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

Hello together. Ladies and gentlemen, a very warm welcome to MTU's Investor and Analyst Day 2022. After 2 years of virtual sessions, finally back in person. It's great to see you all. But also a warm welcome to the people in front of their screens as we have a video feed going out there for the ones that can't join us. So what's coming up today. As usual, the attending Board members will hold a presentation of their respective responsibilities. Unfortunately, Reiner is sick and cannot join us. I'm sure he watches the event from home. So Reiner, get well soon. So now let's have a look at the agenda. Right after this intro, I'll hand over to Lars, who starts with a look on the actual market environment. Michael takes over and will update you on our expectations in the different market segments. And after that, we will have a short initial Q&A session. After this second part, we will have a lunch break. We prepared lunch in a meeting room on the other side of the hall. This will certainly be a good opportunity to catch up with each other to join the MTU team and discuss and refuel. Next to our management and the IR team, I have the pleasure to welcome some additional MTU colleagues who will also be available for discussions. This is [ Andrea Luebke ], our Head of Business Development. It is [ Michel Luda ], somewhere back there. She is the Executive Assistant of the CEO. Then we have Eckhard Zanger, Head of Corporate Communications; and Martin Friis-Petersen, head of our MRO Programs. After the lunch break, that's going to be around 2:00 p.m., we will start with Lars giving you an update on topics around production, supply chain sustainability and the latest technology project we have in place. After that part, we will have another Q&A session to catch up immediately after the news. Following that, Peter will provide a view on some selected financial topics for most of our expectations for '23 and beyond. A Q&A makes that part round. With an executive summary from Lars, the presentations will be concluded. And after that, we will have a combined Q&A session to answer all the questions that might not have been answered until that point. So I think for now, that's enough, and I hand over to Lars for the market environment.

Thank you, Thomas. Yes, good morning, and a very warm welcome from my side as well to our this year's Capital Market Day. If we ever got used to any changes in the past and how to react on that. This is what happened with Reiner yesterday night. He sent his regards, that he can't be with us. He is sick. Reiner, I wish you a fast recovery, if you listen to us, and I have the honor to welcome you and to start with our Capital Markets Day and some insight on the market environment. As we know, the market environment is challenging, remains challenging and maybe more than ever. You see a couple of points that we have put on the slides, and I'm detailing that in the slides to come. Obviously, the COVID-19 pandemic is still ongoing, and we have some remaining travel restrictions, mainly in China, and we'll come back to that in detail more often actually. When we thought about our industry is ramping up in January, February this year, then we had the Russian invasion of Ukraine and also the related sanctions, and I have some details on that as well. Out of that, in consequence, we've seen the energy supply crunch mainly in Europe. And following that, again, the global rise of the energy prices. And the economic slowdown -- economic slowdown and the price inflation. We have been seeing supply chain constraints lately and mainly that started with a COVID-19 pandemic when -- especially in the U.S., but also in Asia, most of the companies reduced their labor staff, their working stuff, almost by 50%. But now we see some additional constraints due to the economic slowdown and the inflation, obviously. And last but not least, if you put aside all that, what's happening on the macroeconomics, there is still an ongoing climate discussion. And I forecast, we forecast, if hopefully we get to a solution on that Russian Ukraine issue, then especially in Europe, this climate discussion will revise and ramp up significantly again. So let me show you some more details. First of all, probably I'd like to say despite the fact that we now having war on European soil and having in mind the pain and the suffering that the Ukrainian people are going through, the impact of Russia's invasion of Ukraine on the air traffic is limited. It's limited in region and in scale. You see some indicators here on the left side, the global commercial fleet affected is minor, is low single digit, 3% of the fleet is affected. And that obviously deals with the sanction that are put in place on basically all aircraft parts, sale of aircraft, sale of parts, engine spare parts and MRO service to all Russian company. A second point on our agenda is obviously the detouring that international traffic needs to do when flying -- supposed to fly over Russian space. So roughly 8% -- 7% to 8% of the global international traffic is affected. So we see that also as limited. Our major concerns back then was the supply chain issue and mainly the support and the supply of raw materials, mainly titanium. There was lot of issue of titanium when that war began. And meanwhile, I think we have solved the issue as an industry. Some of the companies solve that with higher inventories. Some of them have found alternative sources. Titanium is coming besides Russia, is coming out of Australia, Japan, but also South Africa. And I'll give you an update on how MTU dealt with that situation in my part on the CEO agenda. What's challenging with these new materials is always in our industry, we roughly need 18 to 20 months to qualify a new supplier. So it's not that you can go from one supplier, A to B, in the month or 2 months. It needs some amount of time. And I think that was a fear when the situation started, but we have overcome that, also a limited impact. And then last but not least, we see another trend then as a consequence of this war, the German government, but also the -- most of the European governments have increased their defense spending. There is a EUR 100 billion plan of the German government. And we as MTU are also involved in this plan as the main system partner for engines of the German armed forces. Another point is, as I mentioned, the energy supply crunch. And you see both of that, I mean, natural gas prices increased, nearly doubled, I would say, they are close to tripling in Europe and in Germany. There are several plans of the new government to shorten -- to reduce the usage of gas and also to put price limits in place. The good thing on our industry, aerospace companies, we have less than 1% of our sales represent our energy costs. So it's not good to see that, and we have measures in place, we as an industry but also we as MTU in terms of hedging, energy costs, making long-term contracts for energy costs, and we have escalation clauses in place so we can transfer or give these high rising energy costs to our customers. On the second thing, you see skyrocketing oil prices. We are seeing now USD 120, and I'll come to that in detail on the next slide. Meanwhile, I would say the oil price is going down again a little bit. I think just this morning, I've read that we have seen on Jet A-1, the lowest price in this year since March. So there's a good direction of reduced oil price and kerosene Jet A-1 for our industry. What's more, more headwind is the higher ticket prices because of that increased oil price. But we have seen, if you balance that the opening of the COVID-19 restrictions in the rest of the world. And hopefully, soon, sometimes in China is leveraging the high ticket prices. So we benefit more while the world is opening and traffic is enhanced then we have seen the headwind of the increased ticket price. So speaking of this high ticket price, this is an evolution of the oil price over the years. And as we have seen, as I just said, we have seen a very high peak at the beginning of this year, and now we are slowly decreasing some of the measures have been because OPEC announced their production cuts. So they want to stabilize the oil price, but we still see an evolution of the barrel around USD 90 to USD 100 in the year '23. What's more on our agenda is the high inflation in the world, and we are approaching 9% to 10% in most of the European countries. We are seeing 20% in Poland. We are seeing, I believe, 80% now in Turkey. So this is definitely on our agenda, and it's driving the economic slowdown or the recovery as you might want to see that. Next on that, this is not really working -- so here you see, obviously, high inflation is also slowing down our GDP forecast. You see on the left side that especially in '22 and in '23, we see a sharp slowdown of the GDP growth and then a softening and the leveling in the year '24 and '25. And that also reflects on the passenger traffic growth on the right side where we basically only see in the year '23, a slowdown in the traffic growth because of higher prices because of less buying power of the final passenger. But then back again, an increase of the global traffic, and that's mainly because COVID-19 restrictions will fall sooner or later. And we are waiting for China to ease up their Zero-COVID policy. This brings traffic back into the air. This being straight back into the year, and this is a major recovery for the traffic growth in the year '24 and '25. Here, you see that in the chart again, the traffic recovery since basically the pandemic started in the second quarter -- first quarter 2020, we are back in the world, and this is the -- what is it, the yellow curve, we are back to almost 80% on the world PAX flight cycles. You see dip, obviously, in China. We have touched it several times now because of the Zero-COVID policy, but there is a slow and steady recovery towards 80% and even more. What's nice to see for us for MTU, the narrowbody recovery, obviously, and we know that since a while, the narrowbody recovery goes faster and stronger than the widebody recovery. and this is especially good for MTU as we are mainly working on the narrowbody and fast recovery on that market and that sector is good for us. Cargo flight, I promised to touch it as well. Cargo flights. You've seen in the upper curve is representing the cargo flights. So we're still somewhere 30% plus of what we have seen pre-COVID. But we do see some softening in that trend as well because, obviously, if narrowbody and the widebody is recovering, the belly cargo freight is increasing. So that puts a little bit of softening on the freighter market. We do believe once again, Zero-COVID is opening up, then this will be a booster for the cargo market as well. So we believe there's a moderate outlook for the cargo rates -- for the cargo amount, but normalization in the freight rates, and we are benefiting from that as well. We touched it several times on our engine program CF6-80, also PW2000 that come in our shop frequently. What's also important in our industry is the park rates and retirement, and you've seen here that the park rates now are going down from 30% in the COVID year now to a 16%, and we see a further decrease of that park rate coming. That is mainly because the industry, the airlines are not really sure what is the evolution after COVID-19? Is there be a steep rise or not? So park rates will go down, retirements are on a historical low, and that deals with most likely the inability currently to ramp up the new platform, the new Airbus and Boeing ramp-up. But we will believe as soon as the ramp-up is in place as soon as we have the impact of the higher oil prices, then these retirements will increase to a normal level that we have seen before COVID. And then a view on the -- okay. All right, here we go. A lot of numbers on this slide. I think the basic message is there's a growing demand for the new platforms, A220, A320, also 737. If you see on the right side, for example, there's a huge backlog on the promising platforms that I just mentioned. If you add this up, A220, A320, 737, that's a 10,000 aircraft order book. And we are very much involved in the top 2 A220, A320. The rates are increasing. You know about the rate 75 that Airbus is communicating. Also Boeing wants to ramp up on the narrowbody market. the widebody market, we see rather in the mid-single digit somewhere. So a slow recovery to a rate 4 or 5 on these widebody programs. MTU is the partner for both single aisle, so narrowbody with Airbus, but also widebody with Boeing. So we will obviously benefit from this ramping up in this environment here. And having said all this we got to do something with either the battery or the position here. The long term -- I'll give you a couple of insights on the short-term overview. But here, we try to summarize the long-term fundamentals. And you see in all the major KPIs, the GDP growth is 2.5% for the next 20 years. The RPK growth is 3.5% for the next 20 years. We have the cargo development also above 3% for the next 20 years. And this is a very good news. We see a delivery -- new aircraft deliveries for the next 20 years of above 40,000 aircraft. I believe even if you have some challenges in the near term, short term, this is a fine industry to be in. If the market is developing like this, and we have 40,000 aircraft to be delivered and sooner or later, Martin, they come in our MRO shops. And you see the distribution, the majority is of the single aisle. We touched on that several times, and this is the sweet spot also for MTU. With that positive long-term fundamental outlook, I'd like to pass on to Michael to give you some more details about our business. Michael, thank you very much.

