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

Good day, and thank you for standing by. Welcome to the MTU Aero Engine GTF Update Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Mr. Thomas Frank (sic) [ Franz ], Vice President, Investor Relations. Please go ahead, sir.

Yes. Thank you. Ladies and gentlemen, welcome to our update call on the fleet inspection program for the PW1100. We'll start with a quick view on the program and how the situation developed presented by Lars. Peter will talk about the financial implications from this program. After that, Lars will walk you through the impact on our guidance and midterm outlook. Following this, we will open the call for questions. Let me now hand over to Lars.

All right. Thank you, Thomas, and also welcome from my side. Let me first say I'm sorry that we have to come together today due to these unexpected events. And I also want to apologize for all implications this situation is causing. As you're all aware, RTX released an update to the previously announced HPT Inspection Program. This was deemed necessary as a result of a rare condition in powder metal Pratt & Whitney is using to produce certain engine parts. At the time, there was an expectation about the scope and impact of the program. On Monday of this week, RTX issued a press release and had a conference call, with a couple of changes to this inspection program and a more detailed outlook of the implication which I summarize here. On the one hand, the scope of the program has been increased with respect to the suspicious parts as well as a number of engines that might be part of the program. Following this expansion, the previous expectation to be able to handle this program through a high number of quick turn shops visits didn't hold. The actual program assumes that the majority of the necessary shop visits will now be heavily-work scoped -- heavy work scopes and result in 600 to 700 incremental shop visits. Given the already tight situation in the MRO network for the GTF engine feed, this leads to even longer turnaround times and an elevated AOG situation in the global customer fleet. With setting up this fleet management plan, Pratt & Whitney also modeled the financial implications. But before Peter talks about the financials, I also want to comment on the future of the GTF Program. We are certainly convinced of the medium and long-term success of the GTF. The engine itself has the right forward-looking architecture. The current challenge is not a technological or fundamental problem, but a manufacturing problem. The GTF is only in its seventh year with 25 or even 30 more years to come. And currently, these are -- there are around 1,600 aircraft in use with the GTF at 60 different airlines, and orders for around 10,000 more engines are on the books. This overall picture leaves us looking optimistically into the future of the program. Now Peter, I hand over to you for the financials.

Yes. Thanks, Lars. Indeed, Pratt & Whitney has communicated the overall financial impact in a range between USD 6 billion and USD 7 billion for the total program, as you know. That translates into a Pratt & Whitney operating profit impact for their 51% program share in the range of USD 3 billion to USD 3.5 billion. Further, they plan to book the major share of this impact as a nonrecurring sales and pretax operating profit charge in Q3 '23. On cash flow, they expect a headwind of $3 billion between 2023 and 2025, with a yearly roughly distribution of roughly USD 0.5 billion in 2023, $1 billion in 2024 and USD 1.5 billion in 2025. Based on the release from Monday of this week, we are currently assessing MTU's liability for the related cost based on the risk and revenue scheme in place. This process is not finalized yet. Based on the numbers Pratt & Whitney provided, we might be burdened by these effects by building up liabilities for the program, resulting in a one-off charge in Q3 '23, reducing reported revenues and reported EBIT. In order to provide an ongoing comparability of our KPIs for prior and future periods, these extraordinary impacts would be adjusted for in sales and EBIT adjusted. The cash flow impact associated with this fleet management plan is expected to materialize at MTU's accounts in the years 2024 to 2026. We currently do not expect a major impact in 2023. Following all of this, we are already working on measures and driving forward activities to reduce this possible impact on our business. First, together with our partners, we obviously tried everything to reduce the overall impact for customers and the program as a whole. For example, to build up additional MRO capacity as quickly as possible or to define smart work scope to reduce the anticipated 250 to 300 days wing-to-wing time. Further, we will obviously also enter negotiations with Pratt & Whitney on commercial conditions for additional MRO capacity, which will be needed for additional 600 to 700 shop visits, but also on other ways to compensate us for the hit we probably have to take. Internally, we will launch an efficiency program to streamline CapEx plans and other costs while keeping in mind that our underlying business is strong, and we have to deliver on the strong customer demand in all of our business units. As we speak, we are working all of these actions to offset at least part of the potential impact from this program. But to be clear, we are going to see an impact in our cash flow generation in the affected years 2024 to 2026. Lars, can you now share the revised view on our outlook?

Yes, I will. Thank you, Peter. As mentioned, the recent announcement from Pratt & Whitney presents a major blow for the program and a major challenge for the partners and the MRO network. Together with our partners, we are working hard to find possibilities to reduce the current expected impact on operations and financials. This news overshadow the performance and improvements that have been achieved. We are confident that the engine itself and the benefits it provides to its operators will reassure customers of the value of this technology, while the GTF A will bring further improvements. Now coming to the broader picture. The overall market environment remains very strong. Passenger traffic, as well as freight cycles, are very favorable and supply chain pressure eases slowly. Based on this, on an adjusted basis, we remain confident to reach our sales and EBIT guidance. Also, on the free cash flow adjusted side, we are confident that we can still achieve an amount above the 2022 actuals. Now looking beyond the current developments to our midterm ambition we communicated at our CMD in November of 2022. We are very confident that we will exceed revenues of EUR 8 billion in 2025, with a corresponding EBIT adjusted of more than EUR 1 billion. This marks the end of the presentation, and we are now open for questions.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Kseniia Maslova from UBS.

