MTU Aero Engines AG (MTX) Earnings Call Transcript

Welcome to the conference call on MTU Aero Engines 9 Months 2026 Results. For your information, the management presentation, including the Q&A session, will be audio taped and streamed live or made available on demand on the Internet. By attending in the conference call, you grant permission for audio recordings intended for publication on the Internet to be taken. The speakers of today's conference are Mr. Dr. Johan Bussmann, Chief Executive Officer; and Mrs. Katja Garcia Vila, Chief Financial Officer. Firstly, I will hand over to Ms. Thomas Franz, Vice President, Investor Relations, for some introductory words.

Thank you, Marina. Good morning, and welcome to our conference call for MTU's 9-month 2026 results. We'll begin today's session with Johannes sharing some thoughts on the current environment and recent developments. Following that, Katja will walk you through the financials. Johannes will share our guidance and will summarize the key takeaways before we open the floor for your questions. With that, it's my pleasure to hand over to Johannes.

Yes. Thanks, Thomas. Welcome, everybody. Today's key message is straightforward and you continues to execute exceptionally well. In the first nine months of the year, revenue grew by 13% to EUR 7.1 billion with an adjusted EBIT exceeding EUR 1 billion and a margin of 14.6%. Most notable, free cash flow increased by 67% year-over-year to EUR 466 million, resulting in a strong cash conversion rate of 62% -- this strong performance gives us the confidence to update our 2026 guidance, in particular for revenues and for free cash flow. Let us start with a brief look at the market environment and some key business highlights from the quarter. The overall industry environment remains supportive. Global passenger and cargo traffic continues to show resilience despite ongoing geopolitical uncertainties and elevated jet fuel prices. Flight cycles have steadily recovered since June this year with limited disruption from renewed [indiscernible] At the same time, we are not seeing any material changes in the airline behavior. Demand for both the new aircraft and MRO services remains strong. This reflects the continued importance of fleet availability and operational reliability for airline customers. The aftermarket environment remains particularly strong. High fleet utilization, combined with low retirement on mature engine platform continues to drive demand for the maintenance services and supports favorable market conditions across the MRO value chain. The key challenge for the industry remains on the supply side rather than on the demand side. Demand continues to exceed available capacity, while supply chain bottlenecks and production constraints are limiting industry output. As a result, execution, capacity expansion and supply chain stability remain critical priorities across the aerospace sector. Thanks to our diversified product portfolio, MTU remains very well positioned to capitalize on the attractive growth opportunities across both OEM and aftermarket. Let's take a look at the GTF program. Execution of the GTF fleet management plan continues in line with our expectations. Improved operational performance, better availability of powder metal parts and additional shops in the network have contributed to a higher output of GTF engines for maintenance. Due to an expected seasonal pickup in engine removals AOG remained relatively stable recently. We expect a further reduction of aircraft on ground during the coming months. Overall, we see a significant lower level of AOG compared to one year ago. Good progress on compensations. We expect the remaining powder metal related AOG compensation payments to be settled by the end of 2026. During the first nine months of 2026, we paid roughly USD 170 million. At the same time, we achieved important milestones for the GTF Advantage. MTU assembled and delivered its first GTF Advantage engine this summer. And in September, United Airlines took delivery of the first GTF Advantage powered A321 XLR. The aircraft has entered service in the past weeks, and we are very excited to see this engine in service now. Looking ahead, the transition from the PW1100 base production to the advantage standard across the network will further strengthen the competitiveness and operational performance of the GTF program. The technological improvements of this upgrade will also be made available for the GTF base engines. After certification of the Hot Section package, we expect to incorporate the upgrade during the shop visits already early next year. Let's move on to our MRO network and two expansion projects in particular. The opening of our Fort Worth VAT facility and the induction of the first CFM LEAP-1B engine mark an important step in expanding MTU's global MRO network and capability. The site strengthens our North American footprint, adds significant capacity and supports long-term growth. It allows us to increase our capabilities in the huge LEAP MRO market. In the second step, we will add GE full engine overhaul capabilities, rounding up our profile for this new site. Genuen already completed its 100th PW1100 shop visit just 18 months after opening as part of the successful ramp-up of our global GTF MRO network. Genuen's rapid start highlights the scalability of our global MRO network and our ability to efficiently expand capacity. The facility is well positioned to support growing GTF aftermarket demand through potential further capacity expansions and productivity gains. Let me now hand over to Katja for the financials.

