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

Welcome to the conference call on MTU Aero Engines' Preliminary Full Year 2021 Results. For your information, the management presentation, including the Q&A session, will be audio taped and streamed live or made available on demand in the -- on the Internet. By attending in the conference call, you grant permission for audio recordings intending for publication of the Internet to be taken. The speakers of today's conference are Mr. Reiner Winkler, Chief Executive Officer; and Mr. Peter Kameritsch, Chief Financial Officer. Firstly, I will hand over to Mr. Thomas Franz, Vice President, Investor Relations, for some introductory words.

Thank you, Sandra. Ladies and gentlemen, welcome to our conference call for MTU's Preliminary Full Year Results 2021. We will start with a business review presented by Reiner. Peter will give you the financial overview in comparison to our 2021 guidance and a more detailed look into our OEM and MRO segment. After that, Reiner shares his view on our guidance for 2022. This will be the end of the presentation, and we will then open the call for questions. Let me now hand over to Reiner for the review.

Yes. Thank you very much, Thomas, and welcome also from my side. To start, let's have a look on the developments in flight activity in the past year. Passenger traffic improved in the year but is still significantly below pre-COVID levels. The domestic travel improved the most, reaching roughly 70% of the 2019 levels. International traffic remained weak at roughly 20% to 30% of pre-COVID levels. IATA forecast passenger traffic to improve to about 60% of the pre-COVID levels in 2022, but uncertainty remains. The cargo traffic remained robust and resilient throughout the year, being 7% above pre-COVID levels. And this momentum is expected to continue in 2022. For MTU, this is a very positive environment as our product portfolio fits perfectly into these expectations. We feel well positioned to benefit from this recovery. Now let's move on with our business review of 2021. I would like to start with some key highlights of the GTF engine program. In December last year, Pratt announced the GTF Advantage. The engine will provide higher thrust, lower fuel burn and more durability. The updated GTF will be the most powerful engine for the A320neo family when it enters service in January 2024, and it is best positioned to power the A321 XLR. In 2021, the GTF family collected more than 1,200 GTF orders. The latest order came from Qantas to power its newly ordered A321 XLR and also A220. MTU Zhuhai inducted its first PW1100 engine in September last year. With MTU Zhuhai, we now have 3 MTU locations with full assembly, disassembly and test capabilities for the GTF engine. So we are proud that MTU Zhuhai is the first active PW1100 MRO shop in China, home to one of the largest GTF fleets. The strong success of the GTF is very much focused on the aircraft platforms, A320neo, A220 and the larger E2-Jets. On the other side, for smaller E2-Jet platforms, we trimmed our business outlook and booked a write-off on program assets. The value of EUR 80 million is part of the adjustments in our numbers. In the MRO segment, we celebrated the start of the construction of our new parts repair shop in Serbia and the groundbreaking ceremony for our second MRO shop in China, MTU Zhuhai II. MTU Serbia is expected to start operations by end of 2022 and will add efficiency to our high-performance network of MRO locations in Europe, Asia and also North America. The new facility in China will have an initial capacity of 260 shop visits with a focus on PW1100 and V2500 engines and will start operations in 2024. The additional capacities in Serbia and China are essential elements in our ability to provide world-class services on the global MRO net market. This position enabled us to secure independent MRO campaign wins in the value of USD 4.6 billion in 2021. And this confirms, once again, MTU's strong market positions in the MRO even in a difficult market situation. But we also achieved important milestones in our military business. In April, the 50-50 joint venture EUMET was founded, which will lead the engine activities for the next-generation fighter. Good news also from the Eurofighter program: Following the signing of the Quadriga contract for 38 Eurofighters for the Germany in 2020, Spain placed an order for 20 Tranche 4 Eurofighters in December last year. And the last year was another challenging one for the aviation industry, but we managed to further improve our performance. And therefore, we will propose a dividend payment of EUR 2.10 per share at this year's AGM on May 5, of course subject to approval by the Supervisory Board. In December, we announced the proposal for the election of Gordon Riske as a new Supervisory Board member and to chair the Supervisory Board. With his experience in fields like automation, digitization and electrical engineering, we are convinced that Riske will support MTU very actively and with great strategic foresight. So let me now hand over to Peter for the financials.

