines?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [6]

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I think Pratt said something on a PW4000 contract revision, but we are not exposed. I mean, they were talking about the PW4000 base engine, where we are not a program partner. So for us, it's really the PW 2000, which is simply down mid-single-digit now. But it's -- I mean, the PW2000 was more or less stable in the first quarter. It was down mid-single digits in the second quarter. I mean, that is a quite mature engine program, which is a bit volatile. I mean, altogether, for the full year, we expect it to be roughly stable for this.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [7]

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Is this just a function of that aircraft fleet being quite small, quite old, so a bit lumpy from quarter-to-quarter?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [8]

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Right, exactly. I mean, on the -- as you know, I mean, the major part of the fleet is on the military application on the C-17, which is a comparably young fleet. So rather, I think, 10, 11 years old. And on the commercial side, you have some maybe Delta, United, the big operators, and it's a part also in the freight of the UPS, and FedEx operates some of these aircraft -- but it's not a broadly diversified fleet.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [9]

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Okay. And then as a follow-up, GE obviously has had a few issues on the GE9X engine. Boeing has pushed back the first flight of the 777X. Has that had any impact on what you're doing on this engine?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [10]

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Well, not at all. I mean, it's not coming out of our work share.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [11]

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And you haven't seen any delay in...

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [12]

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Yes, but it's a normal process. I mean, I would say, more or less in every new program, you will see some delays, but we are talking here about a few weeks for -- or a few months. But you should not be worried about that.

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Operator [13]

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Mr. Norbert Kretlow from Commerzbank, may we have your question?

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Norbert Kretlow, Commerzbank AG, Research Division - Equity Analyst of Industrials [14]

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One follow-up question on the older spare part sales for the PW2000 and CF6. You mentioned that sales have declined year-over-year. Could you maybe shed some light on what's the trigger for that? Do you think that this is structural due to more grounding? Or are these rather quarterly fluctuation effects? And also a follow-up on the trends you mentioned in MRO -- that is, changing mix between materials and own work performed. Can you maybe shed some light here on the trends in Q1 versus Q2? Because when looking at the growth rates of MRO sales and the margins, I get the impression that the trend as of Q1 have exactly reverted in Q2, that is that the materials share has declined, and this has driven margin. Can you confirm that? And what would be your, say, your indication going forward here?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [15]

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I mean, in the second quarter, what was we -- what we faced was that, I mean, we did some small -- the number of shoppers was as expected, but the work scopes are smaller. So we put a less, less new spare parts in the MRO division, which is obviously not good for revenues, but it's also a little bit of a tailwind on the margin, which is really -- that is a quarterly fluctuation. So -- and I mean, we did not change the outlook for the MRO, and that's why we expect -- I mean, that to recover that fully in the second half of the year. I mean, the second thing is that the ramp-up of the V2500. Now Canada takes a little bit longer in the introduction of the CF680 in Canada -- has moved a little bit to the right, but that is only a question of weeks or months. So there is nothing material behind that. I mean, the V2500, I mean, it's only a quarterly fluctuations. I mean, as explained before, it's not a very broad, broad customer base, so -- and the engine program being between 20 and 25 years old, you have that kind of quarterly fluctuations. So year-over-year, it should be more or less stable now.

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Norbert Kretlow, Commerzbank AG, Research Division - Equity Analyst of Industrials [16]

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Okay. Good to know. Maybe one more question, if I may, regarding the air taxi letter of intent, can you indicate what your share in this project might be? I mean, there are projects under development, including purely electrified drive trends and others combining jet engines with electrical lifting. I would rather tend to expect that you would participate in a project specified in the latter way.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [17]

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I mean, in general, we are looking on different, let's say, technology areas and different projects to have, let's say, a more -- a better view on what is going on in the market for the next -- I mean, today, nobody can really predict or forecast what will be the solution in whatever, 10 or 20 years. So therefore, we look on different potential applications for this. And we decided to go with this e.SAT project, and we will roughly take a 10% stake in that program for the engine, yes, so roughly.

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Norbert Kretlow, Commerzbank AG, Research Division - Equity Analyst of Industrials [18]

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But is it a combustion engine?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [19]

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It's a hybrid electric. You combine electric motor, you still have a gas turbine in the aircraft.

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Operator [20]

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Mr. Alexander Hauenstein from DZ Bank, may we have your question?