Yes. Good morning, and a very warm welcome to all of you. It has been quite a while since we met here in person. Actually, I'm already a bit -- a little bit nervous here to make this presentation today after such a long absence. And in this context, it's very helpful. If some of you ask me today, very nasty, very deep drilling questions. Thank you, Andrea, for making me even more nervous here. Thanks a lot. So -- but let's get started. Let's have a look into our business segments. What's happened now in the last 2.5 years and maybe even more interesting, what is going to happen in the next years to come. Okay. This works now. So what happened really, no choice, no surprise. The COVID crisis has affected the world. It has affected MTU. It has affected our business and our production units. But on the good news is I think the narrowbody market has recovered rather quickly and has proven that our business model and our company is more resilient than other players in this market. And this is, I think, valid for both of our segments for the new engine parts production and delivery as well as for the maintenance division. What helped us in the past years to maintain our liquidity? Yes, definitely, the military business because military obviously was not affected at all. We had very stable revenues, very stable cash flows out of this business and a good employment also and utilization of our Munich facility. Airlines have been and to a certain extent, are still in a cash preservation mode. And I have to say, we came to good agreements to good restructurings, Martin, thanks to you and to your team, the good restructuring of our long-term maintenance contracts. And we hardly lost any of our customers. So we could maintain our customer base, and this was very important for us because we know that this crisis has an end and then we end the ramp-up -- and the quick ramp-up start again now. As MTU, I think, we did very well not to lay off a single person in our company. We saw layoffs are hindering now the ramp-up of some of our suppliers or some of our peers, especially in U.S. We kept all of our people, all of our competence, our capacity on board. And furthermore, we continued our investment program even during these difficult times. So having said this, we definitely believe that MTU is back on its growth track. And we will expect the full recovery of air traffic by 2024, 2025 time frame, so very, very soon. We see currently demand signals from the supply chain, that's the one side. We see pent-up demand for shop visits. Actually, all of our engine shops are full as office -- as we speak now. And as I said, we constantly have to invest in more capacity in order to cope with this pent-up demand. We still see on the bad side, significant supply chain disturbances, which are -- we are faced with geopolitical uncertainties and with macroeconomic effects, which Lars just explains. And this affects delay, even faster growth of MTU. So let's have a look at our business segments and starting here with the military side. For the first time since I joined MTU, there has been now a significant rise in the defense budget due to the EUR 100 billion special funds in Germany. With this budget, Germany has the opportunity to reach its goal in the later goal of an annual spending of 2% of its GDP for defense equipment. The question is now, are we currently participating from this? The answer is partially yes, in form of spare parts and in form of additional aftermarket sales due to clear demand signs also from our customers and the high availability and high intensive use of this military equipment, especially the Eurofighter, which is involved in air policing on the eastern part of Europe. And they need flexibility in the aftermarket and we are committed to provide this flexibility by adding more capacity to our military production lines. But this increase in defense budgets is even more important for us going forward and looking to the future. In the past, we and the customers with always crazy and fancy ideas of what we could deliver, what we could produce and develop. And then we have the issue, the budget was not there. And this problem is solved now. If you see on new programs and we need new programs, all of these new purchasing programs, all of the new development programs are now backed up by a committed funds by committed budgets. So budgeting is not the issue anymore when it comes to execution of new military exercises. And any future programs are highly relevant for MTU as we need a good pipeline in our portfolio and to renew this pipeline also. MTU has a solid military product portfolio by participating in fighters, transport aircraft and helicopters. And beginning on this slide from the right-hand side, every engine up to the Eurofighter has a very stable and a very solid and a very planable aftermarket. The TP400, the power plant of the A400M just entered this phase, but the aftermarket is picking up significantly. The Sikorsky CH-53 kilo is in operation since last year, and we are in front of a huge production ramp-up for the U.S. Marine Corps deliveries. And new programs like the future combat air systems or like new rotorcraft models are on the horizon now and are being discussed in the European forces. But first, let's have a look on our fighter portfolio, which is very important for us since it accounts about for 70% of all of our military revenues. The Eurofighter engine, the EJ200 is in the middle of its life cycle and is expected to generate revenues over the next decades for us. Until this year, over 1,400 Eurofighter engines have been delivered already. New engine deliveries are secured towards the end of this decade, supported by the Spanish and German order for the [ Tranche 4 ] Eurofighter. And what will come is an order of about 50 to 55 aircraft to replace the aging Tornado aircraft in Germany. We furthermore expect some international sales success, export potential, mainly from Middle East customer. So by the beginning of the next decade, more than 1,600 EJ200 are expected to be in service. And this is a solid base for growing the military aftermarket because of high utilization rates and a high installed active engine fleet. I mentioned briefly another program, the future combat air system. And I'm standing here, I'm very happy about the way this program is turning now in the last days and weeks. Europe is in desperate need of a 6 generation fighter aircraft. And the future combat aircraft system is so much more. It's a fighter. It's an integrated system connected by real-time information via combat cloud and is supported by remote carriers to protect the aircraft. For us, it's important because this program will allow us to reinstall a true European supply chain, where we also will benefit on the commercial side. Just imagine that we can build up casting houses here in Europe that we can support new forging houses and therefore, get more independence from today's supply chain structures. For MTU, this program is very important since we have the opportunity to develop the technologies for the aircraft for the engine, and we can further enhance our technology basis, which is definitely a plus when it comes to the next generation of commercial engine development, which Lars will take care in his presentation just after lunch. So I can see a high revenue potential for us as much as EUR 20 billion over the lifetime of this program for MTU. So it's really a program where we delivered 2,000 engines, which will stay operation for decades towards end of the century. It will create workloads and experience for about 500 engineers at MTU and therefore, enhance our technology base again. There was a pause now in the program to have the airframers discussing their program structures, also supported by the nations, Spain, France and Germany. But I think this pause will come to an end, and we remain very high confident that we can sign this program towards year-end now. Yes. Let's move to the commercial business segment. The good first news is that the growth rate of engines with MTU participation is back to increase about 6% year-over-year. The active engine fleet with MTU participation is today about 16,000 engines, where the installed fleet is 14,000 engines, plus another 1,700 engines coming back to the market from storage. The split of these engines into the segment is about 60% in the narrowbody segment. So the fast recovering segment, 24 cargo and governmental engines and about 20% widebody exposure. And I think there was a very interesting statement the other day from a very well-known colleague, Steve Házy, the Executive Chairman of Air Lease Corporation, who said by 2025, there are more than 6,000 airplanes turning 25 years of age. And we all know that the OEMs will not build 6000 airplanes in the next 3 years. So there is a gap there, statement from Steve. And to be honest, I like the gap. Because what does it mean? This gap can be filled only by existing aircraft with existing engines with platforms on which we are on the sweet spot on the aftermarket spot. So our customers will be operating older aircraft for a longer time, which is definitely good news for all of us. [indiscernible] was last week I think in the U.S., hearing exactly this message, I was in the Middle East to speak to customers, hearing exactly this message. So this market of refurbishing older aircraft, keeping older aircraft for 3, 4, 5 years long in operation. This journey already has started. Again, good for us. And then looking to the future, what will happen. We will see about 11,500 new engine deliveries with MTU participation and thereof again, about 9,000 engines on the widebody -- on the narrowbody market. 2000 engines in the widebody segment, which is for MTU participation on GEnx and GE9X and about 450 engines on the cargo and governmental segment, which is mainly the CF6 still V2500 and also the GE9X in the freighter conversion. So the narrowbody engine fleet with MTU participation will increase to 58%, which is approximately 9,300 engines, 1 from today, 58% will increase to 68%, which will be about 16,000 engines going forward. Widebodies will remain stable and also cargo and governmental engines will remain stable. So as you can see, our near-term future growth is definitely driven by our narrowbody expansion exposure. Now let's have a look on our most important narrowbody programs, which is the V2500 and the geared turbofan family. So starting with the V2500. This will remain a key revenue driver for MTU for many years to come. [indiscernible], the V2500 utilization was about 75% compared to pre-COVID level already. Today, it's about 70%, so still good. Park rates of this model decreased from 15% from previously 24%. And as discussed in our last Capital Market Day in '21, the retirement rates are still very rare, retirement rate is really amongst the lowest in the entire narrowbody segment. So we are very happy about this trend. And this trend will continue, since as I said before, new aircraft deliveries are not at the rate where they should be and where the market demand is. And therefore, the supply chain issues in this time also help us to keep the older fleet longer in the field. And the V2500 is a very reliable, very efficient engine. It will remain an important engine, which perfectly satisfies a big portion of the short-haul demand going forward. Also pax-to-freighter conversions with A321, including the V2500 engine is something which picks up and where MTU is also a partner with various customers and various conversion houses. And the engine is fairly young. The average age of the engine is 12.5 years. And therefore, roughly 65% of all these engines have not even seen a second shop visit, the shop visit where we sell the life-limited parts, so high-value spare part business for us. So MTU has still has a total market share in this engine program of above 35% of the overall V2500 maintenance markets, and we are the largest MRO provider for this engine model. So we benefit on the reside as well as on the maintenance side. And again, for the next 15 years, the V2500 will remain an important pillar of our aftermarket portfolio. Then having a look on our geared turbofan family. So what are the phases of the geared turbofans coming from the development phase 2010 to 2015. We have invested. We have developed a more efficient engine. With the increasing prices of kerosene, we could convince the customers, we could convince Airbus that is now time for a new power plant on this -- on the A320 family. And GTF is the answer. It's a highly efficient engine. It has an extremely high market appeal. And it's a good upgrade -- it was a good upgrade option for the A320neo aircraft, so investment phase, 2015 completed. And then we started the enter into service with the first Lufthansa machines in 2016. So the technical upgrade since then led to an improved engine reliability. The customers see the value of this engine. They were flying this engine even during the COVID phase very heavily. And we had a very high production rate until 2019 with roughly about 60 shipsets per month. And then corona arrived. So we saw the impact on the aerospace industry. Production rates dropped down from 60% to roughly about 45%. But the [indiscernible] geared turbofan was operated during the corona crisis because of its efficiency. And from this year on, we are now in the re-ramp-up phase. The utilization of the GTF remains very, very high. We have a strong order book for the next 6 to 8 years on this engine program. And we started to accelerate the production of geared turbofan engine for both models, the A320 and the A220 aircraft. The A320neo production rate is confirmed at a rate of 65 shipsets for the year 2024. And on long term, we are also prepared to support higher demand. Of course, we are closely monitoring the abilities of a ramp-up in the wider supply chain, especially for forged materials and for castings. But we are committed to support this demand. And we have developed a GTF advantage configuration in order to make the engine even more mature and more cost efficient to maintain. And by the way, this is also a perfect engine, which suits the needs of the long-range application of the A321 family XLR and ELR. So we are convinced that the GTF will be the revenue and profit driver towards the end of this decade. In the period from 2022 to 2030, more than 10,000 GTF engines will be delivered to the customers. High utilization rates will be favorable, driving our aftermarket demand. With the GTF, we also introduced a new aftermarket business model. We call it the GTF network in order to optimize the cost of the aftermarket. So this is also the mission which we have now, we focus currently on optimizing production costs and maintenance cost of this program and hence increase the profitability of the GTF models. So on the short term, the profitability will be increased by normalizing of discounts, lower warranty costs and leverage effects of the volume increase and learning curve. And of course, we will take the lessons learned of GTF also into account when we have a look on the next engine development programs. The targets are to optimize the existing fleet, improve reliability, enhance the on-wing time to avoid or at least to reduce maintenance costs. We make design adjustments, we develop repair technologies, and we optimize the existing MRO contracts. And MTU has many advantages, which will help to achieve those targets. We are successful in the MRO business since 4 decades. We have a very strong MRO know-how and experience to manage fly-by our contracts. We have a high MRO market share on the V2500s, where we have proven that is possible. And we have a broad knowledge about the GTF MRO and work closely together with Pratt & Whitney and the other network partners to reduce maintenance costs. Then let's have a view on the remaining key engine program, and I would like to start with the PW2000 program. So I repeat myself, the PW2000 is a rather old engine, yes. But 30% of the installed engines are used in commercial applications, 757, which is an ideal candidate for passenger to freighter conversions and which is also flying as a cargo aircraft for many years to come. And the other 70% of the PW2000 engine is installed in its military derivative on the C17 Globemaster aircraft, where more than 200 of these aircraft are flying and will fly for the next 30 to 40 years. And especially now, they are highly utilized. And therefore, the PW2000 is anything else than a dying program. And Peter, I would share [indiscernible] that even this year, maybe we'll have the highest aftermarket revenues on the PW2000, which we ever saw. And similar picture we see on the CF6 program. 40% of the engines are installed in passenger aircraft, but about 60% of the engines are installed in cargo aircraft, and the fleet is daily growing also by customers of us like Amazon Air. We expect the CF6 to continue to fly over the next 20 to 30 years. Looking on the widebody segment. We gained significant market share through our GEnx participation, which currently holds about 67% of the market. And looking now also on the spare parts revenue distribution for around 40%, we are gaining in the widebody segment, which is GP7000 GEnx and will be in the future, the 9X and also the business jets account now for roughly about 13%. It's a small portion, but a very highly profitable business. Maybe some comments here on the business jet segment because we did not touch this too often. The utilization rates have been recovered to pre-COVID levels driven by a very high charter demand of business jets. Currently, we have about 8,000 engines with MTU participation in the field. And we currently -- we likely be applications because this journey is continuing. On the new engine models, or PW800, we have delivered already 400 engines to the market, mainly to Gulfstream. The certification of the 812 model of this engine program has taken place this year. And this will serve the Dassault Falcon [indiscernible] program, which goes into the field beginning of next year. A year later then, the PW812 also will be applied to the Gulfstream G400. So nonetheless, we are seeing a growing demand in this segment. which leads to a slow but a stable growth on the short term. And as I said, it's a very profitable business also. Yes. Then let's move to our last and next business segment, which is the maintenance segment. In terms of sales, which we see on the chart, we have reached the pre-COVID levels of turnover already last year 2021, thanks to our product mix and the flexibility of our staff. Midterm organic growth in MRO reported revenues will be in the mid-teens and is backed up by existing contracts already. We have also succeeded in maintaining and growing our strong order book because of our very excellent market positions as well as our favorable product mix, this will be the basis for our future. For 2022, by the way, we expect revenues in the range of EUR 3.8 billion. So again, significant growth compared to 2021. And I think it's safe to say that we have fully recovered our -- in our MRO business, and we have recovered definitely faster than any of our competitors. The sales development is backed up by a very strong increase in flight activities via high airline capacity needs, which results in turn in strong demands for new shop visits. The supply chain constraints are currently delaying at even faster growth because we lose slots because of longer turnaround times. But at MTU, we continue to invest in new capacity, also during the pandemic because we always saw the need to secure our market position as the #1 independent maintenance provider. We want to increase the flexibility in our global MRO network. And we want to also invest in existing and new engine programs in order to ensure we have the right capacity utilization available. And what I don't leave -- and what I'm not getting tired to mention is, we are currently in a kind of a transition phase, as you see on the chart here from about a balanced portfolio of ours in the high cost area compared to best cost area. And this is going to change in this decade to definitely an overweight of ours, which we are performing in the best cost areas. So more than 60% of the hours by end of the decade, we will have in best cost, but we will maintain our competence in the high-cost fields. All in all, this will strengthen MTU's market position. But with this growth, I think there's also a second task and the second duty in all of us. We have to harmonize our business processes. We have to harmonize the customer experience across our locations, and therefore, to gain an additional efficiency and to maintain an excellent customer journey. I was speaking about extending of our network. This is what we are doing, starting from the left-hand side, we have moved our facility in Canada to a much brighter, much wider facility. So this move has been completed last year. The shop is now operational again. We have about doubled the workshop space in our facility in Hannover. Although this has been done and performed in 2021 successfully. Similar, we have renewed our logistics area in Ludwigsfelde south of Berlin, so also this has been done. In Serbia, we have built a new facility, which we opened some 4 weeks ago, and which will start to deliver piece part repairs beginning of next year. Our facility, our joint venture of Lufthansa Technik in Poland, Engine Maintenance Europe is in the ramp-up mode. So all investments are behind us. It's now the question to basically every year double the output of the facility. And we are currently looking forward to decide with our joint venture partner in China to build a second facility very close to Zhuhai-1 about 30 kilometers away. We established a second MRO facility with first with our own tested in order to cope with the demand growth in the Asian region. Having a bit closer look to MTO -- Zhuhai, Zhuhai our door to Asia Pacific markets, MTU is well positioned in this area with this Zhuhai facility and its representations in Shanghai and Singapore. In 2021, this facility generated about EUR 1 billion of revenues and has a capacity of roughly about 450 shop visits. And we are proud and we are very grateful about our long-term partnership together with the biggest Chinese carrier, China Southern Airlines. Actually, it's a 50-50 joint venture of China Southern. Maybe some facts about our joint venture partner, China Southern Airlines. China Southern operates today about 700 aircraft, which they have in operation. They are, by far, the biggest operator in Asia, #4 of the world. Revenue of about USD 16 billion, 98,000 employees. And if you ask me, it's only a matter of time that China Southern will become the biggest airline in the world. Some milestones of this company, we have introduced just this year [indiscernible] model, PW1100. And we have introduced -- started to introduced last year, the 2 LEAP models 1B and 1A. Have a look at the Southern facility. That's another example -- another good example of our MRO network here. We opened this facility in October, together with the highly motivated staff and together with the government of Serbia, and we expect to be fully operational by December this year, creating output from January next year onwards. All in all, we have invested roughly EUR 130 million on this company, and this shop will provide 470,000 repair hours per year for our network. By 2027, the company will employ 500 high-skilled workers in Serbia. Our shop is located just north of the capital, north of Belgrade, some minutes away from Belgrade airports. So why do we need Serbia? Very simple, we need the capacity. Our repair network will grow from about 1.9 million production hours today, to 2.5 million production hours. So we need this capacity, and we want to have this capacity in the best cost region. And our motor repair [Indiscernible] replacement. This is, first of all, a major cost saver for our customers for the airline, but it's also a driver to a more sustainable business. And to Serbia, I think, offers also a lot of space for [fantasies] in the future. Another example where we invest is our asset and lease management business in Amsterdam. We call it MTU Lease Services, MLS. The company has a lease pool difference to the chart. I think on the chart, we still have the 80 engines; this has changed. Meanwhile, we have a lease pool of 100 engines, which we own or which we manage, and therefore, offering full package services to our customers. MLS engines primarily support our own customers. They give us their engine for service. We give them a lease engine to seamlessly ensure their operation, but we're also now entering the business of third-party customers, and also some assets and trading business. The company was founded in 2014. And since then, we have established a customer base of more than 300 customers across the globe. And also to give you another number, we perform roughly about 160 engine transactions per year. So it's a real business now with roughly about EUR 200 million turnover per year, and as you see on the bar, steadily growing also in the next years. Again, we are very proud about investing in this business and having a complete customer service. To summarize the MRO market, and what we are doing in our MRO strategy. So we are securing market access by increasing our independent MRO business and by further growing our collaborations with the OEMs of this world. We are constantly working to expand our product portfolio. So we are always in search of new customers of new OEM partners, but also airline partners. This year, for example, we have added the PW800 to our network for our facility in Ludwigsfelde. And we have added also the LEAP engine programs to the network. We are expanding our global MRO network mainly in high-volume markets, and securing therefore, also access to these markets. And our competitiveness is increased by our market network initiatives to strengthen the collaboration amongst the sites, and therefore, optimize also the cost structures by moving work into best cost locations. So I come to the end of my presentation. Just to sum up all the business segments. All in all, I think we are very happy that MTU emerged stronger, leaner and faster out of this crisis. In the military segment, our fighter engine will remain the key revenue drivers going forward. We have big hope, and we are watching the future combat air system as one of the future revenue drivers for us, but we are confident there. The recovery is accelerating despite significant supply chain disturbances, and despite the fact we are faced with geopolitical uncertainties and other effects. We have faster recovery than our peers in the narrow-body market, and the cargo segment. And this will again result in a very strong and sustainable growth. And with our experience and our very wide MRO portfolio, MTU is very well positioned, and will remain the #1 in the world for engine maintenance. Thank you. And I think now we move to the first Q&A session. Yes.