Yes. Thank you, Reiner, and also a warm welcome from my side. For the full year, total group revenues increased by 5% to roughly EUR 4.2 billion. In U.S. dollar terms, revenues were up 9%. EBIT adjusted increased 13% to EUR 468 million, resulting in a margin of 11.2%. In the fourth quarter 2021, we saw further sequential improvement in the margin from 11.7% in Q3 to 13.6% in Q4. Respectively, net income adjusted increased by 16% to EUR 342 million. Our free cash flow remained strong with EUR 240 million, resulting in a cash conversion rate of 70%. The strong EBIT as well as a solid working capital management were the major free cash flow headwinds. Turning to the next slide, you can see that we managed to achieve our updated October guidance quite well. Revenues ended up a bit below our guidance due to lower-than-expected OEM and MRO revenues. And I'm going to give you some more color on that a bit later in the business segments. EBIT adjusted of EUR 468 million was at the upper range of our expectations as well as the 11.2% margin. Net income adjusted grew in line with EBIT adjusted. So that also met our expectation. The cash conversion rate of 70% was also in our expected target range of a high double-digit cash conversion percentage. Overall, a very positive set of results and a clear step forward on our recovery path. Now let's turn to our 2 business segments, and first, some details on our OEM division. Total OEM revenues were almost stable at EUR 1.5 billion. Military revenues remained stable at EUR 480 million, which is definitely below our full year expectation of a 5% growth. We already expected revenues for the FCAS project in 2021, which did not materialize as the final contract for the demonstrator phase has not been signed yet. Further, some EJ200 deliveries moved into 2022. Commercial business revenues remained almost stable at EUR 1 billion. And within that, organic OE sales in U.S. dollars were down by around 6%, which is definitely also below our expectations. Main reasons are lower than expected GEnx deliveries and some delays on bizjets. On a quarterly basis, Q4 2021 OE sales were up 20% compared to Q4 2020, mainly driven by increased GTF engine deliveries. Organic spare part sales in U.S. dollars were up 5% year-over-year. Q4 2021 spare parts revenues were up around 40% compared to Q4 2020. Main spare parts revenue drivers are the V2500; the cargo engines, so meaning that PW2000 and the CF6 and GTF. The overall spares volume recovered in 2021, but is still 30% below precrisis levels. EBIT adjusted ended at EUR 320 million, translating into a strong margin of almost 21%, resulting from the more favorable business mix. So let's move on to the commercial MRO segment. Reported MRO revenues here increased by 9% to EUR 2.7 billion. In U.S. dollar terms, revenues were up 13%, which is slightly below our full year expectations of a mid-teens range. The mix between core MRO and GTF work remained roughly stable at 60%/40%, so 40% GTF share. EBIT adjusted increased 9% to EUR 149 million, resulting in a stable margin of 5.4%. The EBIT margin was impacted by a high share of GTF work, as already mentioned in previous calls. At this point, I would like to hand back to Reiner for some words on our guidance 2022.

Yes. Thank you, Peter. So based on the Q4 results and the first indications on the start into the year, we are able to confirm our guidance for the year 2022. The overall developments in our end markets are within the expected ranges. Airlines expect a strong summer season, and they are preparing their fleets to meet the demand. The high infection numbers following the occurrence of the Omicron variant, did not harm travel recovery significantly. Anyway, the ongoing pandemic is certainly a factor to watch. It might influence our growth path. The same is true for possible supply chain disruptions. We have managed the obvious pressure on the supply chain very effectively, but global supply remains volatile. We will certainly monitor these developments closely and will update our outlook if necessary, during the year. So for the total group revenues, we confirm our expectation at EUR 5.2 billion to EUR 5.4 billion. With the net military revenues, I expect it to be up high single digit. Delays in tasks for the FCAS are partly compensated by delivery shifts from 2021 into 2022. Commercial MRO revenues are expected to be up in the mid- to high 20s range. The outlook for the commercial OE and spare parts business remains unchanged, up mid- to high teens for OE and up mid-teens for the spare parts business. The EBIT adjusted expectations are -- remain -- also remain unchanged, and the numbers should grow in the mid-20s percentage range. On the free cash flow side, we are now guiding for a cash conversion rate in the mid- to high double-digit percentage range. Mainly working capital and CapEx expectations remain volatile as rate discussions and market demand triggers larger movements in that area. So thank you very much for your attention. We are now ready to answer your questions.