Thank you, Johannes, and a warm welcome also from my side. Let me start with an overview of our key financials. As Johannes highlighted at the beginning, we continued our strong performance in the first nine months. Revenues increased by 13% to EUR 7.1 billion. In U.S. dollar terms, revenues show a 17% increase. Growth was primarily driven by our commercial MRO and military business. In commercial OEM, euro revenues remained almost stable. Adjusted EBIT increased by 5% to over EUR 1 billion, resulting in a margin of 14.6%, a strong profitability while down year-over-year due to a different revenue mix with stronger MRO growth. Profitability was influenced by higher installed engines and strong spare part sales as well as a solid military business. Commercial MRO delivered a strong EBIT contribution despite ongoing headwinds from the capacity ramp-up in our entire network and a high GTF MRO revenue share of 45%. Adjusted net income increased by 4%, broadly in line with EBIT, reaching EUR 751 million. Free cash flow is exceptionally strong at EUR 466 million, an increase of 67% year-on-year and already above the full year level reported for 2025. Cash conversion of 62% is ahead of our expectations and highlights our consistent focus on cash generation, operational excellence and long-term value creation. Now turning to OEM details on Page 9. OEM continued to deliver a solid performance with strong spare parts demand and high military revenues offsetting OE mix headwinds. Starting with Q3 2026. Total OEM revenues increased by 15% in euro terms, driven by 16% growth in commercial OEM and 10% growth in military OEM revenues. Military growth was mainly supported by GFE and TP400 programs. In commercial OEM, organic U.S. dollar revenues increased by a low to mid-teens percent, reflecting high single-digit growth in OE revenues and mid-teens growth in spare parts revenues, particularly for V2500, GTS and PWC engine families. While installed engine deliveries increased significantly during the quarter, spare engine deliveries normalized from the elevated levels seen earlier in the year. Together with ongoing supply chain constraints, this led to OE revenues coming in below our initial expectations. As a result, we have lowered our full year OE revenue outlook. Johannes will provide further context on this in a moment. Consequently, adjusted EBIT declined to EUR 212 million, resulting in a margin of 28.6%, in line with our midterm outlook. Headwinds from OE mix effects were largely offset by the stronger spare parts business and positive military performance. Turning to the nine-month performance. Total OEM revenues increased by 2% in euro terms with commercial OEM revenues broadly stable and military OEM revenues up 13%, again, driven by the EG200, NGFE and TP400 programs. Commercial OEM organic U.S. dollar revenues increased by low teens percent, supported by mid-single-digit growth in OE revenues and mid-teens growth in spare parts revenues. While spare engine deliveries remained broadly stable during the first nine months of the year, installed engine deliveries increased as expected. Adjusted EBIT stays even above our midterm target range. It reached EUR 633 million, corresponding to a strong margin of 30.3% -- these earnings reflect robust spare parts demand and high military revenue growth, slightly impacted by the OE mix. Overall, OEM profitability remains fully in line with our full year expectations despite continued supply chain constraints and BOE mix. Let's move to commercial MRO on Page 10. Commercial MRO continued its strong performance in the first 9 months, driven by GTS MRO and a healthy core MRO business, resulting in a stable EBIT margin of 8% -- let's have a look at the Q3 2026 numbers. Commercial MRO revenues in euro were up 14% in U.S. dollar revenues have been up 13%. Core MRO revenues in U.S. dollar increased by 18%, mainly supported by broad-based growth across independent MRO, M&S leasing and asset management business and parts repair activities. The GTS MRO revenue share stood at 45%, reflecting a higher number of shop visits as well as high material content. Adjusted EBIT increased by 20%, resulting in an improved margin of 8% compared to Q3 2025. Strong performance in our core MRO business, including MLS, overcompensated headwinds from the capacity ramp-up, particularly at MTU Fort Worth and Gen 1 and the higher share of GTF MRO revenues. Turning to the nine-month figures. Commercial MRO revenues in euro were up 19%. In U.S. dollars, revenues have been up 23%. Within that, core MRO revenues in U.S. dollar increased by 11%, driven by the aforementioned contributors. The GTF MRO revenue share stood at 45%, reflecting, as already mentioned, a higher number of shop visits, including high material content. Adjusted EBIT increased by 15%, resulting in a solid 8% margin, underlining the resilience of our MRO business and earnings profile. The basic effects were basically identical to the ones described for the quarter. Let's move to Page 11 for more details on our free cash flow. Cash generation was once again a standout of our performance in Q3 and the first 9 months of 2026. In the third quarter, free cash flow more than doubled to EUR 172 million, resulting in a cash conversion rate of 69% Lower GTF AOG compensation payments and military prepayments were the main drivers of the improvement. Year-to-date, free cash flow increased 67% to EUR 466 million, lifting cash conversion to 62%, slightly above our expectations for the full year. The improvement reflects lower GTFAOG-related cash out, strong operational performance, military prepayments and healthy dividend inflows. At the same time, we continue to invest in capacity expansion to support future growth. Excluding GTF AOG compensation payments, cash conversion would have reached 81%, underlining the strong cash generating capabilities of the business. Overall, these results confirm that MTU continues to translate profitable growth into strong cash generation while investing for the next phase of expansion. Let's now move to our hedge book on Page 12. As already mentioned in our previous earnings call, we are fully hedged for 2026 at an average hedge rate of 1.14. For 2027, we increased our hedge coverage to USD 2.36 billion, in line with our hedge coverage target range with an average hedge rate of 1.16. Due to our rolling hedging model, we are well positioned to take advantage of more favorable FX rates in the coming months, depending on U.S. dollar movement. Nonetheless, our hedging policy and related actions limit the impact of U.S. dollar fluctuation and provide greater predictability of our earnings. Turning to our order book now on Page 12. Our strong order book of EUR 29.8 billion continues to provide exceptional long-term visibility for both revenues and earnings. Demand remains strong across our businesses. In OEM, order momentum continues to be driven by the GTF program, reflecting airlines ongoing need for fuel-efficient aircraft. In MRO, we see continued demand for wide-body engines as well as mature narrow-body platforms, underlining customers' confidence in MTU's technical capabilities and global service network. Overall, our backlog and recurring aftermarket exposure provides a resilient foundation for sustainable growth over the coming years. With that, I will hand back to Johannes for the guidance update and final remarks.