I think we have -- we should have 2 microphones available, yes. So whoever wants to ask a question. We have the first hand.

Rob Stallard from Vertical Research. One for Lars and one for Michael. First of all, Lars, you highlighted the decline in dedicated freight activity in recent months, and there's a lot of China uncertainty here. But are you seeing this starting to impact your dedicated freight to aftermarket? What are your thoughts there going forward? And then, Michael, you mentioned that the geared turbofan has a different aftermarket structure than what you've done in the past. I was wondering if you could elaborate on where that stands today? And equally, how you expect that to evolve going forward?

Well, I use the opportunity to pass it on right to Martin because he just traveled the world to speak to our freighter customers.

We still believe that cargo will be an important pillar of our MRO growth. It's roughly 10% of the entire fleet is dedicated cargo. As you know, P2F, strong development. We see more than 160 aircraft being converted. And if you buy into that, you have another 12 to 14 years of continued operation of engine types that we have in our portfolio. Secondly, I think very important, 10% of the overall fleet, but probably 13% to 15% of the MRO market. So that means they tend to be older, the aircraft types. And that's a market where we have historically been, let's say, well positioned, and will continue to be because we need a replacement of the 74. We need a replacement of the 75, and that's all. 777, for example, could be one component or A321, all with engine types that we command. So we are pretty confident that cargo will remain a strong foothold in our MRO portfolio. .

Yes. Moving to the geared turbofan question. I mean what is different to older types of engine. We sell the engine, but we also sell the insurance solution called the aftermarket contract, which is, say, 10 years fixed-price contract. And now it's for us the opportunity as a partnership, Pratt & Whitney, our Japanese partners, and us to bring all of our brain and knowledge together in order to reduce the maintenance cost. And to be honest, we just came from a meeting with [Indiscernible] in September, which we had, and this was the #1 topic to improve the profitability of the product, and what kind of actions can be together to develop new repairs, to industrialize new repair. You saw our Serbian facility, this is a best cost repair facility, which we definitely want to bring all sorts of an asset to this GTF network. So by doing so, by commonly work on product cost improvement on the aftermarket side, the margin is going to expand for the entire partnership. So we are not competing anymore like in the old times, on an engine platform, but we bring all the brain together to optimize this program together.

David?

Charles Armitage, Citi. There's a lot of pent-up demand from maintenance that didn't happen in 2020 and 2021. Presumably, we're getting -- at some stage, we're going to work through that, so that will disappear. But offsetting that is the recovery in the underlying demand as things come back, and just trying to work out, it's going up, it's going down, where do we actually end up as regards to the [battle ways] and the aftermath of the [battle].

If you see our forecast, we are not so much limited and concerned about the demand side. We are currently more concerned about the fulfillment side. So spare part availability and our own capacity -- actually, our shops are full for the next 3 to 4 years, I would say, Martin. And the question is really how do we balance this now. So there's a pent-up demand from the past. But as I said, also, the airlines are growing again. And the new equipment, which would be necessary to cope for this growth, and I just come back from Middle East, and customers told me this, I've got 10 aircraft. Normally, I would have to replace them by new A320 together with from GTF or with LEAP, but I cannot get this aircraft in the next 3 years, so can you please make me an aftermarket offer for the next 5 years in order to keep my fleet flying. So I think there are 2 elements, the path to recovery and the catch-up demand, but there's also demand in the next 5 years from this situation that the new engine and aircraft deliveries are somewhere hindered.

I think David...

David Perry from JPMorgan. Just 2 questions on some of your big picture views in your slides. Page 9, the traffic forecast. I mean here from spring 2022, I mean a lot has happened since spring. And I suspect the growth is lower. So maybe either of you care to opine on what you think the traffic growth could be this year and next year, I know it's difficult, but they do look a bit outdated those forecasts. And then on Page 19, I'm just curious about your views on German defense spending because it looks like there isn't anything official from the government. So I just want to clarify, these are your views. They probably look a bit more optimistic on [Indiscernible], which has it much more back-end loaded over the coming sort of 4 or 5 years?

Well, David, I'm not sure what you mean with outdated, but we see -- I think I commented on the generic growth of the traffic that is -- I think you have to see that in regions of the world. Europe is recovering. U.S. is recovering. Asia is recovering. China, we talked about it that might be a little bit lacking behind. But in general, we see a recovering of the traffic over and above 80% to where we've seen that in next or the other 2 years, really depends on the macroeconomic development that we see next year and maybe even in '24. But there's -- for us, there is no question mark. That traffic is coming back strongly, let's say, middle of next year and going forward.

Yes, maybe to add on the question of defense, obviously, when [Indiscernible] have different products and different life cycles. For us, it's important that this budget is available. And David, you saw that we also send the Quadriga, which means that for now Eurofighters already for Germany, but also for Spain. But this was in a situation where the budget was there. And this is something I can tell you in the last 5 to 10 years, we always had the struggle that there was a demand there, but no budget. And therefore, I use this development very, very positively for what we have signed, but also for what we are going to sign, which is namely the future combat air system. So that's the one side, but also what are you positively that throughout the government -- the political parties in Germany, you have now a common understanding that we want to reach the 2% goal going forward. And this, again, will be a solid, solid basis for further defense spending.

It's Harry Breach here from Stifel. Can I just ask a very simple one really, about commercial MRO. Looking at, I think, Slide 28, where we see the capacity and best cost regions rising up to, I think, around 60% or above 60% of total commercial MRO capacity, can you help us to think about profitability of that? And does that mean that when we think about commercial MRO margins going forward, looking out sort of 3, 4 years, should we see upward trend there driven by higher best cost regions delivering greater revenue, and the lease business expanding as well, I suppose.

This is definitely the case. But if you remember Peter's presentation from the last Capital Markets Day, there's also a slight shift mix from between the independent MRO business, which is higher margin business. And then this business where we -- which we do as a kind of our program obligations, for example, geared turbofan. So geared turbofan growth is significant. And we need also this kind of best cost benefits in order to perform this work on an efficient basis. So if you have a look on the mix, how it grows and if you just pull out Peter's presentation from last time, you will understand that we are forced to go into this best cost at least to maintain, but gradually also to increase our maintenance margins.

George Zhao from Bernstein. I guess first question on spares prices. I guess, how do you think about the impact of whether it's 10% price increase, but offset somewhat by USM supply. So like how does that fall down to how you think about revenue per shop visit, and investor pricing, does that essentially just offset the cost inflation? Or can you -- are you making up more than that and getting better margins?

Okay. You ask a question, which Peter will answer in about 2 hours from now.

There's another question. On GTF -- on the recent quarters, we've seen lower-than-expected GTF maintenance, and you've talked about better durability. At the same time, we've seen elevated levels of spare engine deliveries to the airlines because the engines have been coming off the wind faster than expected. So can you just kind of reconcile what's going on there? .

I'm not sure if I got the question.

Look, we've seen elevated levels of spare engine deliveries from Pratt & Whitney to the airlines, partially to account for the fact that some of those engines have been coming up way earlier than expected. So how does that reconcile with it's -- what you've seen this year that the durability has improved.

I think. But I think these effects are not material. I mean, we speak about roughly about 30 to 40 engines which have been diverted to the maintenance market in order to harvest the material for MRO customers. So it's not really material, I think. And again, all this is an alignment also with Airbus production rates, which they can fulfill.

