MTU Aero Engines AG (MTX) Earnings Call Transcript & Summary

Ladies and gentlemen, I hereby open this year's Ordinary General Meeting of MTU Aero Engines AG in a format that is new to all of us, namely as a virtual AGM. Of course, as usual, we would have loved to see you in person today and conducted the tried and tested dialogue with you. However, the current situation also offers us opportunities. Due to the virtual AGM, we can offer our shareholders the opportunity to participate in the AGM from home or on the road. We hope that we will be able to do this in the future as well. On behalf of the Supervisory Board and the Executive Board, I would like to welcome you all. We are very pleased that you accepted this invitation, thereby, showing your keen interest and loyalty in your -- in our company. For those of our shareholders who do not understand German, we are offering simultaneous interpretation into English to which you can switch by choosing the appropriate setting on the Internet. Ladies and gentlemen, this brings me to the housekeeping information for this AGM. The Executive Board, with the approval of the Supervisory Board, based on the law on mitigating the consequences of the COVID-19 pandemic of the 27th of March 2020, decided to conduct the AGM as a virtual AGM without the physical attendance of the shareholders or their proxies and to enable them to participate and cast their votes by electronic communication means, namely per postal voting and to -- for the members of the Supervisory Board to participate in the AGM via an audiovisual transmission and to allow the audiovisual transmission of the AGM. Furthermore, with the approval of the Supervisory Board, it decided to afford shareholders the opportunity to ask questions via electronic communication means. Questions could be posed 2 days before the AGM by electronic communication means. On due free discretion, the Executive Board will decide which of the questions it will answer. The shareholders who have exercised their voting right will be afforded the opportunity to file an objection against any resolution of the AGM. The company has set up an AGM portal for exercising shareholder rights in electronic form, the access data of which you received together with the documents accompanying the invitation. The AGM will be transmitted up until the end of the CEO and available to everyone on the website of the company after the end of the event as a video in the same place. The entire AGM is now accessible to shareholders via the AGM portal. In view of the protective measures within the scope of the COVID-19 pandemic, we have limited the number of participants physically present at this AGM. I find that as Chairman of this Executive Board, Reiner Winkler; and the CFO, Mr. Peter Kameritsch; and the Supervisory Board, of which I am the Chairman and I'm acting as Chairman of this AGM, are all present. The other members of the Executive Board and Supervisory Board are following the transmission of the AGM by electronic means, and we can get into contact with them if necessary. The minutes of today's AGM are being taken by the notary public, Dr. Joachim Schervier, whose business domicile is in Munich, and I'd also like to welcome him. The convocation of the AGM was made in due time by publishing the agenda in the German Federal Gazette dated the 24th of June 2020. A specimen copy of the publication has been made available to the notary public. The invitation to the AGM was sent to all shareholders that had entered themselves into the share register of the company no later than 14 days before the AGM. The participants' register has already been completed. Due to the conduct of the Annual General Meeting as a virtual AGM, the participants register only includes those voting proxies -- only includes the voting proxies as well as the votes that they represent. I would now like to announce the present. As a result of the present voting proxies, 350,590,488 individual shares into which the capital stock is divided, 780 million are represented with just as many votes. This represents a share of 71.3% of all shares or of the capital stock. In addition, for 210,107 shares, votes were cast by postal voting. Together, this results in a share of 71.77% of all shares and of the share capital. You will find, ladies and gentlemen, the current level of the votes and postal votes represented by the voting proxies in the AGM portal under the tab Additional Documents. The venue of this AGM, as defined per German Stock Corporation Law (sic) [ Act ], is the business domicile of the company in Dachauer Strasse 665 in 80995 Munich. We are in the museum of MTU today, where you can see a series of engines on which MTU has worked over decades and is still working and that have helped lift the company to its prominent position in the aviation sector that it has today. You have the possibility and had the possibility to cast your votes via the password-protected AGM portal of MTU, via postal votes or to issue instructions to voting proxies nominated by the company in order to exercise your voting right. If you duly registered for the AGM, the exercise and change of your voting right is possible in the AGM portal right up until the beginning of the votes at today's virtual AGM. The questions that you have submitted will be responded to by the Executive Board following the speech of the Chairman of the Executive Board. The speech by Mr. Winkler was published by the company in advance in the AGM portal in order to afford the shareholders the possibility of asking questions pertaining