I have two, please. So in their update on Monday, Pratt & Whitney referred to issues on HPT risks and compressor risk. Can you just please explain specific issues in more detail? And most importantly, if all of them are solely related to metal contamination issue? So maybe let's answer this question and then I'll ask my second one.

Yes. Well, Kseniia, I think we can reiterate what Pratt and RTX clearly said on Monday. We are talking about a powder metal material that is used for certain parts in the engine. And here, specifically, the HPT Disk 1 and Disk 2 and the IBR -- integrated blade disk on Stage 7 and Stage 8 in the compressor. So because of this powder material, we have identified in the current work scopes and the shop visits that there might be cracks, potentially, cracks in these disks and while producing these disks, and they now need to be reassured on a safety call that we inspect these disks that there is no crack available and then either replace them again, or -- install them again or replace them again. So the root cause of the issue is the powder material, and then associated to that are the parts that are affected.

Okay. Understood. Very clear. And then maybe also, if you help us understand the free cash flow impact in '24, '26. Maybe just any more color there? Like, around savings or and key moving parts, in particular, how do you estimate compensations to airlines? And if there is any risk basically to estimates provided by Pratt & Whitney, that it could be too low, the number they communicated?

I mean, today, to speak, I can only rely on the numbers, I mean, Pratt & Whitney gave you. I mean, they are the face to the customer. They are administrating the fleet management plan towards the airlines. And I mean, they indicated the EUR 3 billion cash flow impact. So in the yearly distribution, I just reiterated. We are working, obviously, on measures to reach at least that number or even to be able to reduce it. But I mean, in our -- I would say, in our accounts, we expect it to be somehow distributed to the years 2024, '25 and 2026, maybe. So that is our expectation. But I couldn't tell you the exact numbers per year now. It's just too early for us. I mean, we have the information now today [ so ] .

We are now going to proceed with our next question. And the questions come from the line of Phil Buller from Berenberg.

Firstly, can I just follow up on the answer you gave to the previous question. It's obviously difficult from the outside to know exactly what's going on between yourself and Pratt & Whitney. I assume you're not happy with the communications between yourself and them? And if that is the case, what is it that you're able to do proactively to ensure you cross the issues with some of your partners a little bit better, please, if I can ask that upfront.

Well, so how should we answer on this one. Obviously, this is a long-term, very important and very successful partnership with Pratt & Whitney. And we always had a very good communication on all these issues. It is, in fact, true that we started to be involved on a technical perspective on what's happening with these powder metal parts. But this time, it really occurred that we only got to know the financial impact on Monday morning. And this is probably also because of the magnitude of the problem. And we also all have a regulatory issue that we need to stick to. And for me, this was not a good communication, but it was an understandable communication on this program. But this should not lead to any kind of misunderstanding. We have a very good relationship with Pratt & Whitney and being informed on the technical issue as early as possible.

Okay. And the question I was going to ask, just to clarify a few things, if I can, please. Of the 250 to 300 days, I think that's what you said, how much of that is just, waiting around time? I assume it's most of it, in which case, is the decision to replace all of the HPT disks due to the fact you've got plenty of time to produce those due to a lack of shop swaps? Is that the right way to think about it? Or is the change in scope due to the failure rate being higher than previously assumed?

So let me start with the first part of the answer. I also believe that the majority, maybe half of that is probably waiting for induction, because that's our track record in the past on heavy shop visits in the amount of 150 -- 100 to 150 days-ish, I have technically not heard that we have a different assumption on the crack prolongation and crack movement. So I would consider what you mentioned, to replace the disk because of the long wing-to-wing turnaround time might be the better condition and a better situation in order to enable our customers to have a fully working GTF back on their wing.

Okay. That's great. And then just finally for me, if I may. Obviously, we're going to have a few hundred A320s around at any point over the past -- over the next few years. But at the same time, it sounds like Airbus still plan to deliver hundreds of GTF-powered new A320s over the next few years, while all of this is happening. So from your perspective, what is more costly to you? Is it paying a penalty for an out-of-service aircraft to be grounded for 12 months? Or how does that compare to slipping delivery of a new engine for 12 months in order to support a spare support. So how do you think about that trade-off and what are you assuming in the guide? And where are you in terms of discussions with Airbus and your customers, please?

We don't comment on these kind of questions. I mean obviously, we're trying to fulfill our customer needs both on the MRO, so the flying fleet, but also on the OEM side, the Airbus needs. And what we do together with Pratt is obviously optimizing both elements. And the final discussion on which customer gets what engine is done by Pratt & Whitney, because they have the contact to Airbus, and they also have the contact to the [ a last ] customers.

We are now going to proceed with our next question. And the questions come from the line of David Perry from JPMorgan.