Any more questions for now? I don't think so. So as mentioned before, we can have a lunch break now. It's out of the room, and then there's plenty of space to grab some food and connect to each other or connect to the MTU people, take the opportunity. And then we're going to be back here at roughly 1:30. And that's especially for the guys in front of the screen, yes, around 1:30, we will go back online. Enjoy your lunch. [Break]

Hello, hello. 1:30 pm, we are back. I hope you enjoyed your lunch. At least I know that we had good lunch in here. I hope the guys out on the screen also had the opportunity to fuel up a little bit. Yes, let's get going. Lars, please?

Thank you, Thomas. Welcome back, everyone. I hope you're now energized to listen to some insight on our production and technology road map. As Michael pointed out, we are on the growth of recovery, and that obviously needs to be backed up by production #1, and then to come up with new products for the years and decades to come. And both of that, I'd like to address in my speech today. Let's start with supply chain. I talked a lot about it in the macroeconomics in the beginning, obviously, we do have an issue in the world in terms of supply chain. But I believe MTU worked out great in the past to stabilize its own supply chain. And a couple of examples I'd like to give. We actually started to stabilize or to think about the future state of our supply chain way back even before COVID started. And to give you a view of how that looks like, this is a one-pager where you see our current global footprint. We spent roughly EUR 500 million in production material in 2022. We have a worldwide distribution of suppliers, 300, 400 suppliers for our production material. On top of that is another EUR 700 million, EUR 800 million for indirect material with even more suppliers, obviously. But here, we are focusing on the production material, big in the U.S. and Americas, obviously, also big in Germany. And what might be interesting for you guys, how do we -- how independent or how dependent we are in our supply chain concerning China and in Russia. And to give you one example, we have one more supplier left in China. And this supplier is backed up by a double source, so we do not see any risk of our supply chain in China. We are completely independent of our supply chain in Russia. We talked about titanium earlier. And we have started to make long-term contracts even before February of this year. So we have a supply chain in place that secures us with a good hedging as well looking forward on our raw material and especially on the nickel and on the titanium. And also in the bottom left corner, you see our procurement share. We do procure 68% of our OEM series, and 32% in-house, which we believe is a fair balance. It's a good balance actually to have. And if I talk about double and triple sources in our supply chain that also implies our own production as an internal source and always to have a backup when anything happens in the global world. This is a result out of our procurement and logistics strategy, which we are always updating every year -- or every second year, we're updating our logistics strategy. I made a comment to a couple of these points. First of all, obviously, we look to competitiveness. And that mainly comes with different sources, multi-sources. So we always try to be more competitive than the market out there. We have a makeup buy strategy. We do long-term contracts that's relatively new, again in our environment, the majority of the suppliers try to force us into short-duration contracts. But this changed significantly post COVID. And most recently, we are lucky and happy to work out 8 to 10 years contract for our supply chain. We digitalized everything, obviously, meaning we have an early warning system. We do know with our major suppliers about their quantity and the quality of production way ahead before the parts will be shipped to MTU so we can act accordingly. It's always a difficult endeavor because our lead times are so long. And I just said earlier, you can't just change a supplier to a different supplier that takes more or less 3 years, but we do need to have a visibility in the production process of our suppliers, are they shipping quality and quantity of what we expect. And therefore, we have digitalized our supply chain with the supply chain control tower. We will basically see what's going on in the world. Second item is the technology support that I'm really proud on my teams on this one because we do send our representatives, our technology guys into our new suppliers to make sure we have the first-time right approach, again, with a lead time. And if something is going wrong in the production process, and it takes 6 to 8 months until this process is reramped and redesigned. So we want to make things first time, right. And this is a lot of work, especially if you come up with a double and the triple source strategy. For the future programs. As Michael pointed out, we are already looking into what is necessary for a next European fighter engine, what kind of technology, but also what the ITAR-free supply chain, we need to set up in Europe and looking long term, and I come back to that on my technology slides, what kind of new production technologies and maybe even different suppliers might be necessary for GTF evolution, the second-generation GTF. And then on the supplier relations -- yes, my buzzword and my keyboard is we do what we say and we say what we do. It's not always the case in our industry. But MTU has a good reputation, and that's mostly because of our procurement organization that we are going into the suppliers. And we order what we believe is right, and we just don't order too much and then take less. So we have a good -- it's fair to say we have a very good relationship with our suppliers. We are not the biggest one out there. We're somewhere in the midfield, but we do have a very high reputation. Here, I come to ESG later on, but I wanted to give you one, maybe small example of ESG and our supply chain. We call it a circular economy, we roughly use or produce 500 tonnes of titanium and 1.5 tonnes -- 1,500 tonnes of nickel. And as you know, both of these materials are really expensive. So what we're trying to do with our supply chain is we recycle basically the chips that come out of the -- our process and we sell it back to the raw material provider. It's a small gain right now, maybe somewhere mid- to high-single-digit millions. But as we go higher, and as raw material prices might increase as well, this is not only good for our ESG and footprint in our recycling process, but also good for our balance sheet. Here, I think it's also necessary to talk about that. we have used the COVID period on both sides, OEM and MRO to think about our organization, our operational organization. And we have decided in the OEM setup to bring in a value stream management, meaning an end-to-end head of orchestra, if you want to say, we call them internally head of orchestra, so he's basically tracking what are the demands and the changes at our end customer side, and then he's pulling -- he's giving the tact of what needs to be done in our production facilities, in our supply chain, but also up to raw material or that is digitalized as well. So we have a fast reaction time if anything changes at our customer side. This organization we put in place is highly scalable. It's a matrix organization with output centers and support centers. They are only focused on delivering what the customer is leading. And again, the challenge is lead time. What happens at the customer, if there's a demand change, you need to think back and order 2 years ahead of the time, some raw materials at the supply chain. So it's really essential to have a fast and a good reaction on that one, and to have someone who has end-to-end this value stream in mind. I think that was pretty successful, and that enables us to look positive in the future for any real ramp-up, that's now coming. We talked about the rate of Airbus, at least. So we are ready to serve that ramp-up. And then we also, in the OEM footprint, we think about next strategy. This is we call it a 2040 setup. I showed the slide the last Capital Markets Day as well. It's basically unchanged, but there is some dynamic in that. So the target set up is in the future. We have our headquarter, our home base in Munich, where we have high-tech production, and we are getting ready for second-generation GTF. We are getting ready for the military programs and eventually, whatever comes out of the new technologies for flying fuel cell, we have our existing OEM factory in Rzeszów in Poland that -- where we're enhancing the portfolio. And the more we load Munich with the new technologies, the more we transfer into MTU Polska. And then, obviously, there's another sites on the horizon that could be either induced by rate increase, a ramp-up. If we talk about strategics later on, if we need to increase our output then we are targeting another site in the best cost environment. It could also be because we are focused on profitability, and we are focused on our unit cost that we start to move elements out of Poland, out of Munich, even earlier to best cost side. And how that works, you see on the right. There's a chart where you see 2021 labor cost in our Polska and Munich facilities and what is our forecast to be the labor cost in 2035. And you see the evolution in Munich. You see even higher evolution MTU Polska that goes with the higher inflation rate that we probably see or currently see in Poland. But in the long term, and you see the best cost as well on that slide. On the long term, there's a significant difference between Munich, Poland and the best cost side, and this is where we focus on. This is the benefit out of that. And obviously, you have a greenfield approach to a new facility where it can be really in terms of operational excellence, you can start from the basics and put up a complete new factory. That is our global footprint. Again, I repeat either because growth on capacity or focus on profitability, and unit costs were in both. Sustainability is a big issue now these days. So first of all, we have put ESG targets in our top management compensation, all management levels in -- at MTU have now an ESG criteria in their remuneration. And to give you some examples, what we do. This is kind of a collecting slide because I don't want to give details of everything, but we are committed to the UN Sustainable Development Goals. I mentioned the criteria in our management compensation, going to the top right corner, clear commitment towards sustainable products and sustainable production. I talked about it, if I remember right, last time. Obviously, our whole technology strategy is part of thinking ahead, thinking about sustainable products, burning less fuel, burning better fuel, this is on product sites. And our industry has been working on improvement since ever, especially on CO2 in my next slides, you see that we -- you are going to see that we are focusing more on other climate emissions as well, not only CO2, but this is still a relevant part. And what becomes more and more are important for us as for the world is a sustainable production. We have -- I think I have a slide in the following. So I don't give a lot of details right now, but let me come back in a minute to sustainable production. But ESG is more than CO2. Obviously, ESG is also diversity. We have -- my successor is now Silke Maurer. She comes on Board on the first of February. She's not here with us. Actually, it's her birthday today. But she will start on the first of February, and this kind of brings diversity already in the top management, but we think about like women in leadership position, women in our employee base to increase that share. We go to schools. We just want to foster diversity in our company. We believe -- I believe is the right thing to do. So that's part of our ESG context as well. And excellent working conditions. I believe every company tries to say that, but we have an average time of an employee in our company that -- average is 14 years. And every year, we have 40 years of, what you say, of time within MTU. Sometimes we have 50 years, 5-0 years at MTU. I think that's indicated by itself that we have excellent working conditions and open-minded corporate culture. Like I said, I repeat again, the Eco Roadmap, that's our top project name to become sustainable on all our production facilities. We started in 2020 with the Munich facility. And then we enlarge the scope to our German facilities in 2021. We have enlarged it again, to our European facilities now in 2022, and it will continue growing to our worldwide facilities. What's the plan behind it, we want to be climate neutral latest in the year 2030. We have declared Munich and the German sites already as climate neutral by buying CO2 certificates. But we want to get rid of these certificates and reduce -- transform, reduce our CO2 emissions in our internal production. And that means 60% CO2 reduction. And we have a plan, we -- for every facility and that basically starts with reducing your energy consumption, and this is especially valid in these days where we have less and expensive energy available. We buy new machinery. We think about IT structure. We think about regular enhancement in our infrastructure at the buildings, but obviously also when we create new buildings. And the latest step we are now doing is to produce our own energy at our sites. We have obviously PV cells on all our roofs. That's a tick in the box. But in Munich, we are now thinking about establishing a geothermal plant on our premises to substitute roughly 80% of our CO2 emissions in the year '25. That's going to be the start date of that geothermal plant. In our MRO facility -- Michael, you're also working on some of these elements. So it's a mixture of reducing the energy that you consume, but also creating your own energy or transform it towards better biomethane, for example, by better fuels or gas that we can use. And whatever is left at the end, you might need to compensate that with some gold standards on CO2, but we try to be better than that. That brings me to a question that many of you asked me over the lunch break, how dependent are you on gas? I believe, first of all, good news is Germany's gas storage is above 100%. That's the news out of yesterday that will certainly and most likely bring us through the winter. But we have thought way before that, and I just gave a couple of examples how we want to reduce our energy consumption and produce our own energy. Mostly in Munich, the gas is used for heating, and we have an energy factory on site that we can use either with gas or with oil in terms the gas runs out. Obviously not that good for CO2 emissions, but we are, let's say, independent, and we can still produce even if gas is running out. Similar in our German facilities in Hannover and in Berlin. Berlin might be a little bit specific because we use gas here as well for testing our industrial gas turbines, IGTs. Here, we have come up with a backup plan in case gas gets short, but I don't see that right now. It might be an issue in the winter '23, '24, depending on how the situation on the world market solves. But with that '22 to '23, we don't see an issue, hopefully, and most likely. And then another good point that comes back to Peter then, we have tried to, let's say, hedged in a positive way our energy cost for the year to come for gas. And for electricity, we have very good contracts that we finalized before the Russian invasion. So we are roughly 100% backed on gas, maybe 50% backed on electricity for our German facilities in '23. And the rest, we will see when it comes to a decision point when we need to buy the next -- or finalize next contract on our natural resources. But that's a new task force we have set in place. I don't recall that I ever thought about establishing a task force for energy prices and when to buy, when to hedge, when to go into a contract discussion, but this is the way we deal in operations. When we have an issue, we created a task force, and now we have a clear task force for energy costs. Let's see. Okay. Now we come to the second part of the presentation. It's innovative engine concepts. As a nature of the game, there is not much to tell every year and so on. So we have a technology cycle that looks forward 10, 15, sometimes even 20 years. So obviously, we are progressing, and I'm happy to give you some notes on how did we progress in the future. But the concept of our engine program are staying the same. I've come up with a new slide because that got a lot of momentum in the previous year, what is going to be the energy source for emission-free aviation. And we believe that near term, obviously, SAF is the bridging technology to propel all the engines out there because it's a drop in fuel. That means you can mix it with regular JET A-1 kerosene. SAF is a combination out of hydrogen merged with CO2 out of the atmosphere. It's really -- we call it a good fuel. The question now is on industrialization. It's a chemical project process that is valued right now. It's industrializable. But we don't see big amounts of SAF coming out of the factories, and that's valid for Europe, specifically. Now U.S. is catching up a little bit. So we do need some kind of investment to get green hydrogen and afterwards transferred into -- or converted into SAF. SAF was utilized predominantly by aviation. Now we're getting some other discussions in the world that all the other sources of mobility want to use SAF as well as a bridging technology. So I forecast there's a lot of fights in the future on this miracle fuel that we are going to develop. But I see some good movements now in Germany, has decided for a pilot factory -- several pilot factory, actually in Scandinavia, there are pilot factories coming up. So it's kind of a hen and an egg problem. When do we start to have quotes in the European aviation industry 10%, 15%, 20% of SAF by 2030. Then we start -- the industry will start to produce that. Otherwise, it's difficult to convince an investor to invest into an SAF factory. So there's a lot of political momentum and initiative that we need to have until we see really a 50% blend on this SAF. Long term, we need to distinguish the difference on plane sizes, if you want. I believe, on the long-range widebody aircraft, SAF is going to be future for the next 30 years. That's why you clearly need a very efficient gas turbine to either burn SAF on the widebody, but we might come to a single ad as well that's burning hydrogen directly. But anyway, you need an ultraefficient proprietor system because both fuels either hydrogen purely or SAF will be very expensive. So there is -- this is the tailwind for our industry for MTU to work further on the evolutionary, but also revolutionary setup of our gas turbines. If you come to smaller aircraft, commuter, maybe below 100 seats, I do see that there's a future for either direct go on hydrogen for a fuel cell, so making electricity out of the chemical process on a fuel cell. I will come to that a little bit later, but you see a picture here, the third picture on the -- from the left is a fuel cell where we start to investigate what are the possibilities and what needs to be done to bring a fuel cell as a proprietary system on the 20-seater aircraft that you see on the right picture. After that, you know that we have bought together, with the German Research Institute, DO-228, a 20-seater that we want to equip one site with a flying fuel cell by the middle of this decade as a technology project, and then we'll see how to scale it up. This brings me to our three concepts. And these are -- they are alike as you have seen them last year. So we work on the evolution of the Geared Turbofan, eventually coming to a second-generation Geared Turbofan by conventional evolutionary measures, but then the focus also is on revolutionary technologies. I introduced the wet concept, water-enhanced turbofan concept also last year or the year before, where we try to improve. This is revolutionary. This is on the technology scale level right now. We try to improve the efficiency and the thermodynamic cycle by reusage of water and heat out of the exhaust stream and then bringing it back the steam into the combustion chamber. We believe it's not rocket science. We believe it's currently done on the IGT, so on ground. So there's the technical know-how is available. The problem, the challenge is to bring it into [the air] and make it light and durable, but there are a couple of advantages that come with this revolutionary technology. It's not only another 15% to 20%-ish CO2 reduction on top of what we see today, but because of a very homogeneous combustion, we reduced 80% of NOx. And because you use water at the end, we use water out of the exhaust stream, you also reduced the contracts in the air. And these are the three climate emissions, if you say, that foster global warming, that's CO2, that's NOx, but also contracts. And here, we believe we have a solution, at least a technology plan to come up with a technology that reduces significantly CO2, even more significantly NOx and contracts. We are not yet for sure, but we leave in the vicinity of 50%, 5-0, on contrary. We just recently won a European funding program on an aviation together with Pratt & Whitney and Airbus to come up with a technology radiance Level 4 in 2027 for this WET concept, and afterwards, we'll see how we can develop this technology into the next decade into a sellable customer product. Really proud of my teams that they have progressed that well on this technology. And the last item on the right, I talked a lot about it a little bit already, is the flying fuel cell. Fuel cells are out there in automotive, in trucks and maybe even trains, but the challenge, obviously, is to bring that in the air to make it certifiable and secure. We are starting with small very, let's say, technology racks where we investigate on the fuel cell performance really on a small scale. The project I mentioned it is the 20-seater, and we want to be ready and equipped to bring that in the air by the mid of this decade, and by then, we will see. Obviously, that all depends on if hydrogen available -- as green hydrogen available, but at least we want to be at the forefront of the technology to say this is possible or this is not possible. These are the three unchanged projects, and I don't believe that this will change significantly in the years to come. So every year, I try to give you an update of these three technologies. And I believe this is already it. I expect another slide, but this is it. So in a nutshell, from an operational model and supply chain basis, we believe both in MRO, but also an OEM, we are well prepared to master the challenges that comes with the ramp-up and the international supply chain. And on the technology side, we are investing our R&D budget into these three solutions to make GTF a conventional gas turbine evolutionary beta, but also revolutionary beta. And we investigate on the flying fuel cell for aircraft in the range of 20 to 100 seats and more to come. Thank you very much.