[Operator Instructions] We've got the first question coming from the line of Robert Stallard from Vertical Research.

A couple of questions from me. First of all, Reiner, you mentioned the volatility and risk in the supply chain. Your partners at Pratt & Whitney say that they've been experiencing some issues in casting. I was wondering if you could comment on whether you're seeing strains in your business in similar areas or different areas. And then secondly, in your commentary, I think it's Peter who said this, there had been some bizjet delays in the fourth quarter. I was wondering if you could elaborate on that.

I mean, I'll start with the supply chain. We do not actually see significant problems in the areas, especially not in castings. What we see is from time to time, say some -- let's say, supply issues, especially with smaller suppliers. But as you know, in the past, we have more or less for every part we buy, we have a second or sometimes also a third source. So yes, there is a little bit of volatility and a little bit of uncertainty. But as of today, we see no major impact coming from that. But as I said, we have to monitor that closely. We've introduced the Monitor Board here within MTU to watch that closely. And maybe if there are things happening, we will update this during the year. But as I said, actually, it's not really a big issue.

Bizjet deliveries, I mean, there were some problems at Pratt Canada, so -- to some PW300 and 800 and shifted from December to January. So that was also due to, I think, supply chain issues at Pratt Canada, so -- but nothing to worry about. So it's just a shift of several weeks out.

So it's just a short-term sort of delay over the quarter end. That's all right. Okay.

Yes.

Yes.

Next question from the line of George Zhao from Bernstein.

I guess, first question, I mean, what drove the MRO revenues to come slightly below the expectations considering your spares for the year came in slightly above? I guess, second question, I mean, looking ahead to 2022 for your commercial OE, I guess, what kind of production rates for the 320neo and the 787 are you assuming as part of the mid- to high teens growth for the year?

I mean on the MRO side, I mean, that's always a little bit a source of volatility. The one hand side is, I mean, the exact work scope of the engine. So typically, the bill of material was a bit weaker in December and a handful of engines. So it was more an internal issue. So a bit longer turnaround time of engines due to technical issues, so that for the parts of -- that shifted from December to January. So that can always happen at year end. So it's not coming really from market demand, rather, as I said, from work scope and a little bit longer turnaround time for some shop visits.

Regarding the rate of Airbus, I think it's for the A320. It's something in the range of mid-50s. And for the 787, it's around, I think...

It's a very low rate, actually. So what...

Two to 3 aircrafts.

Yes, roughly. So our shipments for the GEnx is something like 50 engines for the year 2022. So maybe a slow recovery at the end of 2022, but that depends, definitely, on the technical problems. I mean, that's public, Boeing has with the 787. So we slowed down engine deliveries because, I mean, they do not deliver a lot of aircraft to the customers. So that -- so when that -- the problem will be solved, that's not in our hands as of today.

Mr. Ben Heelan from Bank of America, may we have your question, please?

Wanted to ask a question on the margin in OEM. Obviously, it was pretty strong, high 23s, 24% in the second half of '21. Can you talk a little bit about how sustainable you think this is as we go into '22? Or is there anything that we need to be aware of that might -- that may drag it down or even benefit it in '22? So first question would be on the OEM margin. And then secondly, on shop visit visibility, can you talk a little bit about lead times on shop visits, how you feel about visibility? Where is kind of shop visit utilization at the moment? Yes, any color on that would be great.

I mean, it's quite obvious. I mean, Q3 was very strong in the OEM. It was 23%. Q4 was very strong at 24%. And -- and that's -- 1 part is obviously the business mix. So we had a very strong -- typically, the second half of the year is typically very strong regarding stators business. I mean stators were up 40% in the fourth quarter. On the other side, OE deliveries were down a little bit in Q4. So it was a quite favorable business mix. Q4 was also -- in the commercial section, the military business was very strong in the fourth quarter, also combined with a quite good margin military business. So overall, it was a very favorable quarter for the year, OEM division. So we won't see 25% now in each and every quarter. But I mean, you have seen -- I mean, if you monitor the development year-over-year in [ OEM ] emissions, we moved from 18.2% to 20.7%. So 2.5% points up. So it's a clear development in the right direction. And obviously, our ambition is to improve this further. And finally, also reach at a certain point of time, the 25% for the year we had in 2019, as you know.