Lars, Peter. I've got 3 questions, if I can, please. I mean the first one is you started with an apology, which I think is very gracious of you, because ultimately, it doesn't really feel like it's your problem that you caused. Now I know on the last call, there was a philosophical discussion with another analyst about RRSPs, and I get it, you share the risk. But I'm just curious, in a situation where one partner has so obviously been at fault and for such a ridiculous reason, in the contracts, is there any force majeure clause? I mean is there any sense of the RRSP to have 49% stake together -- coming together and trying to get recompense from Pratt? That would be my first question. My second one is, have you actually been able to audit the USD 6 billion to USD 7 billion? I mean you've taken 2 days, which is totally understandable, to communicate. But how does one even begin to audit that number in such a short space of time? And the third one, maybe I'm clutching at straws, but are there any silver linings here for you? I mean, V2500 spares sales? Are you going to change your assumptions on that?

David, these are 3 questions. Let me start with the first one. I don't comment on the public note now how we deal within the contract. It's obvious that we have a look into the contract, that we start discussion with Pratt & Whitney. But after 2 days, it's too early to say what the outcome will be. The second one is on the audit, if you want. I mean we are trying to understand, and we are sharing the assumption that lies -- that gave Pratt the way to the USD 6 billion to USD 7 billion. And as we speak, there are teams trying to challenge these assumptions, trying to understand that, in order to find common ground there. So that is done during this week. But so far, I mean, Pratt is the OEM partner, I have no doubt, no reason to think that this is even higher or lower than it's over exaggerating. So we're trying to understand the assumptions behind that. And compare them obviously to what we think it's necessary and possible. The third one, it's also too early, Peter, I don't think we are now updating any kind of guidance in the different programs, we usually don't do. But it is clear that when you have less GTF in the air, that older fleets and here, especially the V25, is flying more and longer. So naturally, that probably leads to kind of an increased...

More maintenance work for other narrow-body programs for [ separate space ] for other narrow-body programs. We're going to look at that, obviously, in our forecasting in our budget planning, but it's too early now to do that.

We are now going to proceed with our next question. And the questions come from the line of George Zhao from Bernstein.

So first, on the cash, I know you said you're not going to give exact number per year. But if you take the total cash impact over '24 to '26, is that -- should that be close to the $1 billion impact to the EBIT that you talked about? So the total cash impact over the 3 years? And then second one is on the MRO side. For the MRO shops that you have that can perform both GTF and also other independent work, can you prioritize on the GTF work? Or how do you balance between the different requirements from all your different customers?

I mean on the cash profile, I would say, I mean, let's say, take for a minute, that the $1 billion, probably that is an item which is tax-deductible, so 30% tax credit, so $700 million cash flow impact. And that is -- I mean, I would say the focus is 2024, 2025, and we're going to see some spillover to 2026. So that is the rough profile which I could share today.

On the capacity, George, I mean, MTU successfully build up more capacity for MRO activities since 2019, and we continue to do so over -- even over the pandemic. And we are still able to provide more capacity to the GTF, and we have been asked and we're discussing that with Pratt due to the prior ERI issues. Now, that is obviously another on top demand for shop visits. And here again, we are in discussion with Pratt, what we want to do, what we can do, what's needed to do and how to balance that with our independent business. But we have contracts with our independent partners that we need to fulfill, and this needs to be balanced. But again, too early to say after 2 days, how do we go forward in the next 3 years. Both need to be done, both -- we want to do both of them independent and GTF work, and there's a balance to it.

But that has obviously to come with the right commercial conditions, no? So if we cannot replace independent business -- a high-margin independent business with low-margin GTF MO business, that is not conceivable. It has to come with a higher profitability and with obviously a very low working capital.

We are now going to proceed with our next question. And the questions come from the line of Chloe Lemarie from Jefferies.

Yes. I have two. The first one is actually to go back on the question that you're having with Pratt. I mean around what do this focus? Are there really just how you share the extra cost visits -- the special visit cost? Is it more around the responsibility on the compensation side? Or is it just to assess what is really program cost versus Raytheon costs in what they've announced? The second question is, actually, can you explain how the number of shop visits required expanded from 1,200 to now 3,000? Because it feels like it's above the number of A320neo GTF that you delivered over the 2016 to 2021 period. I'm just struggling to understand how it reached the 3,000.

Let me try to pull that up, so the second question first. When we went public, RTX went public, roughly 4 or 5 weeks ago, we talked predominantly on the HPT disk 1 and 2, and that came with a population of 1,200, 200 of them where we didn't have a proper angle scan result, and the 1,000 that are due because of lifing issues. And we want to just be sure that there is no crack in there. There will be a limited life. So that is the first population of 1,200. Now, we explained earlier that we are now looking at all the powder metal parts and the IBR7, IBR8 are the 2 examples of that. And obviously, that increases the population. And we -- it is not correct, Chloe, that we have not delivered 3,000. Obviously, it's more than 3,000 engines delivered, but the population right now is roughly that 3,000 engines have at least one part of ME16 inside. So that drives the number of engines. And -- but out of this population, we still only see 600 to 700 incremental shop visits because the majority of these shop visits now needed have already been planned in the past. So they're not incremental. And that deals with lifing -- predominantly with lifing, it's a reinspection after roughly 3,000 cycles. And so far, we have a life expectation of, I think it's 6,500 or 7,000 -- 5000 to 6,000 cycles. So this is driving the amount of shop visits. And the first question is basically we all do -- we do all 3 of them, so we are in daily communication with Pratt. I would say, first of all, we need to see that we get a nice and smooth operational system ongoing to serve these shop visits, to have capacity available, to have spare parts available. And secondly, and in parallel, we do the financial discussion with Pratt and RTX.