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [21]

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First of all, with regard to spares, did I get it right that you're looking forward for the next 1 or 2 quarters for, let's say, mid-single-digit development here, means similar like in Q2? Or is there a chance that we might see in Q3 or Q4, a positive surprise from that side, maybe reaching the higher end in terms of catching up some effects here? That was the first one. And the second one is, could you please shed some more light about the recent order intake from the Paris Air Show? Its structure, its mix and especially on the margin quality side here -- any indications for the business going forward? And on OEM, how should we think about Q3 adjusted EBIT? I mean, should we expect a number further down into the direction of EUR 100 million versus EUR 112 million in Q2? Or is it likely that you see a seasonal uptick? And the same kind of question also for MRO, but the other way around, is Q3 MRO likely to decline a bit quarter-on-quarter? Or is this a strong development, including Zhuhai that's going to continue its trend?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [22]

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I mean, spare parts, obviously, I cannot say more as -- which we gave in our guidance. I mean, we expect for the full year, a mid- to high single-digit growth. And I mean, after -- I mean, we had -- in Q1, we had a high single-digit growth. Now in the second quarter, we have mid-single-digit growth, and that is the area, which we also will see in the second half of the year. Obviously, that's what we expect, and that's what we have baked into our guidance.

I mean, regarding order book at Paris Air Show, the $1.3 billion. The major part is for GTF engines, PW1100s, some PW1500s for the A220 and some GEnx engines for 787. So that is the -- but the major part is definitely for the Geared Turbofan engine.

Regarding margin going forward, I mean MRO, we expect something around 9% to 9.5%. I mean, after -- I mean, last year, we were at MRO something like 8%, 8.5%. And then we have that changed contracting process in our Zhuhai. So you take out for the full year, something like EUR 300 million of revenues, and that is a tailwind for the margin. So it improves the margin by not exactly 1 percent point. We have a better at equity contribution from Zhuhai. We have a more headwind from the at equity consolidation of our new Polish joint venture, some millions. So all in all, you can expect for the full year margin between 9% and 9.5%.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [23]

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Okay. But then on the OEM side, should we expect a further decline here for the coming quarters as the GTF volume is really picking up in the second half?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [24]

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A bit, yes, a bit. Sure. I mean, we see throughout the year ramp of (inaudible) engines and that puts a little pressure on the margin.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [25]

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But for [Q, through --] yes.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [26]

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But overall, for the group, we expect 60%, [of SD].

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Operator [27]

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Mr. Andrew Humphrey from Morgan Stanley, may we have your question?

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Andrew Edward Humphrey, Morgan Stanley, Research Division - VP [28]

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Just a couple, please. You've called out mix as a driver of profit and the upgrade for the full year and talked a bit about MRO and spares within that. Can you talk a bit more about the individual programs? Obviously, you've mentioned, diverging performance on V2500 versus some of the legacy programs. Is that also a driver of mix on the spare side for you? And secondly, on cash, obviously, we've seen an increase in the guidance for cash conversion for the full year. I noticed from the cash flow statement, there is some release of provisions relating to refund liabilities, and maybe profitability would have been even better if that hadn't been in numbers. Could you just talk in a little bit more detail around that? What the dynamic is there? And give us an idea of whether the cash performance is something repeatable and something we need to carry forward to future years?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [29]

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I mean, the mix, we are rather seeing to be delivered a bit more spare in these engines compared to installed engines, and these are not loss-making. So that's -- that is meant by a mix. So that is a mix more in the OE part of the business. Mix between programs, not so much. So rather the kind of engines -- so installed engines versus, say (inaudible) engine, that is meant by mix.

Regarding cash flow statement, I mean, that's the provisions we built. These are the main parts or rather warranty provisions, which we built up technically when we deliver an engine to the customers. We have -- we take a view of what the warranty cost will be finally, and with the ramp-up of OE deliveries, obviously, also the warranty provisions follow that kind of ramp up. So the improved cash conversion rather comes from 2 elements. So the one thing is, I think, we launched 2 working capital projects for MRO and OEM, and we see that's the -- the first success already in the second quarter. I mean, when you compare second with first quarter, then you see that receivables come down a little bit, that inventories come down a little bit. So I think a better working capital structure is the first source. And the second source of higher cash conversion is less investments -- less investment into financial assets. So we don't have to contribute as much equity into the leasing company for the PW1100 as last year. So that helps also.

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Operator [30]

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Mr. Harry Breach from MainFirst, may we have your question?