thereto. The shareholders who have exercised their voting right by electronic means have the possibility via the AGM portal of the company right up until the end of today's AGM to file objections against resolutions passed by the AGM. Having said that, ladies and gentlemen, I conclude my introductory remarks on the housekeeping issues. Ladies and gentlemen, this now brings me to the agenda, the entire wording of which has already been communicated to you. I now call Item 1 on the agenda. Presentation of the adopted annual financial statements, the approved consolidated financial statements, the combined management report for the company and the group, and the report of the Supervisory Board, including the explanatory report of the Executive Board on the statements pursuant to Sections 289a and 315a of the German Commercial Code each for fiscal 2019. I find the following in this regard. The mentioned documents have been available since the convocation of the AGM on the website of the company where they could be viewed. I would now like to present to you the report of the Supervisory Board. I here refer to the Supervisory Board's report printed on Pages 40 at Secretor of the annual report. Ladies and gentlemen, at MTU Aero Engines, once again, we have experienced an outstanding fiscal 2019. I would like to thank all employees for their successful work and high level of dedication on behalf of the entire Supervisory Board, and I'd also like to extend the same gratitude to the Executive Board. These thanks also go out to the Works Council for its constructive cooperation, and in particular, of course, to the shareholders for the trust that they have placed in the company in the past year. In addition, I would also like to express my gratitude to the Executive Board and the company's executive for the substantial financial contributions that they made on a voluntary basis by paying into a solidarity fund. In sum, this has accumulated more than EUR 4 million, which can be made use of by MTU employees who have fallen into financial problems through no fault of their own as a result of the corona crisis and short-term work. Ladies and gentlemen, this for me is an expression of lift solidarity. The Supervisory Board has endorsed this and decided to renounce this year's attendance fees from May 2020. Ladies and gentlemen, the Supervisory Board regularly advised the Executive Board in running the company, monitored its work and constantly concerned itself with development of business and the situation of MTU. It was involved in all decisions that were of fundamental importance to the company, both directly and early, and it was informed regularly and comprehensively about the situation of the company. The Supervisory Board received monthly written reports on major transactions and the development of the net worth financial and asset situation of the company. New budgets were discussed in detail with the Supervisory Board. Together with the Executive Board, the Supervisory Board discussed the strategy and all major projects on which Mr. Winkler will report shortly, and it endorsed the strategic orientation of the company after careful examination and deliberation. In 2019, once again, the Supervisory Board paid attention to the internal control mechanisms of MTU, in particular the risk management system, auditing and corporate governance in compliance with the law. The Supervisory Board reviewed these issues based on the documents submitted to it and in dialogue with the Executive Board and reached the conclusion that the company has set up effective systems for all of these matters. Monitoring compliance of the company was one of the activities of the Supervisory Board and also a focal point of the work conducted by the Audit Committee. Internal audit reports to the Supervisory Board regularly on the results of its audits and the compliance officer informs the Supervisory Board on the findings and new developments in the fields of corporate -- of compliance. In fiscal 2019, there were 6 ordinary Supervisory Board meetings. Attendance was 98.6%. At all meetings, the Supervisory Board discussed the development of business at MTU and all of its affiliates with the Executive Board. The Supervisory Board concerned itself in detail in its meetings with a technology road map of MTU, in particular, with alternative drives and fuels. Furthermore, it discussed the development of the market and the strategy of the commercial maintenance division and the establishment of a new repair site in Serbia. The Supervisory Board also concerned itself with the issue of a new convertible bond and the partial buyback of the convertible bond from 2016. The Supervisory Board discussed in detail the operating business plan and budget for 2020. The performance-based compensation of the Executive Board for 2018, the determination of the goals and the ranges of the performance-based compensation of the Executive Board for 2019. In addition, the Supervisory Board concerned itself and provided advice on the appointment of the independent auditors. Based on the recommendation of the Audit Committee, it suggested to the AGM to appoint Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft in Munich independent auditors of the parent company and consolidated financial statements, and auditors for the audit-like review of the half year reports for fiscal 2019. The AGM approved the proposal by a vote of 99.7%. The Supervisory Board in 2019 further concerned itself in detail with the application and implementation of the German Corporate Governance Code