Yes. Thanks, Katja. Let's turn to our updated guidance for the full year 2026, which we updated on revenues and free cash flow. Based on the strong performance in the nine months we had already in 2026, we feel very confident with these targets. We now expect group revenues to reach between EUR 9.5 billion and EUR 9.7 billion, supported by both the strong business performance and the more favorable U.S. dollar exchange rate. Our guidance for adjusted EBIT remains unchanged between EUR 1.35 billion and EUR 1.45 billion. Adjusted net income is expected to grow broadly in line with adjusted EBIT. As Katja already highlighted, free cash flow benefits from lower GTF-related AOG compensation payments, military prepayments, higher dividend income from our equity accounted companies and strong business performance. As a result, we have increased our cash conversion rate guidance to the upper end at 55% to 60%. This is already the second increase in our outlook on cash conversion rate coming from 45% to 55%. This represents a significant improvement versus 2025 when the cash conversion rate stood at 39%. Based on the ongoing supply chain constraints across all major programs, we have adapted our expectations for organic commercial OEM revenue growth to mid- to high single digits. Previously, we had expected growth in the mid- to high teens. Organic spare part revenues performed strongly during the first nine months of the year, giving us confidence that growth will reach mid-teens, the upper end of our previous guidance. Within this, we see a higher share of newer engine programs providing a slightly unfavorable mix effect. The outlook for our military revenues remains unchanged at mid-teens growth, sorry. Commercial MRO continued to perform strongly above our expected growth range, allowing us to increase our outlook and now expect growth at the upper end of our previous range in the mid-teens percentage. To specify for Q4, our shops are operating at full capacity and engines awaiting induction are already lined up outside the facilities. Due to ongoing supply chain issues, revenues will defer into 2027 partly. To wrap it up, MTU delivered a strong performance in the first nine months, leading to our 2026 guidance update. The GTF program is progressing as planned, the GTF Advantage has entered service and the fleet management plan remains firmly on track. Free cash flow improved above initial guidance. This proves our relentless efforts to improve cash conversion rate and future shareholder returns. We look forward to discuss these topics along with MTU's next phase of growth at the upcoming Capital Markets Day and to welcome many of you to Munich on November 30. With this, I would like to conclude our presentation. Thank you for your attention and more than happy to take your questions.