So I think that's time for Q&A, if -- yes. I see it a question.

Chloe Lemarie from Jefferies. I have two, if I may. The first one would be on the future best cost OEM facility. What kind of OE volumes would trigger that investment for you? Is it the current production rates that have been announced by the airframers? Or would you need to go above that level to trigger that investment for you? The second is on the second-generation GTF. What could be the timeframe for entry into service? And what would be the level of investment compared to the other two technology breakthrough routes that you're exploring?

So the first answer is, the trigger for the investment would most likely be a growing volume, not what we base today. But we have -- in Munich, we have a site that is close to 50 to 60 years old. So we need to do some investments as well in Munich, and there's a point in time where Peter and myself and the Board of Management will decide, is it worthwhile to invest further on in Munich or do we start investment because we prevent investments in our headquarters. So there's a couple of trigger points that we see. Definitely, if volume goes up, with the next platform next decade, but most likely earlier because of the reasons I gave you and unit cost improvement as well. Second generation GTF. You need to be ready when the market is ready. So -- and when the market is ready, we just heard from one big airframer in the U.S. that there's no major projects in this decade. I don't believe there will be another platform that early. So my answer would be, be ready when the customer asked for an evolutionary propulsion system. And level of investment we usually don't share. It's a mixed share between and our IE consortia between MTU and the Japanese, but we do invest that much. So we have a good proposal on the table.

A couple of questions. First of all, on lead times and production. Given that it's about a 2-year lead time between entering your supply chain and delivering an aircraft. Presumably, you're already at rate 65 for Airbus. Second question -- let's do that one first.

Well, we talked about over lunch. I'm surprised you asked the same question again, but...

[indiscernible] words.

These 2 years is the maximum. Not every part, obviously, in our supply chain has a 2-year lead time. And we are preparing for a rate that we discuss with Pratt & Whitney together, and when Pratt tells us to be ready, we are ready. So I don't give you a detailed rate analysis right now, but we are targeting a rate increase.

Okay. The next question is on the fuel cells. Why are you the best company to explore fuel cell technology in aircraft when you consider quite how much bigger the market is in other areas for fuel cells on one side? Or is it the certification difficulties that make you believe that you're the right people to do it?

First of all, we are -- if you compare what we invest in R&D for our conventional gas turbine and our fuel cell, the majority -- I believe even 75% or 80% of our R&D budget goes into the conventional gas turbine to make it evolutionary and revolutionary better. So it's not like we risk the company on the development of a fuel cell. We believe we are the first mover or one of the first movers. We have started a while ago to think about a fuel cell. And I don't see many other companies really further in the development process than we are. And obviously, to bring -- that's the point of your last question, to bring a fuel cell from the street into an aircraft, it's not that we can look -- we cannot just like an automotive supplier cannot just take his stack and bring it in the aircraft. It's a certification, and it's a safety issue. You need to be licensed for that. So that takes several years to convince FAA, EASA and the authorities that the flying fuel cell is safe. And we believe our company can bring that benefit because we are working on safety regulations on gas turbines since ever.

Final question, if I may, on that. The market for a 20-seater is tiny. The market for a 50-seater probably isn't very big or rather historically, the market hasn't been very big. How big do you think the aircraft would need to be for a fuel cell for it to be a big enough market? And how big can you make an aircraft be with a fuel cell?

Yes, that's a good -- fair question, and we discuss that every time in our management Board. I -- that's a bet on the future. I believe there will be some structural changes in the size of the aircraft because of CO2 and emission constraints. So if you see it today -- just for a 20-seater market, as we see today, there would be, I guess, no business case come up with the fuel cell. But I would say, everything under 100-seater that is possible with a fuel cell in the middle of next decade and then you can even scale it up, not in the widebody, but as a vision, you can see that on a single type of aircraft, different design, but somewhere in 2040 -- mid or end of 2040. So that technology is scalable, and because of the emission constraints that most likely EU and the U.S. will put on the market, I see there's a market opening for smaller commuter aircraft, 100-seater or less, bigger than today.

Just following up on Chloe's question on the next-generation GTF. What sort of timeframe we're looking at this potentially entering service? What sort of fuel or emission savings are you targeting? Could this be easily retrofitted or up engine onto the Airbus narrowbody fleet?

Well, the timeframe, I answered already. The timeframe is predicted by the airframe OEMs platform. So give or take, middle of next decade, beginning of next decade, that's the rumors in the market. Will that be retrofitable? I don't think so. If it's second generation, some parts might be retrofittable, but this isn't the new engine, per se. So benefits of retrofit is limited from my point of view today.

Maybe I'll ask this in a different way then. If you develop the engine and it was ready to go, do you think you could convince Airbus as a business case to put a generation GTF -- to second-generation GTF on the A321, for example?

This is normally not the way it works. The way it works is, the big airframers or the customer out there, the airlines are asking for a new platform for new efficiencies, then Airbus or Boeing, they give a go ahead, and then we start with the real development of the engine. What we do right now is technology work for enabling a second generation in the years -- in the decade to come. It's the other way around, as you said.

Yes. On the WET concept, two questions, please. How does it compare to the ultra -- not to your ultra fan, to the open fan from one of your competitors in terms of well characteristics? And the other question is, if that goes through, can it coexist with an open fan, if you have dual sourcing? I mean if Airbus and Boeing have dual sourcing on engines.

That's a fair question. So from a technology basis, an open rotor has an ultra-efficient gas turbine as well the main propulsion theme. So -- but we have a fan and open rotor has a very big rotor, talk about 3 meters of diameter. So it's a different engine setup and that calls for a different location in the aircraft more or less. Is it possible to have the same aircraft on both engines? Right now, from my personal opinion, I would say, not easy. We never say never, but because of the diameter, it would be difficult to put it under the wing. But as I believe, and we believe that there will be a dual engine request from the customer baseline out there. We need to find a solution to have two possible technologies like an open rotor and the Geared Turbofan on the same platform. That's all I can say right now. We'll see where that develops. And we are targeting with a WET engine. Like I said, we're targeting all three emissions. I don't see that yet with a competitor, but this is technology at its early stage.

Coming back to supply chain and production, please. I have a couple of questions. The first one, can you give a few elements of comparisons of your best cost size compared to your traditional locations in terms of production lead times and production cost? How does it compare today? And the second question, can you give us also a few metrics of on-time delivery in your production? You talked about supply chain derisking and organization? What is the on-time delivery today of parts to your assembly lines? What is the on-time delivery of your own complete engines? And what is the on-time delivery on parts in the MRO network as well? And what are your plans to improve the situation?

Right. Many questions at the same time. So let's -- when we look at the OEM facilities, and Michael, maybe you want to comment on MRO, but OEM, we only have one best cost side, and this is MTU-Polska right now. MTU-Polska has been loaded with labor-intensive activities. So it's not easy to compare MTU-Polska scope with the current MTU-Munich scope, but what I can give you is the hourly rate. I mean the wages in Poland is roughly 1/3 to 1/4 to what we see in Munich, and that's why we decided to do so. But more and more, obviously, new technology also becomes -- gets into the facility. So we think about more automization as well in Poland, if it makes sense from the business case. And then if we think about a third one that might be rotating idea to move elements from Poland into further low cost and from Munich then into Poland or directly into the third best cost facility. The second question on the delivery performance so far. It's difficult to answer because I have -- or we have two elements that are not delivering on time. Everything else is 100%. So the parts, blades, cases, everything is 100% delivered on time to our internal assembly sites, and that is the same for our GTF engine. Michael is -- we deliver as promised to our customer.

We have to see where the demand comes from. I mean if you have got a very short-term demand, then we want to use the spare parts of the PW2000 as one example, where all of a sudden, the step-up demand popped up. It would be unfair basically to penalize production for a bad on-time delivery rate. We are level loading this kind of demand. And as Lars said today, I think we are all very happy with what the last organization is delivering, and this is valid for new engines. This is valued for the spare parts, and there's no point where MTU today holds a work stop or creates a work stop neither in the MO segment or in the new engine segment.

There was a customer feedback. So thank you very much [indiscernible] a customer.

Lars, just a quick one from Harry Breach at Stifel. Just thinking about GTF, I think you've spoken or certainly, Reiner has spoken about work to extend time on wing, improving parts durability. Is there any sense or any sort of numbers you can give us that help us to understand a bit better the improvements you're making in terms of time on wing, part durability, I guess, especially for the LLP stack? Anything you can share.