We are now going to proceed with our next question. And the questions come from the line of Tristan Sanson from BNP Paribas Exane.

I'm Tristan from BNP Exane. I'm sorry, the line is bad on my side as I am on the road, so apologies. I have a couple of questions for you. Apologies, again, the one -- the first one, you're not going to be able to fully answer it, I'm afraid, but I have more hopes on the second one. The first one is, I wanted to know whether you could share your level of confidence on the fact that the issues that we are talking about will be contained to high-pressure compressor and high-pressure turbine disk on the PW1000, or whether you still see potential possibilities as an extension to the V2500 or to a larger population of the PW1000, number of parts or number of engines, that would be helpful. The second one is more an accounting question. I wanted to understand whether the charge that you're planning to take in Q3 will encompass the whole of the cost that will be incurred, or whether there's a possibility to have also a future revision of the PW1000 support margin, Lars, I think, mentioned 100 basis points of margin pressure in 2025 as well. Will we get an impact over time that will be estimated with your budget at the end of the year as well? Or will everything be booked in Q3? And sorry for the bad line again.

No, we could understand you very clearly, Christoph (sic) [ Tristan ]. So the first question, you referred to PW1000. This is our nickname for the whole GTF fleet, so small and big GTF. Right now we are looking only into the PW1100. And with the information we have so far, the smaller GTFs and other engine programs are not affected by this.

Yes, regarding accounting, I mean we have started discussions with our -- with Pratt & Whitney on the one hand side and with our auditors on the other hand side since Monday. So we are not as far as RTX and Pratt & Whitney is, obviously. But I mean, a possible -- therefore, I cannot confirm today the way we're going to account for that in Q3 2023. But a possible outcome could be that, I mean, the major part of the customer compensation, so customer concessions, customer support costs that could be booked as a one-off, obviously, will reduce -- it's going to be a liability which flows directly against revenues and against EBIT reported, so that will reduce reported revenues and reported EBIT. We would adjust for that in sales and EBIT adjusted, obviously, and I mean in practical life, it probably is difficult to differentiate between shop visit costs for that kind of inspection or exchange program and normal work on the shop visits. So it could be that part of the -- especially the shop visit costs goes into the fleet management kind of -- for the individual airline customers. And as such, would then reduce the margin for the PW1100 in the aftermarket. I cannot comment on the 100 basis points, that's an estimate [ the imichu ] gave on the call. I mean, we're going to evaluate that ourselves in the coming weeks. And I think we'll know more together with Q3 2023.

We are now going to proceed with our next question. And the questions come from the line of Ben Heelan from Bank of America.

The first one for me is, you had talked in the past about going to around 25% of the GTF program in the next derivation of the program. Do you think that, that is still the right strategy for MTU? Is that still the right path to be going down, increasing the share of this program? And then maybe one for Peter. In those opening remarks, you talked about efficiency programs and try and offset the impact from a cash perspective. I appreciate very, very early days, but is there any kind of [ urgent communication ] coming from [ either ], and what do you think you can save from the streamlined CapEx budget on a [Technical Difficulty]?

So yes, Ben, thank you for the question. You really -- here at MTU, we don't change our strategy within 2 days. So the 25% were wisely chosen. And like I said at the beginning, I really believe mid- to long term, the GTF will be a successful program. We still have more than 10,000 orders. We still will have 20 to 30 years to go on the program. And I have a clear view that in the next couple of years after this encapsulated issue that we are talking about now, we will have a successful life and in-service usage of the GTF. So that naturally, that when there is a second generation of GTF, we want to be part of that program. And the strategy has been 25%, and I don't change that in 2 days. So we'll see how we further develop on this GTF story. And then we'll say we either want more or we want less.

Yes. I mean regarding -- I mean, the line was quite bad then, but I am going to comment on the efficiency program a little bit. So on the one hand side, I mean, we have this cash flow impact over the next 3 years, probably. On the other hand side, we have a huge demand increase over the next years. So we have what -- we have to wisely prioritize, I would say, all of our CapEx budgets. We look on CapEx spend, try to push CapEx into the future, prioritize CapEx spending and so on. And the same is true for other spendings, like projects, IT projects, internal projects. So we really have to focus on the very, very important projects which enable us to deliver on the customer demand over the next years. So there is some room for, let's say, compensation internally. But as I said before, we will also talk to Pratt & Whitney about methods to compensate us for the cash flow hit.

That's super helpful. Lars, just a quick follow-up. Is there a way going forward for you to be more involved in the quality and spanning of these programs or mostly kind of socialize these risks away from just one manufacturer to the consortium? Is that something that could happen? Or am I completely misplaced in thinking that, that is potentially something that could happen?