Regarding visibility in the MRO shops, I mean, of course, we have a, I would say, very high visibility. Actually, all the shops are more or less fully utilized, back again to the levels we have seen before. We have a huge order book, as you know, as you can see in the appendix in the MRO business. So I would say we're quite confident that we can reach our targets for 2022 with the growth rates we have just mentioned on that.

Christophe Menard from Deutsche Bank, may we have your question?

Yes, first question on the -- on the OE margin, you are mentioning the cost-cutting programs that help you improve the OE margin. Can you quantify what it represented in -- well, in the year? And should we expect further improvement going forward? You just mentioned 25%. To what extent is it enabling you to reach this target, and how soon, I would say? The second question was on the guidance in military. I understand that the FCAS program has been postponed -- or not signed, sorry, not postponed but not signed. You're saying in the presentation, it will be signed in 2022. So that revenue shortfall you had in 2021, why are we not seeing it in 2022? I mean you have exactly the same guidance as the one you had during the CND in military. So just understanding why it's not a bit improved, I would say. And the last question is on the working cap. The payables increased quite a lot versus last year. Is it due to prepayments or any specific reasons?

So military business that is easy, Christophe. So I mentioned the FCAS program, so that in the guidance we gave in November, we expected that we do FCAS development work for the full year in full year 2022. Now we expect a signature of the contract in mid-2022. So we lose -- we're going to lose some revenues from the funded technology work on the other side. On the other side, we get some tailwind from the shifted deliveries from 2021 to 2022 for EJ200. So that is net 0. So that's why the outlook is the same for the military business. Payables, that's a little bit a difficult thing because on the one hand side, we have program assets on the balance sheet where you have, for example, towards IE, we have receivables and payables. They are typically net, so it can well be that in 1 fiscal year, you have a receivable versus IE in the other year, you have a payable versus IE. So these accounts can shift from the asset side to the payable side easily. So that's -- so it's a better thing to look on receivables minus payables. So the net position of that, then it's lower. And the second explanation is that in the MRO division, we have bought, yes, typicals. These bulk buys at the end of the year 2021. So we bought different spare parts for the MRO division, but you don't pay them. So that results in a higher inventory level, and also in a higher payable level because, I mean, in 2021, you pay the 2021 list price, obviously, and you can build that in 2022 for the new price list. So that's an implied 5% or 4% EBIT margin, which you can achieve through transactions like that. But overall, you can see that we have a tailwind. So we did in, in 2022, quite well, our working capital management given the difficult environment with airlines. So we had a tailwind in working capital of roughly EUR 50 million. And you can see that in the cash flow statement. On OE margin, yes, I mean, we had savings definitely. I mean we had -- we reduced full-time equivalents by roughly 1,000 in the course of the crisis, we reduced general costs. And I would say the general cost savings is still there. I mean it is a mid-double-digit number which we -- that we still have lower, let's say, cost like travel and consulting and so on. We are still at a very low level. But now, I mean, as we expect a very steep recovery, obviously, we have to hire the staff again. So we have a lot of open positions that, I think, only in unique 200 people. So shop floor level, IT, R&D, I mean we are also preparing for FCAS. So once we get the signature, we are ready to really start with the work. So we are already, at the end, at the headcount of 10,500. And so we have started rehiring. So obviously, the reduction in headcount is not there anymore.

Harry Breach from Stifel, may we have your question?

Yes. Just a couple of things. I guess there's been a few questions about the margin on the OEM side. Can you maybe just enlighten us a bit with the MRO margin? It was quite strong in the fourth quarter. Were there any sort of particular dynamics there? I'm assuming that the GTF versus non-GTF revenue mix was still at the 40% to 60% ratio in the fourth quarter. But can you help us to understand sort of what drove that sort of 6% margin? And if that's sort of sustainable into 2022, plus or minus? Second question was, yes, just trying to understand, maybe too difficult to say, to be honest with you guys. But when we think about military OEM, when we think about getting towards contract signature, are there still outstanding issues that are difficult to resolve between the parties at the engine level? Or are they are they now resolved? Is it just really done at the airframe side? And then maybe just perhaps the final question for me was just maybe a little bit, Peter, just following your last question in answer to Christophe about cost normalization. You spoke a lot about the need to hire again, to add people. Can you help us to think when we're thinking about the impact of some of your costs normalizing this year? Is it possible for us to sort of think about the margin impact of that, Peter? Or you think, overall, that will be net 0 with the benefits of operating leverage in the year?