[Operator Instructions] Now going to take our first question -- and this one is from Sam Burgess from Goldman Sachs.

Just starting on free cash flow. It was particularly strong, EUR 172 million. Could you just quantify broadly how much of that was supported by the military prepayments and increased payables just to help us think about the sustainability of that conversion? And secondly, you've upgraded growth expectations for both spare parts and commercial MRO. You've lowered the bottom end of the group revenue guidance -- sorry, you've increased the bottom end of the group revenue guidance, but that EBIT guidance has remained unchanged. Could you just help us understand why that stronger aftermarket outlook isn't translating into higher EBIT expectations? Is that solely the spare engine normalization and new engine MRO in the mix? Or is there anything else at play going on there?

Okay. Maybe let me start with the question on free cash flow, Sam. I will not exactly specify the individual numbers for the contribution. But I think when you look at the payables, you see that our business continues to grow strongly, and we also always said that we would work on improvement of our working capital profile going forward. What you see here now are the results more or less of that. So growth and improved management on the payables side. For the prepayments in the military business, I can also give you the customer more or less. But if you look back over the past calls that we have had -- you see that we do have a stronger order intake on our running programs at the moment, which we also see continuing during the course of this year and the prepayments that we have received there are supporting our business going forward. With regards to the growth rate or the overall rate, I think you've already laid it out quite well. So we do see in the second half of the year rather normalization of the spare and lease engine ratios. That was also what we said. Going forward, when we also talked about the first half of the year, we said that we will see a pickup in installed engine deliveries across the programs in the second half of the year, and that's what you also see in the Q3 figures, that going forward. And regarding the overall margin, you see that we do have a very strong growth in the overall side and this naturally mathematically due to the difference in EBIT profitability and also dilutes the overall group margin. But let me say like this dilution is one thing. We've also proven that this business is a very high-quality, very resilient business that we continue to execute very well.

We are going to take our next question -- and this one is from Sebastian Growe from BNP Paribas.

One on MRO and maybe start there and then I have another one on the cash conversion ratio. So, you pointed to ongoing headwinds from the ramp-up costs across your network. At the same time, the margin has improved year-on-year. So I was wondering how we should think of the cost phasing related to the ramp-up or simply put, whether we might have reached a tipping point for MRO margins to expand from here. So if you can start there, please.

No, I think we mentioned first that the investments there, roughly EUR 100 million year-over-year for the ramp-up and that's what we exactly spend and build it up. I think what is really important and where we managed the project very well to come into operation soon so that we have also work that is done and revenues that are generated. That's definitely one thing. The other topic is, of course, that we are leveraging our abilities on the repair side. So that's why also from the outlook perspective, we see strong potential to have development, positive development on the profitability on the MRO business across all the programs. So there is -- we have a wide portfolio, as you know, and that's something that we are leveraging even more in the future.