Well, I think in a positive way around that. So obviously, these numerous issues now we have seen, that would lead to even stronger collaboration in the future on all these kind of manufacturing and quality perspectives. So I would say, yes, there's room for an even improved collaboration on this one. But let's face it, at the end, every manufacturer and every designer has to go through its own audit. But we had examples in the past where we used a mutual audit program, and we'll put that on the discussion list with Pratt & Whitney. Can we support? Can we help? Do we have competencies to support our partner in their topics, but also vice versa.

We are now going to proceed with our next question. And the questions come from the line of Milene Kerner from Barclays.

Yes. I hope you can hear me okay. I have 5 questions. So if that's okay with you, I will ask 1 by 1. So my first question, I wanted to see on the production of the HTP and the HPC disk that needs to be replaced. Is it all produced by Pratt? Or are they other suppliers?

They are all produced by Pratt.

Related to this, in terms of the ability now to produce the HPT and the HPC disk constraint, given that you need to replace 3,000 engines, plus you need to ramp up on the A320 production. What's your view on this?

Well, Milene, I didn't say we have to replace 3,000 engines. I said it's an inspection and/or replacement program. So we might also decide to keep on going if we find in the EndoScan inspection, we don't find anything suspicious, then we might also decide to put that disk back again into the engine and bring it back after the complete life. So it's not -- don't see it as a complete exchange program now. And obviously, RTX and Pratt commented already on the laser-focused supply chain, how do you say, activities to ramp up both competencies and capabilities to do this powder metal disk that we're talking about. So I believe, as I know, [ Shane ] is fully focused on achieving this ramp-up and all the parts that he needs for this exchange and inspection program.

Then my third question is, how do you think about this 250 to 300 days turnaround time? Do you think it's appropriate?

So far I would say, yes, that's the best -- Pratt is a very experienced OEM. We have a clear view on what's happening in our shops worldwide. And like I mentioned earlier, the pure turnaround time is currently roughly 150 days, sometimes less, sometimes more, depending on the work scope. I think we commented several times that already a high buffer for induction of these GTF engines. And this additional 600 to 700 will lead to even more congestion. So it's our task now to think about a lean and a very smart way to bring in as many engines as possible into the shop, from the induction buffer into the shops and then achieve a turnaround time that's way below these 150 days. And it's a task that we have already started, but Pratt as well and the other shops in the network as well. So I would say this is a good based knowledge right now, and it needs to be our task to reduce that by far.

I mean that's the major level, obviously, to bring down AOG conversation. Maybe it helps the customer and it helps us.

Yes. No, I'm sure. I mean it's clear, I mean, the key metric here. So I just wanted to understand, obviously, how can that change over time? Because I mean you're going to add 7 GTF facility, MRO facility in the next 3 years. And also, I guess, everyone will increase their capacity. Then I just wanted to see with you because, I mean, obviously, on the RTX call on Monday, it was really soon. But do you have more color on what happened with Air China during the weekend?

Well, this is ongoing air-worthiness investigation. So no, I don't have more insight right now, but what we all believe, both Pratt, RTX and MTU, that this is not connected to the powder metal issue that we're just talking about.

And then, I mean, obviously, I mean, the question we all get is what could be the impact long term in terms of your market share and your pricing. Could you comment on this? What's your thoughts here?

Too early to say, Milene. This is a period of time where we need to go through this, and it's obviously very frustrating for all of us, obviously, including our customers. But the GF, I repeat myself, the GTF is a very fine product. When it's under the wing, when it's flying, everyone loves it. The economics are correct. So looking into the next 20 to 30 years, like I mentioned, I believe we need to be able to keep our market share or even improve it. But this is a long time to forecast it, and we are confident that we can at least stabilize it on the level we have right now or even improve it. So I'm an optimist here.

We are now going to proceed with our next question. And the questions come from the line of Marc Zeck from Stifel.

Yes. I've got a question on spare engines. Maybe you can help me to understand if this issue will impact what you expect to sell in spare engines in 2024 and 2025? I would assume that selling spare engines to those affected airlines will reduce the compensation claims for these airlines. So will you -- or are you able to sell these engines and at market rates? Or will they be sold at -- or likely to be sold at a discount or for free? Or how do you think [ about ] this issue? That will be my first question.

I mean -- I mean we have to balance the demand. On the one hand -- as Lars commented earlier, I mean, we have to balance on the one-hand side, deliveries, I mean we have a tight supply chain. We have to prioritize demand to -- for Airbus to ramp new production. We have obviously spare engines, but you can use also, let's say, the material for -- to go to the aftermarket and use the material for doing shop visits. And so we have to balance that in the eyes of the fleet management program. So that is done by Pratt & Whitney. We have to deliver in all of these 3 channels I just mentioned there.

Okay. Understood. But if I then, let's say, talk about the 2025 adjusted earnings guidance. I would assume that if you need to balance all this out, then that there would probably be a negative impact on the adjusted earnings for 2025, no?

No. No. No.