MRO margin, I think there's nothing particular in Q4. I mean the MRO margin hovers around 5% to 6% in the quarters. A little bit -- I mean, in Q4, we had a little bit lower GTF share, so more towards the 30% and more let's say, more 70% for the independent business. So that -- and you have obviously a typical mix between the different programs and customers and not every contract program has the same profitability. So you have always a little bit of volatility. But I think the main explanation is a little bit lower GTF share. So with the known rather low-margin revenues. On the FCAS side, I mean, the engine consortium is ready. So I mean we have founded that EUMET joint venture with Safran.

We are just waiting for this for the agreement between Airbus. And so once that has been finalized, I think then we expect the contract to be signed. And our assumption for this year is the mid of the year, as Peter already said, to start with the execution of the contract.

Then I mean, rehiring, I mean, we rehire obviously the people for a reason because we have work to do. I mean, we hire engineers for the FCAS program, so for the funded technology works or for the demonstrator phase. So that will primarily translate in military revenues and their respective military margin. We hire people on trough level to ramp up the production rate of Airbus. So that sets us in the position to increase here the engine output and the module output and also to work on more spare parts sales. So it's -- I would say it's not something which dilutes our margin also. So if you read our guidance, then you can see that the margin should be more or less stable next year from the 11% which we had this year -- which we had in 2021, obviously last year.

Great, and Peter, so just to follow up a little on that. So I guess we focus there a little bit more on the impact of hiring. Just in terms of other costs that could be more normal, I think you talked about travel, you talked about IT projects. Maybe there are some material cost impacts, maybe there aren't. Can you give us any idea whether those nonpayroll costs are any margin impact one way or the other this year?

I think we're going to have -- we've got to see some normalization, but not yet. But I think in the course of the year, we're going to see a little bit more traveling, meeting customers, going to trade fairs and so on, that will probably happen. We've got to spend more on IT definitely for a reason because we want to get more efficient in our processes and so on. But I wouldn't see a big margin impact there.

Milene Kerner from Barclays, may we have your question?

I have 3 questions. So my first question is on your spare part performance in Q4 and for 2021. It's probably my own inability to forecast, but based on 40% growth in Q4, I would get closer to 7% growth for the full year than the 5% you reported. So if you were able to help me understand where I'm wrong, that will help me. My second question was on your commercial spare parts guidance for 2022. Pratt guided to 20% to 25% aftermarket sales growth. GE has guided to 20% increase in the number of shop visits. I know the mix is different and it's early in the year, but how should we think about your confidence level for mid-teens commercial spares for 2022? And then my last question is on currency. Looking at your Slide 13 that you disclosed, it seems that you had 15%, 1-5, of your 2021 earnings that came at the spot rate. Peter, can you tell us how big the currency impact was for 2021 and specifically in Q4?

The currency impact on revenues? Or what do you mean?

No, sorry. On earnings.

So I mean, first, our parts business, I mean the 40% -- around 40% range, that translates to mid-single digits. I mean we reported in Q1, something like down high 30% range. We guided in Q2 for up roughly 50%, and we guided in Q3, up low teens and now roughly 40%. And so that results finally in mid-single digits. In the upper end of the range so, let's say, 6% to 7% or so spare parts sales. But I can't model 2% over 4 quarters. I mean, that is a minor deviation. So FX, so look -- and you look on our hedge book or what? What do you...

No, I mean it's just -- I mean when I look at your hedge book, I mean it looks like you were 85% hedged in terms of earnings. So I guess that the remaining 15% came at the spot rate, which is better than your hedge rate. So I was just wondering what was the currency benefit to your earnings last year...

In 2021, we had -- finally -- we had finally hedged 95% of our exposure for 2021 at an average rate of 118, yes. So it was more or less...

Okay. So I guess that's the difference. I get 85% where you are 95% hedged. Okay, clear. I see the difference. And then maybe on my second question on your spare guidance, I mean, I know it's really early in the year and you were the first to you actually guide in November. But I mean, since then, we have now the U.S. that have also guided for 2022. So I just wanted to see, like, how confident you were about this meeting commercial spares guidance for 2022.