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [31]

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Can you hear me?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [32]

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Yes, loud and clear.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [33]

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Perfect. Just 3 ones, and I'm probably just being very slow to understand. Just to pick up on Zhuhai, guys, was it really just in the second quarter, really a question of volume of shop visits at Zhuhai and profitability, there was no unusual release of provisions or unusual gain in there -- it was just business as usual?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [34]

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Yes.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [35]

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Then was just business as usual business. Okay. Does that mean sort of -- I mean, it could just be my ignorance here, but it looks as if Zhuhai did sort of -- maybe a lot better than planned? And when you look at the full year, is there sort of a meaningful amount, maybe high single digit, better contribution going to come from Zhuhai?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [36]

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Yes. I mean, that's one of the elements which helped us improve our guidance. So I mean, we -- I mean, if you do the math, then you see that the old guidance to that is EUR 730 million, the new guidance is EUR 750 million regarding EBIT, and half of that comes from at equity contribution from MTU Zhuhai.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [37]

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Got it. Half of the increase, got it. That's clear. Well done. Next question goes, just on the new commercial MRO facility, you touched on in Serbia -- in Belgrade, if I remember correctly. Was that the new facility you referred to at the Capital Markets Day last year?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [38]

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Yes.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [39]

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And it was, yes. And just to help us to think about commercial MRO and the capacity increase, are you able just to give us some indication of where we were last year in terms of overall commercial MRO shop visit capacity? And then now with the addition of the new Belgrade site, where we'll be by the time that, that's -- that is up and accepting shop visits? Can you give us some indication?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [40]

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Yes, just have in mind, this new facility in Serbia, we would not do full overhaul. It's just a repair location.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [41]

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Okay, okay.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [42]

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As I said, it will roughly cover in the -- at the end around 400,000 repair hours. And that's what we expect that we need in the next, let's say, 6, 7 years as additional capacity just for repairs. And that will be covered then in the new facility.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [43]

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New facility. And sorry to sort of maybe press the point a tiny bit more, but it's just important for -- to try and think about a reasonable basis for modeling, just to have some idea about how the shop visit capacity will be increasing. Is there any indication you can give us sort of compared with where we were last year? And maybe where we will be in, for example, 5 years' time?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [44]

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I mean, I would say quite easily. Hannover will be more or less flat, stable. So we, let's say, a little bit -- a little headroom to increase it, but more or less, Hannover is fully loaded already. So we actually do invest into another extension in the Zhuhai facility to go from, I think, 300 to 450 shop visits. So another 100 to 150 shop visits in Zhuhai capacity. And then the new facility in Poland, which we do together with Lufthansa Technik. I think at the end of the day, it will have a capacity of around 400 shop visits. So you can say, we add more or less in the next 5 to 6 years, I would say, 500, 600 additional capacity for shop visits.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [45]

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Got it. And can you remind me where we were last year in 2018? My memory is a bit bad.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [46]

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No, we don't give that number to the public, the number of shop visits or so.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [47]

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Okay. Okay, fine. And I got just very, very last one. Just in terms of learning curve, the cost performance on Geared Turbofan, guys. How are you doing on that at the moment? It feels maybe is if judging by margin performance at the OEM segment, maybe you're doing a little bit better than you'd predicted you're doing, faster learning curve. Is that fair to say?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [48]

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I wouldn't say that. I mean, the -- I mean, we have reached 95% of the learning curve already. So production-wise, there's nothing more to come. I mean, what obviously happens is, you can -- I mean, the production of the Geared Turbofan is obviously highly optimized. So we have the major part of production cost is depreciation. So it can spread depreciation over more -- over higher volume, and that improves the margin. But -- so I mean, the amount of working hours which goes into the engine, that doesn't change a lot now at that point of time. So there's not more to come. I mean, what obviously improves the margin going forward is the introduction of technical improvements on the engine, which gives the engine more durability and so on. So you can reduce the warranty provision, which you build when you deliver the engine to the customer -- that helps the margin. But that's the major source of margin improvement.

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [49]

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Got it. So as we get the -- hit one package in, whatever it's called, forgive me, we'll see lower per engine warranty provisioning?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [50]

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Yes. It's not one step. It's more a cascade of different improvements, which goes into the engine now. So a continuous process.

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Operator [51]

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Ms. Chloe Lemarie from Exane BNP Paribas, may we have your question?

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Chloe Lemarie, Exane BNP Paribas, Research Division - Research Analyst [52]

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I'll have a couple of questions, if I may. The first one is on the free cash flow increase for 2019. So you said it was mainly driven by working capital and lower CapEx. I was wondering whether we should consider this a one-off for this year? Or if it could continue into the upcoming years, especially the working capital impact that you mentioned? And the second question was regarding the engine series organic performance in Q2. If you could walk us through the different drivers because it seems to have come down quite significantly. So between the different programs, if you could give some color, that would be great.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [53]

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Let's start with the cash flow. I mean, we always said that we will improve the cash conversion rate year-over-year to whatever high double-digit number. We are actually in the range, as I said, 65% to 70% expectation for this year. And yes, we expect also for the next year to improve that further. What is the exact number? I mean, that's difficult to forecast depending on, let's say, potential new programs and things like that -- investment -- but we always said in the range 70%, 80%, 90%, that would be, let's say, numbers, which should be achievable. If it's -- but it's difficult to say exactly by year.