I think Michael is better positioned. We usually don't share this kind of information because it's a business case sensitive. Michael, I see what you answer.

Nothing. Nothing. But you know that in the early days, we had this teething issues, bearing three or so, where almost every 12 months we had to remove the engine. This was like 5 years ago. We are now more and more moving to a status with a more normalized engine removal rate, which is more in line of the expectations of such a young engine. So it's going in the right direction. The GTF advantage configuration will further continue to stabilize the situation because we will have more and an extended life of the long lead time items, and therefore, we are not forced to take the engine off every 4, 5 or 6 years. So the journey is continuing. And also during lunch, we discussed this in various aspects. It's not so much complicated in the problem. If you remember the early days of the V2500 program, if you remember the introduction of the GEnx, I mean you need on all these programs every I would say, 5 years kind of technology insertion program and advantage program to make the engine better, to make it more durable, to fix the teething issues. This is a normal part of our DNA, and it's figured into the business case and our numbers. So it's not something which really surprises us. It's a normal work for us.

Where do you think your work share could get to on the next generation of GTF? If you compare that today with the 18% share you have on the current generation GTF and what incentives to Pratt & Whitney have to see share on the program.

Well, yes. I mean Michael is at the forefront of this discussion, but I think we've said publicly that we strive for a 25% work share on the next GTF program. We are in good discussions with Pratt & Whitney, and Michael, you want to elaborate on the win-win position. What's in it for Pratt?

The statement from Pratt & Whitney was always we want to have a solid, reliable, quality-wise very solid partnership. So if you have less partners on Board, I think you can achieve this. And the V2500 has proved now. So the GTF has proven that Pratt & Whitney, our Japanese partners and we are a good team. We can make such changes together. So the less partners, the less interfaces you have in such a development program or also in the supply chain, the better is for the product for the customer and for the OEM. And I think this is where we all are striking to have simple setups. And if we are happy -- if it happens that MTU takes more share like we did from the 11% of the V2500, now increasing this to 16%, increasing it to further now to 18% on the GTF programs. It's a logical development that we take more share, take interfaces out of the engines, take interfaces out of the supply chain and therefore, still a win-win situation for Pratt, for us how to manage this program, and we are committed to do it.

Good. Anymore?

I see Peter here waiting for his turn. We do have another Q&A afterwards, right?

Yes. I think whoever is left, we can go afterwards. So thank you, Lars. Peter, your turn.

So also a warm welcome from my side. Recently, we received a lot of questions on how the current inflation environment would impact them to you. So I will elaborate a little bit on that topic at the beginning of my presentation. So on that chart, you see the typical sourcing strategy we do have in raw materials, finished or semifinished parts or commodities, we typically source a certain part from several suppliers. Main reason for that strategy are, on the one hand side, to reduce dependency on one single source should there be quality or capacity issues. But we also want to maintain some pricing power when we keep a certain level of competition, obviously, in the supply chain. In cases where there are only, let's say, only one or two sources in the world for, let's say, high-quality parts, we typically use long-term contracts. I mean, Lars told you about that before, to secure supply and also pricing mid to long term. All of these supplier contracts have different timings, duration, individual price escalation formulas, but typically, major pricing adjustments are done when a specific contract is renewed. So as a result of that strategy, our purchasing costs are not directly linked to spot market prices. Cost pressures rather do materialize over time, flattened out by these overlapping supplier agreements with very individual escalation terms. So longer-term pricing trends rather materialize with a certain time lag in our procurement cost. It might also be the case that price spikes never hit us. For example, nickel prices, you might remember, in March after the Russian invasion into the Ukraine, spiked dramatically to more than USD 50,000 per metric ton. And now they are back to a more normalized level, USD 20,000, USD 25,000 per metric ton, but we didn't have to renew the contracts at that point of time so that price spike won't hit us. So what happens on the pricing side? In general, OE contracts have a very long duration and for that reason, obviously, include -- and have always included price adjustment mechanisms. And these are typically structured as shown here on the chart. We agree on a certain base price, which is then adjusted according to the price development of the relevant cost factor input factor into the engine. In our example here, manufacturing cost of the engine consists of 75% material, 15% labor cost and 10% other costs, let's say, for example, energy. And they agreed upon base prices then adjusted based on the weighted average development of their respective infrastructures. So in long-term MRO contracts, you typically pass on spare parts prices, list prices to the customer. And for the labor portion, there are similar price adjustment mechanisms in place. So generally speaking, broadly speaking, cost increases and our possibility to adjust pricing and to pass on prices to the customer via our contractual clauses are broadly matching. There might be some timing gaps or for some customers, for individual situation, we have special agreements like escalation caps and so on, but the overall impact to our profitability, to our earnings is quite limited. And these small impacts, we try, obviously, it's always our ambition to compensate that via cost improvements or efficiency measures. So coming to recent FX trends and the resulting implications for MTU. I mean, as you know, you all monitor our financial markets. The U.S. dollar has strongly appreciated in 2022, following the different economic situation in the Eurozone versus the U.S. But also, obviously, I mean the bigger headroom that U.S. Fed has regarding hiking interest rates, fighting inflation compared to the levels the [ ESG ] has. For MTU, broadly speaking, a strong U.S. dollar is naturally a very supportive situation. As you know, all commercial revenues, commercial OE, commercial spare parts, commercial MRO is booked and built in U.S. dollars. We obviously have also a lot of U.S. dollar-denominated costs, but net, we sit on a U.S. dollar exposure of 1.4 billion roughly in 2022, which is growing as the business grows -- as the commercial business grows. Near term, the fix-induced earnings impact is low as we are hedged strongly near term according to our internal hedging model, which I now briefly want to describe to you. I mean we have recently amended that model a little bit to take advantage of the current very positive environment. So it allows for higher hedge covers near term in year 1 or 2. And also, we can now hedge out to longer maturities until the year '27 in theory. So in our model, we have defined going forward a minimum and a maximum hedge cover for each quarter. Near term, we are more or less fully hedged. You see a maximum/minimum are close together at a very high rate, 100%, 90% and so on. And that goes down in the outer years to a maximum hedge cover of 30% in a minimum coverage of 0%. So we hold a quarterly FX committee internally, and there we discussed the technical implementation of that model, and we proceed with a so-called speed grid. So here we define which hedges we do in each quarter, depending on the development of the respective forward rates. So if the forward rate develops in a positive way, we do more, we go more to the maximum hedge cover. If it moves in the wrong direction, we go more to the minimum. So that is a very tactical thing. And looking at our hedge book today, I mean we are fully covered, in 2022, 100% hedge cover with a hedge rate of 1. 15. Next year, roughly 75% covered at more or less the same rate 1.16. 2024, 60% coverage, 1.14, and that goes down to -- in 2026, we did recently -- the first hedges go down to 5% hedged volume to a rate of 1.04. And here further, we modeled what positive earnings momentum we would have if the U.S. dollar stays where it is today around, I would say, around parity. I mean we assume an exposure of EUR 1.4 billion in 2022. We model a 5% growth of the exposure going forward, and that is really -- it's not -- you don't have to derive -- anything is not derived from our internal planning or so, it's not an implication for our growth going forward, but it's really just a modeling number, the 5%, yes. We model the exposure growth of 5%. Calculate the hedged volume at the hedged rate, obviously, and the open unhedged position with parity and then results in resizing effective rate. That's the line here, resulting effective rate. So this 1.50 in 2022, and it goes down to parity in 2026. So in the last slide, you see the potential positive EBIT impact sequentially. So in 2023, which could generate something like EUR 40 million tailwind on earnings out of FX, EUR 100 million in 2024 sequentially. And then 2025 and 2026, then with EUR 200 million or even more should we stay in that FX environment. So now coming to our outlook 2023, and I want to start with the underlying business drivers, I would say. On left-hand side, military -- I mean you heard a lot from Michael before, in military, for 2023, we expect a continued and stable delivery rates for each EJ200 engines for export customers. Major volume and growth next year will come from support, service, MRO for the in-service fighter fleets. So each EJ200 fleet and tornado fleet. FCAS, we are prepared to start. Michael talked about that before, but FCAS volumes or revenues are not yet part of our guidance due to timing uncertainty. I think we will have more transparency, more visibility at the beginning of next year together with the release of our full year '22 numbers. In February '23, we will update you on that one then. Regarding commercial OE, I mean, GTF product is clear, will grow strongly next year, driven by higher production rates on the A320neo family. Obviously, also on the A220, and not to forget, the E2 jets from Embraer, which also ramp up next year. In addition, we also expect good growth in business jet production, especially our PW800 platform for the different custom applications and also Dassault application. Widebody, we expect -- in 2017, we had a really gradual recovery in GEnx delivery. So 2023 will be a slow recovery. More of that will happen after 2023. Commercial spares, major driver will be obviously the growth of narrowbody spares, V2500 and PW1100. In widebodies, we expect further growth on GEnx spares. Spares demand driven by the higher utilization of the Boeing 787 fleet with the GEnx, driven by the recovery in international traffic. And next year, we also expect a recovery in older widebody platforms, such as the PW4000 for the old 777, and also the GP7000 for the A380 platform. And here, the driver is really the partly reactivation of the respective widebody fleets, especially in the case of the GP7000 of the Emirates fleet. In MRO, we expect further growth from our narrowbody portfolio while the GTF share should stay more or less on the level of 2022. From our freighter customers on the G90, CF6 and PW2000 platform, we see a high and stable demand in 2023. Also, by the way, I forgot that in spare parts business, also the spare parts spares -- the freighter spares should stay more or less stable. So PW2000 Freighter share, CF680 Freighter share should be on the same level as it was in 2022. No major growth, but it was already a quite high level in 2022. So to summarize that in a nutshell, we expect military to grow mid-single digit next year. As I said before, there might be an update together with the release of our full year '22 numbers. Should FCAS really start in H1 2022, maybe we can move then this growth at up to, let's say, high single-digit growth. Commercial OE, our take is growth rate up 30% next year organically. And both of our aftermarket platform, commercial spares and commercial MRO in the, let's say, 20% range. So commercial spares, high teens to low 20s. Commercial MRO, high teens. So let's say, as a ballpark, 20%. And GTF share should in the MOB where it is in 2022, so between 35% to 40%. So together with in, let's say, expected FX rate of 105 in 2023. So the target range for sales is EUR 6.4 billion to EUR 6.6 billion, so roughly EUR 1 billion more compared to 2022. And we expect EBIT adjusted to grow in the 20% range next year versus 2022. So looking a little bit beyond 2023 out to 2025. So rolling forward, basically our midterm outlook by 1 year compared to last Capital Markets Day. We see the same underlying business drivers as we gave you on last year's Capital Markets Day. So in military business, especially services for the service fighter fleet of Eurofighter and Tornado will drive the business possibly, as said, funded technology work for the FCAS platform, which is then growing obviously after 2023 to a higher number, high double-digit million-euro revenue number. In commercial OE, significantly higher rates in 2025 will drive the business. Will it be -- I mean Airbus, Airbus pushes for rate 75. Will it be 75? Finally, let's see. But what is quite sure is that we're going to see significantly higher rates in 2025 versus today. Also A220, significantly higher rates so far. In last presentation, target rate, aircraft production 10 on the A220 in 2025. Also, our business jets will grow significantly. PW800 output number today in the 100-module ballpark in 2025, roughly double the size. And on the widebody side, GEnx, we're also going to see significantly higher output rates compared to today, following higher build rates at Boeing. And finally, after two postponements, the GEnx is poised to enter the market in 2024, supporting entry into service of the 777X in 2025. In commercial spares, we're going to see a strong and stable demand from the freighter market, while growth will definitely be driven by narrowbody engines. So B25 still, PW1100, but see also the first spare parts also in the regional jet fleet for A220 and E2 jets. On the widebody side, we're going to see a good level of GP7000 spares in the middle of the decade, and growing spares of the GenX. And here, I mean we have a higher utilization of the fleet. We have aging of the fleet that drives a higher number of spare parts, more content per shop visit and that finally drives a higher spare part sales on our side. In MRO, our excellent market position in narrowbody engines and our big footprint in freighter market engines will drive the business compared to growing work on GTF engines. So together with the current favorable FX environment, I talked about that one minute ago that should provide an additional tailwind to sales and earnings. And so we come up with a rough guidance for the next 3 years. I just spoke about 2023 guidance. I mean 2024 earnings should be significantly above 2019 level. 2019 level was 760. You might remember that. So -- and going out to 2025, our ambition, our target is to generate EUR 8 billion of revenues, and for the first time having an EBIT adjusted of more than EUR 1 billion. So finally, looking on our debt structure and capital allocation. I mean nothing has fundamentally changed in 2022. I mean we were able to renew our RCF line for another 5 years with the option to prolong it for a further for 1 year with an increased banking consortium of 9 banks. We downsized the RCF a little bit from EUR 600 million to EUR 500 million as we now run the company with, let's say, a higher liquidity pattern. Now our aim is to have something like 2 months of revenues as a liquidity buffer, which is now roughly EUR 800 million. Still our firm target to stay investment-grade rated with two agencies as that provides quick and easy access to debt capital markets. I mean you saw that in corona -- in the corona crisis, we were quite quickly able to tap the debt capital markets with the EUR 500 million bonds without being investment grade that would have been possible. So what happens in the next years, 2023, we see the remaining portion of the old convertible bond that most probably will see full conversion. Conversion prices here is 124. So no action needed on that one. So the new convertible bond that matures in 2027, the EUR 500 million. Conversion price, 378. So there's still some way to go regarding share price and also regarding time. So there's also no action needed. So the first real refinancing needs pop up in 2025. So that is the EUR 500 million bond, which we did in the peak of the corona crisis mid-2020, but there's also no action needed this year or next year. So we will most probably see how to fully refinance that -- so in H2 2024. So regarding capital allocation, that is also a stable picture. We still target 0.5 to 1.5 net debt to EBITDA. I mean, in theory, we would love to invest into organic growth, into new engine programs, but we heard before, there is nothing new on the horizon, nothing big scale the Calhoun from Boeing, so I said nothing -- no new program currently on the horizon investigate. Airbus obviously has also no need to push for a new program. So what we currently do is we invest into our low-cost footprint in the MRO to extend here our local footprint. We invest into new production technologies in our Munich facility, like the ECM technology, which is reducing manufacturing costs, reducing warranty costs. And not to forget, I mean, we also invest into our geochemical plant here in Munich to reduce dependency on fossil energy on the one hand side and to reduce also our carbon footprint in production. Regarding dividends, also stable. We're going to increase the payout ratio towards our target payout ratio of 40%. And then in the second step, when we are at the lower end of our target range, we will also consider the share buybacks, that certainly has then to fit into the framework of our investment-grade rating. Regarding M&A in our core business, I mean you know all that we have -- we see limited opportunities here to really do a bigger transaction in the engine business. So we said that marks the end of my presentation, and now I'm happy to answer questions you might have.