and monitored and reviewed the efficiency of its work. In a joint declaration with the Executive Board dated the 10th of December 2019, it was found that MTU complies with all of the recommendations of the German Corporate Governance Code. This declaration of compliance has been printed on Page 35 of the annual report and can also be found on MTU's website. Now moving on to the meetings held by the committees. The Supervisory Board, in addition to the Nomination Committee, has 3 committees with equal numbers of employee and shareholder representatives: the Personnel Committee, the Audit Committee and the Mediation Committee. The Supervisory Board's plenary receives regular reports on the work of these committees. The Mediation Committee did not have to convene last year. The Personnel Committee concerned itself last year in 2 sessions, with the performance-based compensation of the Executive Board for 2018, the determination of the goals for performance-based compensation of the Executive Board for 2019, and the recommendation to the Supervisory Board with respect to the nomination and compensation of the Executive Board members. Attendance was 100%. The Audit Committee last year convened 6x and conducted 2 conference calls with a presence of 100% as well. It concerned itself, in particular, with the parent company financial statements, the group financial statements and the combined review of operations of the company and the group, and with the nonfinancial declaration and the half and full year reports and quarterly statements. It monitored the independence of the independent auditors and the services provided by them as an ancillary measure, including the established fee cap for that and issued the independent auditors their audit assignment. The Audit Committee established the focal points of the audit for the 2019 financial statements and concluded the contract with the independent auditing firm, Ernst & Young. The reports of Ernst & Young on the audit of the parent company financial statements and the group financial statements as well as of the combined management report were made available to the committee and the other members of the Supervisory Board. In the presence of the independent auditors, they were discussed in detail in the meetings on the 24th of January and the 10th of March 2020, and at the balance sheet meeting of the plenary session on the 17th of March 2020, and they reported on the material results of their audit there. As a result of their audit, the committee recommended to the Supervisory Board to adopt the parent company financial statements, to approve the consolidated financial statements, to approve the combined review of operations and the nonfinancial declaration, and to endorse the proposal for the appropriation of distributable profit of the Executive Board. The Audit Committee monitored the process for accounting and the internal control and risk management assess them based on that. And it was convinced that it was effective and receive regular reports on compliance by the company. Furthermore, the Audit Committee concerned itself with the issuance of a new convertible bond and the partial buyback of the convertible bond from 2016. It concerned itself further with aircraft financing and the law on the protection of trade secrets as well as with the EMAR audit of certain derivative transactions. Ladies and gentlemen, this rounds up the material activities of the committees of the Supervisory Board. The Supervisory Board, after auditing the parent company financial statements, the consolidated financial statements, the combined review of operations and the nonfinancial declaration did not raise any objections. In view of the corona crisis, which became apparent in the spring, and the delay of the AGM was due to this, by the way, it endorsed the proposal of the Executive Board to carry forward the distributable profit for fiscal 2019 to new account for the time being and to discuss the appropriation of distributable process over the continued course of the year. The presented parent company financial statements and consolidated financial statements for fiscal 2019 were approved in the Supervisory Board meeting of the 17th of March 2020. The parent company financial statements are thus adopted. In view of the development of the global corona pandemic, which has become dramatic in the interim, the Supervisory Board, weighing the interest of the shareholders and the company, on the 17th of June, approved the proposal of the Executive Board to propose to the AGM to reserve the distributable profit for fiscal 2019, with the exception of the legal minimum dividend of EUR 0.04 per dividend-bearing share and transfer the rest to the retained earnings. The Supervisory Board office of Joachim Rauhut was extended at last year's AGM. The employee representatives, Martin Kimmich and Angelo Gross left the Supervisory Board. Roberto Armellini and Michael Winkelmann have been their successors since the 13th of June 2019 and since the 1st of May 2020, respectively. The Supervisory Board would like to thank Martin Kimmich and Mr. Gross for their years of competent and collegial cooperation. Furthermore, the Supervisory Board on the 8th of July 2020 extended the appointment of Executive Board member, Michael Schreyögg by 5 years through to the 30th of June 2026. Ladies and gentlemen, shareholders, that was my report from the Supervisory Board. I would now like to hand the floor to the Chairman of the Executive Board, Reiner Winkler, for the report of the Executive Board. Please go ahead, sir.