The second question, and [a tricky] question. I mean, I think you were referring to the growth in the OE -- in the new engine deliveries, and that is more a base effect. So if you look into 2018, then we had a very poor first quarter because we had 4 weeks delivery stop due to the technical problems with the (inaudible). And then we had a reverse effect in the second quarter where we had a very strong deliveries in the second quarter of 2018. And so, that translates now into 2019 where we had a very strong growth in the first quarter being something like 40%. And the second quarter in 2019 is then flat. But based on that, it's good second quarter in 2018. So that is really rather the impact. It's not that Geared Turbofan deliveries have slowed in the second quarter also. That's not the case. So if we look on the full year, we were up 20%. On the half year, we were up 20%.

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Operator [54]

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Mr. Zafar Khan from Societe Generale, may we have your question? Sir?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [55]

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Dropped out. Zafar? Obviously, he's gone, and we'll take the next one.

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Operator [56]

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Mr. Charles Armitage from Citi, may we have your question?

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Charles J Armitage, Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director [57]

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Quick continuing on this on the cash conversion, very good number, well done. Just looking at CapEx, both on tangibles and intangibles. Looking -- you've had very, very high numbers as a percentage of depreciation and amortization. Looking forward, 2, 3, 4 years out, what sort of levels should those be?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [58]

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The increase in depreciation and amortization is a reflection of IFRS 16. I mean, you -- what you have to do under IFRS 16, is you have to capitalize the value in use of your leasing contracts. And then you have to amortize it over the time you used that leased-in asset. So that is the main issue. So other than that, not a lot happened. So if you exclude IFRS 16, depreciation and amortization would have stepped up only a little bit.

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Charles J Armitage, Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director [59]

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Sorry, no, no. I'm talking about the capital -- CapEx divided by depreciation going forward. So you've had very high CapEx recently, but going forward, presumably, your CapEx is going to come down as your investments...

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [60]

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Yes, sure, sure. I mean, this year, obviously, we're going to have slightly a bit -- slightly higher CapEx. So we have -- I mean, you saw that investment into property, plant, equipment, something like EUR 100 million for the half year, and we were going to keep that run-rate going into the second half of the year. So, PPE CapEx should be around EUR 200 million for the year. And after that, it should go down slightly, while depreciation and amortization will -- I mean, it depends a little bit on what we lease in, so there is -- you cannot guide for an IFRS 16 depreciation, that's not possible. So -- but it just should move up slightly, I would say, depreciation and amortization, right?

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Charles J Armitage, Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director [61]

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I think you had a lot of questions on cash conversion. And I guess, really, the nub of the point is going from -- you've got the capital elements of the leasing and helping by about EUR 30 million as well. But long term, whether it's 70% or 90% makes a big difference. If you can give any help on what the progression looks like going forward, that would be very, very helpful.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [62]

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I mean, this year, obviously, we try to be between 65% and 70%. And definitely, we should increase that over the next year. So I mean, next year, we won't be at 90%, realistically. But maybe it is somewhere between 70% and 80%. And then in 2, 3 years' time frame, maybe we're going to be at 90%. So -- but we definitely will increase that over the -- beyond the 70%, which we're going to see then in 2019.

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Operator [63]

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(Operator Instructions) Mr. Zafar Khan from Societe Generale, may we have your question?

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [64]

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Just -- it's just me being a little bit lazy, but on Slide 10 where you showed the P&L. The P&L from companies which are under -- accounted under equity or equity investments. Is that largely the Zhuhai business?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [65]

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Yes. That's -- the major part is Zhuhai, but we have also -- what we do is we have also at equity contribution from the leasing company for the PW1100 lease pool. And there, we also saw an increase.

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Zafar Khan, Societe Generale Cross Asset Research - Equity Analyst [66]

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Okay. But I would imagine the leasing company would be a small contribution in that?

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [67]

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Something like EUR 10 million or so.

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Michael Röger, MTU Aero Engines AG - VP of IR [68]

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So we currently have no more questions. And I would suggest that we close this call for today. Thank you very much for joining us. Thank you very much for your questions, and I wish you all a nice day.

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Reiner Winkler, MTU Aero Engines AG - CEO & Member of the Executive Board [69]

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Thank you. Bye-bye.

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Peter Kameritsch, MTU Aero Engines AG - CFO, Chief Information Officer & Member of the Executive Board [70]

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Thanks, bye.

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Operator [71]

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We want to thank Mr. Reiner Winkler and Mr. Peter Kameritsch and all the participants of this conference. Goodbye.