Okay. Catching up. Just the first question from there.

Peter, obvious question really. What are your thoughts on free cash flow, free cash flow conversion looking into 2023 and beyond out to 2025?

Yes, the answer is clear. I mean it's still our target to do a high double-digit cash conversion. But near to midterm. It's not alone in our hands, I would say, supply chains are not very stable currently. We have quite long turnaround times in the MRO. We have volatile delivery schedules in the OEM sections. We have program postponements and so on and all this situation causes, I would say, a higher level of working capital compared to the usual situation. And probably it won't be over in the mid of 2023. When you read the comments of rate here and so on, they expect the difficult situation in worldwide supply chain to last until end of 2023. So that's the reason why, yes, we have the ambition to generate high double digit, but you have to see what we can do on the supply chain side here.

And then following up on the -- again, on the 2023 guidance. What sort of mix headwind are you expecting in the OEM division? Because if new aircraft OEM is growing faster than aftermarket, that's going to be negative to margin?

Sure. We're going to have a little bit of a tailwind from FX. Obviously, I pointed that out. We have a headwind from -- we have a headwind from OE. I mean that will grow like 30% compared to the spare parts business. And we -- some are another -- I wouldn't call it a headwind, but we're going to invest a little bit more on the technology side to prepare for the different things Lars just pointed out to prepare for Gen2 to prepare for all the technologies, which are on our technology table.

A couple. The first one is pretty simple. I just wanted to clarify something on the 2025 EBIT ambition because the slides were saying about EUR 1 billion. And you said actually more than EUR 1 billion. So you sounded very optimistic, but you see it as already relatively cautious. The second is about the 2023 spare parts growth for high teens, low 20s. Can you explain a bit how you come up with it? What are the underlying assumption for air traffic? Do you think that there will still be green tire management? What is the pricing component to it? Do you think it's constrained by capacity or delivering at its full potential, even qualitative comments would be quite helpful? And last one, I wondered whether you could tell us what is the type of wage increase that you have in your plan. I think you had about 6% initially for '23. Was there you're still on a with this or more?

Our major footprint is obviously Germany. We are currently in negotiations with the trade unions. They demand, let's say, I think that they want to have 8% wage increase. The final outcome will be a bit lower, I would say. So I wouldn't expect -- I would expect something like maybe a middle single-digit wage increase in Germany. That is my personal view on that one. Yes. I mean that is the EUR 1 billion target is a little bit worrying. We want to be above the EUR 1 billion. It won't be EUR 1.5 billion. Regarding spare parts, yes, one component of the spare parts growth is definitely pricing I think the list price increases are out. They are in the range average, let's say, like 10%. And I think we want to retain most of it growth, I mean. Stefan, as I said, I mean, we're going to have a little bit more PW2000 growth. We're going to have a pickup in -- in wide-body spares, GP7000, we're going to have GEnx spares growth. We're going to have growth on the V2500 and the PW1100 platform. So there's also volume growth. It's not only pricing, yes.

David?

Yes. Two questions on the guidance, one on '23 then one on '25. Just on '23, probably the bit that has most surprised me is the OE up 30% given your biggest product is A320 and Airbus is not guiding to anything even remotely close to that. So could you just unpick that for us a bit, help us to understand it. And then on 2025, you've got EUR 8 billion of sales. That's 14% above consensus and you've got EUR 1 billion of EBIT, which is 5% above consensus, which tells us that the sell side is rubbish. Just what is it we've all got wrong on the sales? Is it that we're not capturing inflation? Or is it we've got the OE bit wrong? So yes, if you could just help us understand where you think we might have got it wrong on the sales bit.

I have not studied every model the sell side has honestly. I cannot really give you an answer to that one, yes.

Well, for example, I mean is it that they say inflation that just passes through your books. So you have higher costs but higher revenues. Therefore, we're rolling about the right place for EBIT, maybe, but we will just get the revenue number wrong or it could be an FX thing that we've all got right. I mean, do you think there's anything that perhaps we might not be understanding correctly when we look out to 2025.

I don't think so. I wouldn't think there is rubbish in the room. But certainly, there are effects in there were -- possibly one factor is that the pass-on element might be a little bit screwed up in the models, but that's certainly something we could discuss off-site to really go into the detailed models. I think that would make more sense.

And then just on this 2023 OE up 30%?

Yes, I mean our -- I mean we deliver engines before -- significantly before Airbus delivers the aircraft to the customer. So our 2023 delivery has also, let's say, the 2024 rate of Airbus in the -- in mind, so to say, yes. It's not that you can say all engines, which are on an aircraft, which are in 2023 deliver to Airbus customers are our delivery. So we deliver, let's say, I don't know what our lead time is 6 to 9 months before Airbus delivers the aircraft to the airlines.

Question on currency. As part of your '23 and '25 guide. Could you just verify, so are you using parity dollars to get to the '23 in revenue as fast EUR 8 billion for '25. And for the hedging for the '25, the EUR 1 billion, are you using the hedge you have today? Or are you assuming the on hedge position being sold at the...

I mean we have in 2025, we have already hedged roughly 30% of our exposure and the open exposure, we calculate it, it's between 1 and [ 105 ]. So around parity. It's not the forward rate.

Okay. And then for the revenue, it's based on parity?

Yes, exactly.

Okay. And then for next year's margins, last year, you talked about MRO being close to 5% to 6% as long as the GTF remains about 40% of the share you talked about next year being around 35% to 40%. So does that provide some uplift to the 5% to 6%.

No, I mean, if you look on the numbers this year, the MRO delivers a margin of 7.5%. So this year is in several ways, an extraordinary year for MRO, especially due to the fact that we have very strong appreciation of the U.S. dollar this year. We have quite long turnaround times this year. So you sell today maybe a shop visit to a customer and you have purchased the parts, maybe even at the end of 2021 at a U.S. dollar of [ 1 20 ] or whatsoever. So you purchase a part at one hand, you build it to the customer where we at parity, you have an implied margin of, let's say, 20% on the spare part here. And that is a onetime effect, which we see in 2022, but when the U.S. dollar is in a stable situation, you have that impact. You don't have that impact anymore. So -- and if it goes in the other direction, then you even might have a negative effect. So one can expect that the margin in the MRO next year won't be at 7.5% on this year's level, so a little bit below that. And from there, it creeps up again.

Is 5% to 6% that was your target for...

Yes, more than 6%, short term.

Yes, I have a few questions. Just coming back on David's question on the OE. When you say you're significantly ahead of Airbus delivery rates by how many months would you be ahead? And the second one was on the CapEx trajectory. Could you just tell us where it will go from 2022 onwards?

CapEx?

CapEx, yes.

Okay. The delivery, I just said 6 to 9 months ahead of Airbus. So in that ballpark. Regarding CapEx, yes, next year, it will be a little bit above this year, I have to say. So have different we have -- we have built this new manufacturing plant in Munich. We have to fill that now with basins and so on. what helps is that we have more or less done the whole investment for MTU Serbia in 2022. So we don't have that in 2021. But in our Berlin facility, for example, we invest into the MRO capability for the CFM56-7 and also the PW800, so you need tooling, test cell equipment and so on, so to provide the basis for future growth there. We have that geothermal plant in Munich. But it's not -- I mean, it's not exploding, but it's going to be a little bit higher compared to 2022. Slightly above, slightly above. That's -- it's going to be a little bit upwards and then it's going to be stable. So 2022 upwards and then more or less stable.

Victor from Goldman Sachs. I have a question on cost inflation. You have an interesting slide. I think it's Slide 57. And I was curious, first, like if your 2023 EBIT guidance includes the potential impact of cost inflation or the escalation caps that you mentioned on the slide. And particularly interested in whether you could give more color on the proportion of contracts which have caps versus those which don't have caps. And potentially also like some color if possible on the timing difference. What has it been historically? Was it like on average, 1 year or 6 months, 2 years? That would be helpful to think.

There is no general answer to your question because, I mean, you saw that contract, they are moving. I mean, we don't have a static situation there. You have the overlap of these different supplier contracts, they change, obviously. So I would say, typically, you have something like 6 to 12 months gap between cost increase and your ability to pass that on to the customer how big the effect is. And we don't analyze that really in detail. Also, we don't -- I mean, we don't say 12.3% of our customers have escalation caps. There are some cases where we do have that, but it's not the majority, I would say, of customers we have which have these escalation cap clauses in their contracts. Otherwise, we would suffer more.

Zafar Khan from SocGen. Could I please ask you to Slide 60 on the screen. So we can just look at that together because my arithmetic is really letting me down badly. Slide 60 is what I'm looking at. 6-0, this is the modeling you've done on the currency assumptions. Yes. First of all, the potential EBIT impact that you're showing at the bottom there in the blue. Is that a year-on-year change?

No, it's cumulatively. So we have from 2022 to 2023, you have 40. From 2022 to '24, you have 100. So if you if the base year is 2023, you have an additional 60.

Yes. Okay. Then my arithmetic works. That was a clarification I need.

More questions? Doesn't look like for the moment. So thank you, Peter.

Thanks.

And Lars, may I ask you for the last episode.

We have to do a lot of work as a CEO. No, it was planned that I give the executive summary. Peter? This is yours. Not that I convert back to hedging and stuff. No, I think you have seen, I guess, 360 degrees view of like every year of what MTU has on the plate. Very good insight on operations, on programs, finance and also on the current market environment to put that, we have tried to work hard to put everything in one slide as an executive summary. I believe it's fair to say that the next 1, 2, maybe 3 years are going to be rather challenging. But as you get it from today's view on today's speeches, we are very optimistic for the future. We are very optimistic for the future. Most of these top lines, we have taken today economic slowdown. Obviously, that's what I meant with rough years is going to develop. We see the recovery. We see the long-term growth of our industry. We have set up operational excellence levers in both our factories, OEM and MRO. I believe the financial guidance, '25 was a strong one [ 8 1 ] [ 25 ] that Peter just rolled out supply chain we tackled. Honestly, we believe we are very well positioned on that global supply chain. There might be ups and downs. There might be other macroeconomic evolutions. But right now, looking forward, we are very positive on the supply chain, and we do a lot proactively for that. The decarbonization and climate protection issue is not over. It's rather increasing as we see that. And that is important for us on our product side but also on our production footprint side. We have a very good offer to the market if we see the industry reshaping. The GTF is the architecture of the future with a double-digit improvement in fuel burn and operating costs. We have touched as well on the defense and the severity items where MTU, as I said in the beginning, plays a vital and a very important role in European defense program and we all hope that the cash is now getting to a signature soon, very soon. A topic that we did not tackled today, but it's important for every company out there is to retain and to attract talent. It's getting more and more difficult to attract the best talent and to retain our talents globally and worldwide. We are in the same ballpark with all the other companies. We have a good development. We have a very high retention rate. So we believe we are doing something right, and we want to do -- continue to do that in the future. So in a nutshell, I have written down for me here, I'm very happy to be in that industry. I'm also very happy to be at MTU. That's a superb company, great products, really innovative technology road map. We have a strong management team being here present, but also in our factories on all management levels, and we have an enthusiastic and well-trained workforce. And these are the ingredients that make me happy and I'm obviously very proud to be at the home of this organization starting in January. Saying this, we have a guest here online, Reiner, thanks for watching us and listening. I hope I did well. You got to give me feedback when I'm back in Munich, but I understood that some of you wanted to give a direct feedback into the camera, as I've heard. So may I ask you come up on stage with the microphone probably, and I will close afterwards with a personal note after we have done so. Please, I think this is the best spot here.