Thank you, Mr. Eberhardt. Shareholders, shareholders' representatives, ladies and gentlemen, on behalf of the Executive Board, I'd like to extend a cordial welcome to the first virtual AGM of MTU Aero Engines AG. As Mr. Eberhardt has already said, we're reporting today from the MTU Museum on the site of our headquarters in Munich. Ladies and gentlemen, we are aware of the fact that many of our faithful German private shareholders regret not being able to be present and live in Munich. But look at the positive side, we can inform you in this way and answer your questions without any risk to your health. Another advantage is that for the first time, our numerous international shareholders can be present without undertaking the complex journey. And not least because of that, I'm in favor of a more modern, up-to-date form of AGMs, and we ought to try in the future to make the best out of the culture of meetings with presence and on the online culture. This is the right way, as being shown by the corona crisis. And I would, therefore, like you to approve item 6 on the agenda, and I'm looking forward to the new format of the AGM for this year. And I'd like to thank you for your attendance and for the interest you've expressed in MTU. Ladies and gentlemen, aviation is going through the greatest crisis of all times at present. And for MTU, it doesn't accept this situation. We've had to face a number of crisis in the course of history. And I've seen challenging times, and I can say that MTU has experience with all kinds of crisis and has always handled them well. As with every crisis, so far, we can see that when times become difficult, MTU moves closer together. The workforce are required to do great things and face up to major challenges to keep the effects of the pandemic as limited as possible. And on behalf of the entire Executive Board, I would like to express my thanks to all our colleagues. Thank you for your tireless efforts, your splendid working morale and the solidarity shown with our partners and customers. All this is of great value to us. Now thanks though on behalf of the Executive Board to all those who've done so many great things in fiscal 2019. It is painful to us that because of the current crisis, we've had to adjust our headcount. Globally, we're going to have to reduce capacities by the end of 2021 by 10% to 15%, but we have no intention to engage in operational layoffs or social severance plans but relying on individual agreements such as reduced working time, early retirement and partial retirement. We can offer as many of our colleagues as possible an opportunity to remain on board. And I'd like to thank the Works Council for the good and constructive cooperation here concerning this difficult subject. Ladies and gentlemen, the corona pandemic is forcing us to move into a virtual world much more quickly than we could have imagined only a short time ago. Digitalization in the current situation is indispensable, not least in order to guarantee the safety of our workforce. And safety and security, ladies and gentlemen, is always top priority in aviation. At MTU, we've taken a large number of preventive health measures. We constantly monitor the risks and react to changing conditions. Wherever possible, employees at present work from home as far as possible. As you can see, this also applies to my colleagues on the Executive Board and myself. Where home office is no option, and that is in production, of course, most common is the case, we've taken extensive measure to protect the workforce and to contain the spread of the infection. Despite all the concerns about the health and the consequence of the virus, I'm very satisfied with the way the digital way of working is succeeding. And I would stress how smoothly our IT is working. Our colleagues are doing outstanding work and are putting a great deal of effort to keep all the systems stable and to expand our capacities. Handling that most overnight was an outstanding achievement. The crisis has made it clear to all of us, once again, how important it is to have efficient digital infrastructures. And this is why MTU is going to focus more on digitalization in future. This will increase safety and security, increase efficiency and minimize risks. As you can see, we've done everything possible in order to be there for our customers and partners. We need a stable basis for that, and we have one. Even now, we are benefiting from the fact that MTU has become so strong in the course of the years and resilient, and this is because there was only one direction for MTU over the last few years, namely upwards. We'll continue the success story in 2019, with revenue of EUR 4.6 billion, operating profits of EUR 757 million and net income of EUR 538 million, which was a record. Our share price has gone from one record to another. Our success was crowned in September by the inclusion of MTU in the DAX index. And we would like you to participate in the success with the dividend, but in view of the corona crisis, we had to secure our liquidity and make unpopular decisions, and one of this affects you. Today, we're only proposing the statutory minimum dividend of EUR 0.04 per share. We are convinced that protecting our liquid assets in view of the global crisis of unforeseen magnitude is something which is absolutely essential in order to secure the future of MTU. I assure you that postponing dividend is solely to respond to the current special situation. And as soon as we return to a normal situation, we shall allow you to participate regularly and appropriately in MTU's success. I'd like to thank everyone who've indicated to my colleagues and me their agreement with this decision concerning dividends. And we hope that you will remain on our side as shareholders. With -- your trust and your loyalty are very important to us in these times. The waiving of the dividend is not enough to secure liquidity, of course. In the past few weeks, we've adopted a number of other measures. This include reducing expenditure on all the MTU sites and postponing investments and new agreements with customers and partners on payment modalities. In addition, we have optimized our credit facilities and have expanded them. This, I think, puts us in a good position to get through the crisis without state aid. Let me mention the