We are very, very confident, actually. I mean we have -- we see that also now. I mean the main sources of our spare parts growth really comes from, on the one hand side, the PW1100, on the V2500. And there, we have already -- I mean, we have recovered there, 30% to 40% of the market. So we know what we expect regarding shop visits for our sites, I mean for Hanover, for EME in Poland, but also for Zhuhai in China. So -- and I think that -- yes, that gives us quite a high level of confidence that we can meet the 50%.

And what you should not forget with Pratt or GE, their guidance includes the MRO activity. So it's not just the spare parts business. It includes -- it's the entire aftermarket business.

Yes, sure. And the mix is also different.

Yes.

Next question from the line of David Perry from JPMorgan.

Can you hear me okay?

Yes, very well.

Great. So a couple of questions, if that's okay. The first one is can you just give us an update on how the talks with Airbus are going, please, on rate 70 and possibly above, whether you're supportive at the current time? The second one, I think it's sort of been touched on, but let me just ask it more explicitly. Inflation, just wondered what protection you have if labor costs, raw material costs, energy costs go up? What's actually written into your contracts both on spares in OEM, but also in MRO? Is there any protection or do you have to absorb it? And then the third one is a bit of a detail question, but it feels we're at a point where we should start to see more spares sales in OEM on both GTF and GEnx as those fleets are getting a bit bigger and a bit older. Would you be able to share with us the actual sales you're getting in spares on those 2 engines, please? Because I'm really not sure how to start modeling that out.

Maybe I'll start with the rate discussions with Airbus. I mean, actually, there are no ongoing discussions on that. I think we agreed for 2022 and 2023, the further rate increase towards that, whatever, 63 or 65. And whatever will happen after that has to be, I would say, negotiated in the course of this year. So we typically need, I would say, 12 to 15 months or 18 months in advance. If you have then, let's say, an agreement with Airbus, we can execute that and deliver. But as I said, actually, there are no ongoing discussions for the time beyond 2023. But this will definitely happen within this year.

Sorry, the talks will happen, just to be clear, before the decision.

The talks and the decisions then a little bit later. So final purchase order, I would say, I do not expect for this year. They typically do not give you a purchase order for 2 years in advance. So it's typically 1 year in advance.

So in inflation -- so I mean, regarding sourcing, we typically don't pay the spot price. So typically, we have long-term pricing agreements of 3 to 5 years with our suppliers. Also regarding raw materials like nickel and titanium and so on, we typically pay something like a gliding average price over 2, 3 years or so. So you're not -- so the actual spot price doesn't hit your cost of goods sold directly, so that's the one answer. On the pricing side, we can -- on the -- for the new engines, we can pass on price increases on to the customer, to the airline. So they typically -- these prices of engines are subject to inflation with indices. So typically, a consumer price index consisting of a mix of labor cost increases and also raw material increases. So this gives us on the new engine side, protection. Spare parts there, you typically have -- it's rather a pricing power thing. So as you know, typically, OEMs increase the spare parts prices, on average, 5% annually. But we have also seen years where they were 7%, 8%. So in a situation where you really had -- would have a significantly higher manufacturing costs, typically, they would increase spare parts price, maybe by 7 -- 7% or 8% for 1 year or so that that would happen. But I mean, on the spare parts, manufacturing cost is a rather low cost factor, I would say. MRO, the labor rates, typically, which you have in the contract itself, so for, let's say, for testing manual repairs but also on disassembly and assembly of the engines. So the agreed labor rates are also subject to price adjustments typically based on the CPI indices, labor rate increases. So I would say that we are -- regarding inflation, we are quite protected. On your question on spare parts, I don't give you the absolute number, but I mean a rough idea. I mean, the GEnx is currently something like 5% of our spare parts volume; the PW1100, so I would say 10% to 15% of our spare parts volume. These are 2021 figures.

Sorry, 5%. And did you say 10% to 15%?

Yes. I mean, GEnx roughly 5% and the PW1100 10% to 15%, yes.

Sorry, can I just be cheeky then, and just ask 1 follow-up? Because you've given us 5% organic growth but it's a portfolio of mature engines and growing engines. So which products actually went down in terms of spare sales year-over-year? Which ones are now rolling over as the GEnx and the PW1500 grow?