Okay. All right. Okay. Then maybe second question then would be on the wing-on-wing time. Is there -- what is the risk that we see another increase in the wing-on-wing time? Is this just the next risk is just that congestion and capacity is just too tight? Or is there any -- assuming it doesn't spread to other disk or whatever, is there anything that can increase wing-to-wing time even further?

What should we say right now? I mean, we have the first 3 or 4 engines in the shop. The first one was a quick turn. So we don't really have a lot of experience. I would say this is a proper estimation of what's happening. And you know that the majority of the work -- of the shop visits will happen in -- at the end of '23 and in '24. So we would just have to get to know what's happening. But our network, MTU, Pratt and the other partners, we always found clever ideas how to decrease the turnaround time. So that's our scope. But I wouldn't say already, we have a risk of increasing this number. We all work towards reducing it by far.

Yes, no I understand that. And best of luck and much success in reducing the number. That was all from us. Thank you.

We are now going to proceed with our next question. And the questions come from the line of Markus Schmitt from ODDO BHF.

It's just one on your rating situation. You are BAA3 at Moody's currently. Has Moody's implied to you already what it could mean for MTU? Because most recently, it seems you would qualify for an upgrade next year. And so do you think they see this as a point in time issue? Or do you see a downgrade there, which would mean you would lose your pure investment-grade status. And I think to be investment grade across the rating agencies is quite important for MTU. So how do you see the situation? And maybe as a help for you, I think that Moody's was quite relaxed on RTX the other day when they issued a little paper on the situation. So do you hope they will treat you the same way? Or do you think you could be temporary BA1 at least for a year or 2?

I mean we're going to have discussions with Moody's in the next days. So we don't want to give you a prejudice, but I'm quite optimistic that we can keep investment-grade rating, yes.

We are now going to proceed with our next question. And the questions come from the line of [ Ganji Huang from DLW ].

So just now you mentioned the further recalls unrelated to like the Air China's engine failures not related to the powder metal issue. But we all know that the engine on that plane that caught fire was PW1100, which is the one we are talking about today. So will we expect further surprises from RTX regarding further testings and recalls?

Well, Ganji, I said earlier, this is part of the current investigation. I -- from everything we know right now, we don't expect other surprises. We had a couple of topics in the past with the GTF. And I have reason to believe that this incident will be part of this incident we had in the past. But like I said, the investigation, we now need to -- we don't even have the engine in the shop. It needs to be mounted off wing, then we get it into the shop and then we know what's happening around it. But I have no reason to believe there's an additional topic from what we have seen in the past.

We are now going to proceed with our next question. And the questions come from the line of Zafar Khan from Societe Generale.

Could I please just seek some clarification on these numbers of engines, because we've heard 600 to 700, we've heard 1,200, 3,000. How many engines will need inspection over the next few years? And how many engines will need heavy shop visits? Can you help me understand that, please?

Well, I believe the figures are quite clear. So we are saying, Pratt said, we said that 3,000 -- around 3,000 engines have at least one part made of ME 16. So naturally, all of these engines need to have some inspection at some point in time. But obviously, there have been a lot of shop visits already planned for these 3,000 engines. That is why we only believe there's a 600 to 700 shop visits increase. The rest were already planned in our figures and forecasts. And I think I explained why we jumped from 1,200 to 3,000, because of a different additional part.

Yes. That I understand, the 1,200 to 3,000. It was just the 600 to 700 incremental that I was struggling with.

Incremental shop visits, not engines.

Incremental shop visits, not engines. Yes.

Incremental shop visits. Okay. So -- what's the difference incremental shop visit? Isn't one engine visiting the shop, one shop visit?

No, it's incremental. So if you would have asked me 4 to 5 weeks ago, then I would say we have a certain number of shop visits planned for the flying fleet in the next 3 years. Now we have this ME 16 powder metal issue. And with all the know-how and knowledge we have right now, we say this root causes activity increases the demand of shop visit by additional 600 to 700. So it's not like we say there will be additional 3,000 shop visits because 3,000 engines are affected. Part of that, the majority has been planned already in the regular shop visits.

Okay. And the HP disks issue that came up on Stage 7 and 8, does that affect every Stage 7, 8 disk? Or is it just those which have the ME 16, because I think perhaps we're saying that each disk has its own serial number, so they know which disks have ME 16. So how many disks?

All of them. The clear answer is all of them. We have a powder metal issue, and that powder metal is used to produce IBR 7, 8 and HPT 1 and 2. So that has nothing to do with the serial number. All of them at one point in time need to be inspected.

I understand the inspection. I'm just thinking about the replacement. Because perhaps we're saying that some of these things, because of the life limitation had gone down, when they come in, they'll just replace them so that when they go out, they are then have a long life and don't need to come back again any time soon.

It is the optimization we are just currently thinking about. I understood that we have a life limitation of 5,000 to 7,000 cycles somewhere. We have a repetitive inspection interval from 2,800 to 3,000 cycles. So for me, mathematically, you could do one inspection and then put the disk back again in the engine and then pull it off after the second inspection interval which comes in another 3,000. Let's make the numbers easy, 3,000 and 3,000 gives the life limitation of 6,000. If we have -- and that is our plan, enough disks to replace them at the first shop visit, then obviously, they have a full life, and this is our ambition and our objective to give the customer -- to give to the customer an engine that is certified for full life, and hence can fly for the next years or decade.