convertible debentures at this point, which we issued in September 29 to optimize the capital structure. We took advantage of the authority you gave us at the AGM in 2019 to do this. Now ladies and gentlemen, I'm sure you want to know how our business is developing, which is in your interest, you want to know how things go from here. We expect that the crisis will affect the commercial business most, above all, the spare parts business. In the commercial engines business, we are seeing a smaller volume for turbofan engines and the GEnx for the Boeing 787. Commercial maintenance for Freight airlines will ensure good capacity utilization. And then there's also the retrofit program for the A320 PW1100G-JM and the organic decline in revenue in the core business will be compensated by that. In the military business, we are not expecting to be affected. We're expecting about EUR 4.4 billion revenue for 2020. And adjusted, this will lead to an operational earnings in the same order of magnitude. In the long term, neither the continuation of the pandemic nor the scope of its economic consequences can be foreseen completely today. We're monitoring the situation very carefully and are constantly reviewing our premises. At present, there appears to be a very slow recovery phase. Together with experts in the industry, we expect that will take several years before aviation gets back to the level it was on before the crisis. As soon as we have a complete picture, we shall inform you in a transparent, rapid manner. And I must apologize if we can't make any statements or prophecies regarding the long-term developments. But despite all the caution, we are looking at the future with some confidence. There's a whole number of factors which suggests that MTU is crisis-resilient. I've said in past years and repeat today that mobility is important for people. If the world stands still, we all lose because our industry lives on exchange. And in times of crises, mobility of goods and services remains to be secured. Because as we all know, free markets and global value-added trends make a major contribution to our affluence. With our products and services, we support this exchange. As far as the crisis, our business may become slow at present and will -- may shift, but it's not lost. Another point is that we have shown that our business model is sustainable. We worked very successfully for many years. With good results, MTU is on a sound footing as it entered the crisis in financial and structural terms that helps us now. We assume that in the medium and long term, aviation will return to the earlier growth rates, and we intend to participate in that growth to a disproportionate extent. We have faced challenges in the past successfully, and we have always emerged from upheavals stronger and have managed crises with progress. That is our declared aim now. And it's possible because the management team at MTU stands by its values and is pulling in the same direction. We know where we want to steer MTU, and we are just determined to do everything necessary to maintain the strategic cost. In a phase like this, great confidence in the Supervisory Board is very important. And I'd like to take this opportunity on behalf of the Executive Board to thank the Supervisory Board. It has been supporting us in this difficult time in navigating MTU through the crisis. We welcome the decision of the Supervisory Board with the continuity at its head. It means that the many years of valuable experience of Klaus Eberhardt will remain available to us. Mr. Eberhardt, thank you very much for your assistance in difficult times. I'd also like to thank the state authorities for their support in the crisis. Federal and regional authorities made huge efforts and invested large sums to keep the economic consequence of the pandemic as low as possible. I can't imagine what would have happened if politicians hadn't intervened so quickly. The exchange and cooperation between politicians and industry works only if we are able to work together in order to overcome the crisis and its consequences. We also thank our customers and partners for their professional collaboration and their confidence. And to you, shareholders, I'd like to thank you as well, for your support, your confidence in our ability to create lasting value for you. We shall do everything in our power not to disappoint you. Opportunities here arise from one subject which has receded at the background at present because of coronavirus, but that will not remain the case. I'm sure that as the pandemic declines and aviation takes off again, the subject of climate protection will return to political and social agenda again. And that is a clear call for action for us. With our products and services, we make a major contribution to reducing emission. A good example here is next to the stage, namely the turbofan, which is used in the A320neo, among other things, and where MTU has the high-speed, low-pressure turbine parts for the high-pressure compressor and brush seals. It is setting standards in reducing fuel consumption and noise, and is a big milestone towards low-emission or zero-emission aviation. Our technologies are very important here. We are helping to make zero-emission flying a reality. We see opportunities for MTU, which we intend to exploit. We're continuing to invest in a successful future. And at the same time, we are bearing our responsibility in mind. I would appeal to the state again at this point, support the aviation business in their research and development plans, for example, with targeted support for climate political research and technology in aviation. These investments support the unique know-how of our high-tech industry and can be the driver for growth and employment, which is so important in the time of crisis. Ladies and gentlemen, we shall do everything in our power to emerge from the crisis as well as possible. I'd like to thank you for your support. Stay by our side and above all, keep healthy. Thank you for your attention.

Mr. Winkler, thank you for your very informative statement. And we are now saying goodbye to the listeners on the public stream and are continuing with the part of the AGM which is solely for shareholders. [Statements in English on this transcript were spoken by an interpreter present on the live call.]