Thank you very much indeed. This is really for Reiner. I think there are 3 of us in the room today who are on the IPO syndicate back in 2005. If I've missed anybody else out, I really apologize, but I couldn't find the term sheet this morning. 17 years, no other aerospace and defense CEO certainly that I've covered, I think any of us have covered have been doing the job that long. And capital markets are tough. Supervisory boards are incredibly demanding. And that, if nothing else, that tenure is a tremendous achievement and really a mark of how well you've done. What I did manage to find this morning was the pre-IPO presentation that you gave. Page 88 is a cracker. The strap line on the top is MTU has a proven track record of increasing profitability in a difficult market environment. At that time, you, Reiner, were talking about the recovery from 9/11. You were pointing to revenues in 2002, 2003, 2004, that were about EUR 2 billion -- actually under EUR 2 billion. You were making a margin then of 12%, and the business had a totally different mix to what it has today. Military almost unchanged to what it is today. MRO, less than 40% of the business and the rest was OEM. The company today, 3x the size, very similar margins, better despite that astonishing change in mix. So that is, again, it was more an astonishing transition and performance you've achieved there. So from me, certainly, the other people who have been on the sell side of this period, thank you for tolerating us and are sometimes repetitive an annoying questions. We know they are. Thank you for delivering such consistent reporting and performance that really matters to analysts, but also more broadly for educating us in the technology in the politics of this industry and the commercial aspects of this industry over that whole 17 years. Good luck, very best wishes for the next stage of your career. And we really look forward to bumping into you, hopefully, on a shale line of the next really good air show. Thank you.

And with some magic, I have the answer of Reiner on my phone. So he asked me to pass it on, convey the message. Reiner wants to thank everybody who has supported him and us from 2004, '05 onwards. We all know that being in the market in the beginning wasn't always easy, especially since we're not an OEM. He remembers a discounted market valuation compared to some of our peers. Today, we are well established in the market, and we have a great future ahead. He has one favor. He asks you to continue to be well disposed towards MTU. The management team is set up exceptionally well for the future. And thank you again to everyone who has been complying us, especially David Perry and Harry Breach. Thank you, Reiner. I hope I transferred that okay. Now let me -- before we come to Q&A, let me finalize from my point of view with a personal note. You have heard a lot of news now today on the MTU. And I thought you might actually expect as a future CEO of some comments maybe where I want to put priorities and the focus point on. So first of all, I learned always meet your expectations. I learned that for sure. But now let me highlight a few points and please see that -- it's not a government statement as I'm not in the government right now, but rather a teaser on what I will be focused on and what we and the new management setup together with [indiscernible] will work on in the future. First point, obviously, is profitability. There's no surprise that we focus this as #1. You have listened to our midterm outlook. And we -- our commitment goes in that respect. We aim to accelerate going back to pre-covered profitability performance. This mainly deals with the PW1100 aftermarket but also other programs and some internal and external measures. Second is growth. We highlighted several times today that the fundamentals and the growth are good mid- to long term. And we, as MTU, I personally want to steepen that growth trajectory beyond market development. Not an easy task, obviously, but I believe we have some good strategics on our horizon. On the OEM side, we said now several times as well, increasing work share in our existing programs, but also getting prepared for a second platform next decade on the high-volume single aid market. This is our sweet spot and will continue to be our sweet spot. On the MRO side, we have invested Michael a lot in our growing capacity, and we want to fill that with existing but also with new programs, and there will be more to come. Portfolio is number three. We have not seen big acquisitions in the past. And I can tell you, we will not be adventurous in the future. So the first goal is to protect our core portfolio in OEM and MRO business. However, our industry will change significantly, and there might be some opportunities on the horizon, particularly on the technology side. We have ever always never invested into promising technologies, both on the product side, but also on the manufacturing side, and we will continue to do so. And furthermore, we investigate, obviously, of any kind of disruption potential that we see in our industry, again, both on products and our business model, and we want to move proactively to be prepared. Then number four, it's going to be no surprise as a CEO, when we watch the operating model. We have worked a lot on our operational excellence. We are known and we had a good reputation of delivering every time when a customer is leading us, both in MRO and OEM, and we will further enhance this performance, and I'm putting a lot of hope in my successor, [indiscernible], she will bring in new input and new views on an operational excellence and her view on the external supply chain. And then last but not least, is number 5 is leadership. Reiner has been a tremendous and excellent leader for MTU, very integrating a trustful management tie. And I believe, and you just said it relies speak for itself since you are following us, but leadership and corporate culture will also be a major, major focal point for me personally. We are needing -- we are going to transform and collaborate together. These are the main drivers to make us innovative, to have an innovative and a modern culture. And someone said to me, we are a high-tech industry, but traditional in style. So this is what we're trying to work on, but we obviously the rings of the time and the build of the time, and we want to further strengthen our digital mindset and our agility. I hope with that, you see that this is more an evolution than a big revolution. Please continue to be supportive for us. We will work on these important issues in the future, together with the whole MTU management team, and there will be plenty of meetings where we elaborate further in details what is the outcome of the discussion inside the Management Board, but also with the leadership team of MTU. So in a nutshell, before Q&A, one last word to Reiner, if you're still listening, thank you for everything you did for MTU, for us and for myself as well. It was a fantastic ride for the last 20 years, for me, for the last 8 years. We still have some farewell parties ongoing in the next months. But in front of this audience, again, thank you very much. Have fun in your retirement and stay healthy. See you soon. Thank you.

Perfect. Now I ask Peter and Michael share the burden of a final Q&A.

The fun, not the burden. Good. Final round of Q&A, whatever is left. In the front run out there.

Just a couple of final ones. It's probably for Lars. If Airbus does decide to go to rate 75 on the A320 in 2025, can you do it? And then secondly, in your new role, that's coming very soon. What's your long-term thoughts on China? The relationship with the U.S.A., for example, isn't so great at the moment? Do you feel that the risk in China has gone up from when you started with the Zhuhai relationship?

Well, these are -- good question. I think I have to get prepared for this kind of questions. Let me tackle it. The rate 75 is an Airbus ambition, and I believe the market is there. Would we be ready in '25? This question we discussed was Pratt & Whitney together. And I told you earlier, I don't want to make this commitment, yes or no. we are ready -- when Pratt and we together, i.e., decide we need to be ready. And that is an ongoing discussion between, I would say, Airbus in general and the OEMs. Fair to say? Yes. The question on China? It's also a difficult one. I think no one has a crystal ball. China is a big market for us and will continue to be a big market. Right now, the relationship between the U.S. and maybe even Europe and China is not that well. Let's just hope we overcome this issue because it's a tremendous market for everyone. If there's something happening on China Taiwan, then the world has a different problem, a much bigger problem than we talked about today. So 2 things, big markets and the hope that we are going to settle what's in between these 2 nations on the food blocks. Statesmen's answer.

I have a pretty simple question, but you gave a clear series of targets for 2023. When we look at last year, the same for '22, almost nothing happened as planned for the year 2022 in the macro environment. So the environment is pretty volatile right out today in the trajectory that you set for 2023. The key elements of challenge you really need to be focused on to make sure that you deliver on your ambition.

What was the question, didn't get it?

Where is the challenge in reaching the '23 target? What is the one thing you need to deliver 2023?

I would say supply chain basically. So I mean we have long turnaround times in the MO. What I mean in order to generate revenues in order to generate EBIT you have to finalize the shop visit, for example, and you have to send it to the customer, you have to build it to the customer and so on. So if supply chains don't work, you cannot book revenues and you cannot book profits. And I think the supply to manage the supply chain is the most difficult part of 2023.

And that comes before demand in your risk analysis. So bigger than demand.

Our take...

I would say demand is there. This is not so much a topic don't forget, we come out of the biggest crisis of this whole industry. And to make our forecast for 2023 and how fast the ramp up will be, there's a ramp-up, which we explained to you. but how fast this hemp is really depending on what the industry is doing, what our supplier chain is doing, what the OEMs are doing. So there are a lot of elements which we have to put together. The good thing is the demand is there. The second good thing is we are there with our capacity and with our competence we did not lay off people. But all in all, in the macroeconomic effects, we are in a very volatile situation. But you know us, we are sometimes a little bit conservative also.

Harry Breach here from Stifel. Maybe one for Peter, a couple for Lars, if I can. Peter, I forgive my ignorance. Thank you for the escalation clause slide. That was very helpful. Does the escalation formula apply to PDPs as well as the payment on delivery for the engine or is it, if you will, solely a balancing calculation made at the final payment? And then for Lars, if we think about commercial MRO, I remember you mentioned earlier on that your growth forecast for that were well supported by existing contracts in place. When we think about available capacity you have across the network in coming years, when would the next available free position be for induction into your network of shops. And finally, given just how important Zhuhai is becoming in the context of if you will, the 100% of the MRO network revenues, obviously, you only consolidated equity. Can you give us any sense of the sort of where we are roughly with margins at Zhuhai today, maybe at an EBIT level and sort of where those could get to?

Sure. I mean you can read it up in the annual report. Sure it's currently at roughly 10% margin, yes. EBIT margin, yes. Travel Peter is there to explain. Yes. I mean, I will see the same situation which we have on the whole MRO that you heard from Michael that we introduced the PW1100 there. We introduced also deeper new engine programs. big material content. So that will -- we'll see a tremendous revenue growth in the coming years, but that will be a little bit margin dilutive. But I mean, Zhuhai will generate above-average margin compared to the whole MO portfolio that is I think fair to say.

Into the question on reduction slots. Obviously, we prioritize our customers. And if a customer has a real need for a lot, there will be a slot available. The question is, is it in the next week or is it in 2 months here, but we make sure that there will be a slot available. And don't forget, we also have a long-term planning forecast how the capacities, the demand and the capacity side will develop, and we are investing also in this capacity. So in, for example, in Poland, we will create an additional 100 slots in 2023 just for the PW1100 engine. And this journey is continuing in this decade.

I believe you have seen and Michael, we have commented on that. We have continued to invest in our MRO capacity even over the crisis, and that benefit -- we're benefiting from that right now.

There's one more. Christophe, one moment.

Yes. One question on the passenger traffic growth next year. The assumption is that it's going to continue to grow. How robust is this assumption? What could make it derail? I mean if we enter a real bad recession or do you think it's -- you have enough visibility to make it robust and -- at the end of the day, you're very -- I mean, you believe your assumption is very conservative at this stage.

Well, what I presented in the beginning, but maybe I'll ask Andrea later is our Head of Strategy, but we see 2 levers on that. One is the recession we said that might be decreasing. The other one is the opening up 0 COVID in China. And if that happens, and I believe sooner or later, that needs to happen and then this is outpacing the decline we see in -- because of recession. So from my point of view, that's pretty robust, there's even upside potential. I'd like to ask Andrea, Yes. Good. All right. One last question over there.

Just 2 very quick questions. On the escalation formula, are they based on U.S. indices or German indices? Or is it a blended to...

Broad labor index. It's not a German index because the final operator doesn't care where the engine is manufactured. It's a broader worldwide labor indexes.

Okay. Great. And could you give any color on maybe where the capital sitting out or where the bands are where it passes to the customer or where you have to start eating some costs?

We didn't get...

Caps on the escalation formula, like is there a cap where inflation is too high and now you have to eat the cost instead.

That's where I would pass on to Martin, if you want to.

So basically, on the MO side, as Peter also derived, we have a similar structure. That means a large extent of our order book is the long-term contract. And that means similar both we link it to the CLP, the OEM CLP to one extent and then the labor indices. So it's exactly the same. And so as Peter mentioned, to a less extent, we are exposed, it's very marginal where we have kept in our contracts.

I believe it happens to be the last question. I want to...

It seems like we're done. I'd say thank you very much to our Board, to my colleagues that supported us and to my team. I also thank you for joining us here in person and the people at home or in the office, joining on screen. I think it was great to reconnect and I'm very much looking forward to the next event and or the next meeting. Thank you very much. Have a safe trip home or just around the corner, whatever. Enjoy the rest of your day. Bye-bye.