Okay. Now I understand you make the HPC Stages 1 to 4, is that correct?

Yes.

So whose disks have you used in that? Are they supplied by Pratt or somebody else?

What do you mean? The disks 7 and 8 is only coming from Pratt. I mean we produce our disk ourselves. Yes, we produce 1 to 4 and even 5 and 6, part of that, we produce in our facilities.

Okay. But where does the powder metal come from?

It's not from powder metal. It's titanium, titanium or nickel, Stage 1 to 4 is titanium, 5 and 6 is nickel.

And then 7 and 8 are powdered metal?

Yes. Because it gets hot and a lot of pressure.

Yes. Yes. Okay. That's very clear. I must apologize, I was a bit aggressive with you guys in the last call, but it was just that I was very frustrated that -- this was nothing to do with you and you're having to bear such a big cost. Interestingly, you might be pleased to hear this, that in the Pratt call, a lot of the U.S. analysts are asking Pratt if the RRSP partners, the 49%, would cough up their share. So all is not lost. So there's still hope, I hope.

We are now going to proceed with our next question. And the questions come from the line of Miro Zuzak from JMS Invest.

Yes. Can you hear me?

Yes, loud and clear.

I have a couple. The first one would be, is the overall burden for you depending on the share of actual shop visits done by you? So if you do more than 80% of this extra shop visit, will the burden be lower? Or does it depend on that in any way?

Now on the one hand side, on the -- I'll just answer your first question. I mean, on the one hand side, we have -- out of the RRSP contract we share 18% of all -- or we will share 18% of all program-related costs. That's the one side. On the other side in our MRO shops, we obviously do more compared to the 18%. So we'd rather do, let's say, 25% to 30% of the shop visit. So when we do -- if we would do more shop visits for the PW1100, with the right commercial terms it helps to mitigate slightly the burden we have, but only slightly, yes. It's a tiny portion.

Okay. Second question. I think $6 billion or $7 billion that are based on this lead times of 150 days, according to Pratt & Whitney for...

Wing-to-wing time 250 to 300 days. That's the wording.

Exactly. Now I mean there might be a learning curve. You have mentioned it before. You said 100 to 250. Obviously, this has a huge impact on the aircraft on ground penalty payments that you need to pay. Now if you take the full P&L hit of $1 billion in Q3 this year, and you have a learning curve and the cost will be -- the actual burden will be lower than the $1 billion, that would lead them to additional revenues and EBIT, right?

Going forward?

Yes. I think if we would -- I mean, whatever we book in Q3 is obviously an estimate and subject to a re-estimate. I mean we learn over the course of the next 3 years, obviously, how things develop. And if we would do better, obviously, and finally come to the point where we can really -- we are really, really very sure that we -- the actual costs are lower, we would obviously then reduce the liability or the accrual -- and -- but also, I mean, as we have adjusted for that number in Q3 '23, we would also adjust it the other way. So it wouldn't have even adjusted there.

Okay. Very clear.

Let me be again, specifically clear on the turnaround time. The number given by RTX and where we are right now is wing-to-wing. These are the 200 to 300 days. When I said 150-ish, is the turnaround time in the shop once we started with the engine, and we deliver the engine back to the customer, induction to delivery. So what is on top of that is waiting time. And clearly, we are on the path to decrease that pure turnaround time in the shop. That's a learning curve. And if we would have unlimited capacity available, we would decrease that to probably 100 to 150 days. That was my message. Now we need to see how much capacity is available and by how much can we reduce the right now, standing 200 to 300 days in turnaround time wing-to-wing.

Okay. A question regarding the AOG payments. The next one. What are the modalities of these payments? This is like a daily charge that you have to pay if an aircraft is on ground for 1 day? Or how does that work exactly? [ Like some common element ] with like, shop visits done at no cost. I don't know, left pocket, right pocket? Or is this just a charge, the aircraft is on ground, you have to pay, the RTX or [ the EAE ] has to pay.

I would say that -- I mean, that is a question you would have to ask RTX, but I mean there are different ways, obviously, to compensate the customer aftermarket credits: a daily rate for aircraft on ground, covering of leased-in aircraft or whatever to replace the aircraft on ground. So there are different buckets or different ways. So it's a mixture -- particularly a mixture of both and very, very customer specific, yes.

Okay. Then the next one, if like, the major part of the overall cost is AOG payments. And like the waiting time is roughly half of the time needed for the turnaround time. Does this impact your capacity planning going forward? I think your current shops are not fully utilized yet on the GTF shops. Does it -- in which ways does it impact your capacity plans going forward? You probably might be very -- might have a very high interest in reducing the wait times.