I mean, I would say the major source of growth in 2021 versus 2020 really came from the PW1100. So there, you had a significant tailwind in spare parts demand, because I mean 2020 was obviously quite low. V2500 for the full year, I mean, you have to keep in mind that in 2020, the first quarter was an extremely strong spare parts quarter. So we had -- obviously, the growth rate to digest that base effect in the year 2020. So the spares of the V2500 year-over-year were roughly flat. And the growth came from PW1100. We had the PW2000 and the CF6 combined. They were, for the year, roughly stable. And obviously, the widebody engines were rather down because of the lower utilization, I mean, GP7000 for the A380 and so on. Those -- GEnx was slightly down. So that is more or less the composition of the 5% growth.

Next question from the line of Andrew Humphrey from Morgan Stanley.

I've got a couple. I wanted to ask first off about cash conversion. I mean you've highlighted the kind of upper and lower end of the range will be kind of driven by and formed by what happens on rate decisions this year, preparation for a recovered market. Can you kind of maybe go into a bit more detail on that? Like, will you have to kind of make significant investments this year with rate 70 if that turns out to be where we're going? I guess, the question to us is how much of that range between the upper and the lower end on cash conversion is driven by preparation for higher production rates on the A320? How much of it is driven by working capital requirements? If we have a stronger market recovery, then maybe we have visibility on it this year at this point? Sorry, so that would be the first. The second is shorter. I wanted to ask about the very strong spares performance in Q4. How much of that was driven by kind of year-end restocking or seasonal restocking as you might expect? And then my third is whether you see any potential for kind of shorter-term supply chain disruptions. Obviously, we're all kind of well aware that you plan for the long term. There are clearly kind of long-term agreements in place, but clearly the political -- the international political situation at the moment is quite volatile. A lot of titanium comes from Russia. What insurance do you have in the short term on stock levels and continuity of supply?

Maybe I'll start with the first question on cash conversion rate. I mean what drives the upper and lower end of that is more -- it's -- on the 1 side, it's working capital. As you mentioned, what is the effective market demand? At the end of the day, how strong is the recovery that drives it? From the CapEx side, it's not so much rate 70. I mean, if we have to invest for rate 70, and we should not forget before the crisis, we were already in the range of some 65 per month. So there's not a significant investment necessary to go toward to rate 70, especially not in 2022. The majority of the investment is coming from our new Serbia facility, which will go productive end of the year. And there's, let's say, a huge investment, additional investment this year for this Serbia project that drives more the CapEx side this year. So it's not something related to the rate 70 discussion.

I mean, typically, Q4 is the strongest spare parts quarter exactly for the reason you mentioned, that all MRO shops in the world are -- stock spare parts for the old list price, and they can build it then in the following year for the new list price. So that is the typical behavior. And so that's why Q4 is typically the strongest quarter in the year.

Regarding supply chain, we said already we have, for most of the parts, critical parts, we have second sources or sometimes also third-sourcing suppliers. So -- and what we, in addition, did already last year, we did a little bit like buffering. So ordering a little bit more than necessary to have some buffer in the system. And we have to monitor that closely. Actually, I do not see a huge risk coming from Russia or something like that.

But we don't source titanium from -- as far as MOP from Russia.

Celine Fornaro from UBS, may we have your question?

Yes. I have 2 questions, if I may. The first one would be regarding the MRO. And if in your guidance that remains unchanged for 2022 despite some slippage in -- from 2021, do we read this as taking a slightly more conservative stance? Because you're going to have some potential slippages there as you have maybe a risk of, say, an output glut. You had it in -- at the end of '21, and there is a risk of having more in 2022 of that. How do you see it in terms of confidence? And what signposts should we be looking forward to see on how this is going or being recovered? And my second question would be in terms of general behavior of airlines on spare orders or even MRO or the quality of the MRO shop visits. If you could tell us a little bit how you see the 2022 backlog compared to the freighters, but also the non-freighters airlines and also those that were excluding GTF in this question, if that's okay.