I think we have mentioned or commented that earlier already. We are now balancing the need that we have on an independent MRO with the need we have on the GTF. And yes, we might have, and we do have some capacity available and this is a discussion now with Pratt & Whitney for the right commercial terms. We slot in more GTF. And obviously, we have also a responsibility for the program. So these are favorable discussion we have with GTF right now. On the other hand, we need to respect the contracts we have with our independent partners, no? And that is a balancing act that we are currently doing for the weeks and months to come. And potentially then we are obviously increasing our worldwide capacity as we speak, and that should enable the situation to a positive trend in the years to come for both independent and GTF customers.

Okay. And then the last one is probably the most difficult one. Can you please explain how this cost is exactly booked on which -- in which entity? Because I'm struggling a bit. You're talking about costs. Typically, with take provisions or like future costs, typically one might take a provision, which would not impact revenues, but both RTX and you, you talk about impact on revenues. Can you please tell me -- and also you mentioned before something about provisioning or accruals that you make. Can you please explain exactly how this is going to be booked?

I told before that we have not yet finalized our discussions with Pratt and also with our auditor. So I can tell you what might happen or what possibility is, because we book a so-called refund liability. So I mean, for -- in easy words, so when you get money from the customer, you book revenue, but when you pay back money or when you pay back money to your customer, you reduce the respective revenue. So the refund liability is booked against the revenue and translates directly, obviously, to the EBIT. So there's no difference. So if I book $500 million refund liability, it reduces revenues by $500 million and also corresponding the EBIT by $500 million. So that's the way the accounting mechanism works.

Okay. And you will actually have then this liability on the liability side of the balance sheet if you book it against revenues?

Exactly. Exactly. You book a revenue and that impacts the not -- cost of goods sold, but directly the revenue line now.

Okay. And then yes, one last question for me. You mentioned before that you have to negotiate the commercial terms about or the circumstances that need to be given that you are expanding capacities and so on. Is it fair to assume that these additional shop visits, they're going to be -- they will not dilute your margin as much as the GTF shop visits you did in the past?

Exactly. I mean the conditions -- the pricing commitment has to be in a way that it at least matches the independent margin to be replaced by the PW1100 shop visits, and obviously can't come along with a lot of working capital. We would have huge cash burden for the AOG payments. And obviously, we don't want to have additional cash burden by building up working capital for additional PW1100 on shop visits. That is clear.

We are now going to proceed with our next question. And the question is from the line of Charles Armitage from Citi.

Sorry, just going back to these 3,000 engines, is -- I just want to be precise. These are engines that have powdered metallurgy disks that were made between whatever it was, 2015 and 2021. And because of lead times and inventory, et cetera, they have hit more engines than one would think that were delivered in that. Is that correct?

Well, the first part, yes, the second part, I doubt that. Because I mentioned the increase of the population came because we put IBR 7 and 8 into the game and into the [ systol part list ].

But -- but it's still all the things coming out of the plant, 2015 to 2019, sorry, 2021.

Q3 '21.

As one would have thought that the vast majority with the HPC and the HPT would be -- they would have them both in because they are made at the same time. Okay. Fine. Then going back to the compensation, I mean the vast majority of the costs are compensation. And so it's a duration problem, how quickly can you get it done. Is that 250 to 300 the critical number? Or are there other factors such as -- are there other factors that can play a part?

I would say the 250 to 300 days, that is the critical number. I mean that drives finally the number of aircraft on the ground, that drives finally the customer compensation payments, which represents 80% of the estimate cost. I mean that is the major lever to bring that down to reduce obviously customer disruption and the payments.

We are now going to proceed with the last question. And the questions come the line of David Perry from JPMorgan.

It's very kind of you to let me back on. Just one question is a clarification. And then one is a new question. Lars, I think you said quite -- it sounded to me, you said quite confidently that the smaller GTF variants are not affected. I think you're referring to the PW variants on the C Series A220 and the Embraer. I thought Pratt left that more open-ended on their call the other day. So I just wanted to check exactly you are on the same page on that. My second question, which is a completely new one, is just -- over the summer, we've had some very interesting updates and commentary on pricing in the aftermarket. You have very big increases in price from Rolls-Royce, which seem to be sticking, GE and Safran have raised their prices in August. Can we assume Pratt & Whitney and its partners are doing something similar?

So David, let me start with the first one. Obviously, the situation is very dynamic. But from what we know so far and that clearly deals with the lower thrust and the reduced stress on the different parts, currently, our opinion is -- and shared opinion as well, is that the smaller GTF models are not impacted because they come back into our regular shop visits where we can see what's going on. So there is no incremental or additional shop visit plan. On the second one...

It's going to be in the same ballpark. I wouldn't comment on the exact numbers, but, yes.

Are you having a summer price increase as well?

Sorry, what was it? Are we having a summer price increase...?

A summer price increase in the catalog price, which is what GE and Safran have done?

I think it didn't happen in the summer. It's going now online in October. I'm not sure if every product is identical, but some -- but the -- comparably to last year, the step-up should kick in from October onwards.

We have no further questions at this time. I'll now hand back to Mr. Thomas Frank (sic) [ Franz ] for closing remarks.

Yes. So yes, thank you all for joining us, and thank you for letting us answer your question as good as we can. As Lars mentioned, it's a very dynamic situation. We'll keep you posted as soon as we have good news to share, I hope. All the best. Stay safe. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.