Sure. I mean on the MRO market side, I mean, we still have continued high demand for -- from the freighter market, definitely. I mean, as you saw on the first page or on the second page of our presentation is that the outlook for the freight market are quite, quite good. So another strong growth. So obviously, freight operators want to bring everything in the other half. So the demand level is quite high. So in our universe, that translates into high demand for PW200 shop visits where we have freighter operator as a customer. But also for the CF6, which we do in Vancouver and Hanover. Also very high level of demand for more -- especially for North American freighter airlines. So that is -- there, we're going to see, in 2022, really also a growth there, supporting our 2022 outlook. From the airline side, I mean, as Reiner mentioned at the beginning, is that -- so airlines are preparing for a very good summer season. So the -- especially the scope of the shop visits. So they don't do -- I mean, in the past or in the middle of the crisis, obviously, airlines really try to push out shop visits, and the shop visits from a scope perspective quite small. So really only minimum shop visits to keep the engine flying but not more. And now we see that the scope of the shop is also increases and really do full and heavy shop visits. That supports on the other side, also our spare parts outlook. So I hope I have...

And in terms of -- just on that, Peter, on the follow-up, is there any regional difference in regional color, maybe North America, Europe or China and rest of Asia that you can provide?

I mean that's a little bit -- I mean our view because, I mean, we have our -- especially from the freighter side, we have our customer base more in the North American market, I would say. Especially, I mean, PW2000, CF680 engine, they are very popular also in the North American market, but -- is that really a global thing? I really couldn't answer. But from our customer base, we are strongly positioned in North America, and there, we see, really, a strong demand.

And on the question on the MRO, the first one on the MRO risk for '22.

Risk? Sorry.

Yes. I mean you had some slippage on delivery of engines in '21, but in the same time...

Some shops moved from 2021 to 2022. I mean that in an ideal world, maybe we could give a higher growth rate there, but it was not really -- we didn't want to change the picture actually, because of 2% or 3% point more better MRO growth rate. On the other side, I mean, still -- I mean, we are still in the middle of the corona crisis. We see that we have in our German plants, some infections, obviously. And so that prolongs turnaround times a little bit in the shops. So -- but there's no -- I would say there's no market risk from the MRO. There's really a very high demand. So the engine pipeline in front of our shops are quite long. So the market is there, and we have to deliver regarding our turnaround times, so to bring the engine back to the customer.

I mean, as Peter said, if there is a risk, it's more in delivering performance, shop performance. The market demand is definitely there. So -- but we have then to execute it. That's more in the part. And the speed of that, it was really a minor, let's say, slippering from 2021 into 2022. And we thought that it's not really, let's say, justifies an upgrade or a further update of the guidance for MRO. I would say it's in the normal, let's say, in the normal variance.

Tristan Sanson from BNP Paribas, may we have your question, please.

I have a few small questions and a follow-up. First to follow up on the question from Celine on MRO, can you tell us actually when is the first slot available in your MRO shops? Are you like fully booked now for '22? Or is it sometime in H2? And can we assume you're already fully booked ahead of the summer season? That would be helpful. Second question, I think you mentioned with Q3 numbers, supply chain quality issues on the A3 programs. I don't know if it's a reason why some EJ200 deliveries slipped into '22, but can you tell us whether this is now well under control? And the third question is that we saw -- there was, in the directives issued on the V2500 and more recently on the PW1000, prompting for the replacement of some parts. And I wanted to know whether this has an impact on the spare parts trajectory that you had in '21 and your schedule for 2022, or whether we should consider it as marginal and business as usual?

So regarding the military issue, that's solved. So regarding EJ200 deliveries, that was really rather an issue doing the engine test run. Is it in December or is it then in January? So they slipped over into January and we book revenues upon a successful test run. So that's why -- so our revenue slipped in the military field from 2021 to 2022.

On the MRO, I mean, when is the next slot available? More or less we are fully booked for this year, but that does not mean that there's no chance to get a slot. Also I mean, also movements between the customers, some delays in other ones. So -- but in principle, we are fully booked there. And the last one was on the comment of Airbus? Or what was it?

No, sorry. On Airbus and its directives, that I think issued on the V2500 and GTF and whether they had an impact on your spare parts trajectory or whether it's a marginal factor for you.

That's a marginal factor. No, no, that is. But as usual, I would say.

Okay, so I think this ends the Q&A session for today. Thank you very much. Thanks, Reiner, and thank you, Peter. Thank you all to the participants out there. Stay safe, and enjoy the rest of the day.

Bye-bye.

Bye.

We want to thank you, Mr. Reiner and Mr. Peter and all the participants of this conference. That does conclude our conference for today. Thank you for participating. You may all disconnect.