Okay. Sounds good. And then the next one is on the cash conversion ratio. And as a follow-up to Sam's questions prior, Apparently, indeed, the adjusted EBIT outlook hasn't been touched, but I was wondering if you could talk about the impact from other key levers such as working capital, CapEx, et cetera, behind that improved outlook and particularly how to think about the potential spillover to outer years?

I think, Sam, what we have said. So there are a couple of drivers on the cash flow performance. One driver that we haven't spoken before in Sam's answer was that we also have lower AOG payments compared to last year at this point in time and that this will for sure be a positive development going forward as we already said that we expect AOG as direct payments for the GTF fleet management plan to end by the end of this year. The good improvement on the payables side due to business and improved management overall is also something we expect to continue to be carried on. Prepayments, we already spoke about. And another question we always get what were the dividend payments. So the dividend payments follow our good business development that we have. We had strong contribution in the first half of the year, but for the third quarter, that was not the predominant contribution. So we do expect that to continue to perform well. You all know that we've laid out the midterm guidance, and we will also provide you with some more details on cash development, cash conversion rate development during our Capital Markets Day on November 30.

Okay. May I just squeeze in one quick one on the CapEx side because we were surprised I'll leave it there. We were surprised by another supplier earlier in this reporting season on the CapEx step-up. Is there anything because you also flagged that apparently you see good dynamics then on the order intake side for existing programs, which would require you to step up the CapEx payments going forward? Or do you feel well covered with what you had put into your planning assumptions prior?

I think we do feel quite comfortable with the current setup. You see when you look at the quarter reporting that we had higher CapEx compared to last year at the same point in time. This is due to our increase in capacities across all our network. But we feel very well positioned there, and there is currently no -- nothing to think about in significant step-ups going forward.

We are going to take our next question -- and this one is from Robert Stallard from Vertical Research.

Just want to follow up on your commentary on the supply chain. Correct me if I'm wrong, but it sounds like there's been some deterioration here relative to what you've said in the past. I was wondering if you could elaborate on what those pressures are? And then secondly, in relation to that, you've made this cut to your OEM forecast here today. Does that have any knock-on impact on the Airbus ramp plans?

Well, the supply chain is in -- across all programs, and we said that, that is the main topic already for the course of the year. We see it now in some of our shops and programs coming across. That's correct. But at the same time, we are also with our wide portfolio in a position to still have strong growth on the MRO side. Nevertheless, this is something that is rising as also our in the market mentioned earlier on and something we are dealing with. And so that's actually from our perspective, nothing that really changed. Becomes more visible for the one or the other program during the recent months. But nevertheless, with the workload of our shops, we feel very confident that we can keep on the growth. And for the second part of it, I think mentioned it yesterday. So we are fully in line with the deliveries towards Airbus, so that should work out.

We are moving to the next question. And this one is from Adrien Rabier from Bernstein.

Two questions, if I may. First on the V25, cycles seem to be declining a bit more than your competing engine. I know this is also because the GTF is improving. But at the same time, you're upgrading the spare parts guidance. And if I'm right, the work scope impact for you going into Shop 2 and 3 is going to be very positive. So how do we think about the outlook for the V25 going forward in this environment? And then secondly, on OEM margins, can you help us quantify how much is due to the spare engine ratio declining versus the other factors? And can you help us think about the pace of the spare engine ratio normalization and how we think about OEM margins for the coming quarters, please?

Yes. Happy to do so. So on the lease, we still see, you're right, less flight hours in cycles, of course, but we see still very, very low retirement rate. So the shop visits that happen are quite interesting and have full work scopes. And that's one of the drivers also for our spare part business, as you can see. And don't forget, it's still half of the fleet that is operating that requires the second shop visit, which is a heavier one. So that's why we feel quite confident that the program is running on track and will contribute to our numbers for quite a while. And on the OEM margin side, I say sorry, but we are not splitting this out to the extent that you request.

We are going to take our next question. And this one is from Chloe Lemarie from Jefferies.

I was wondering, first, if you could elaborate on the supply chain challenges seen on the OE. Is this linked to the introduction of the Advantage and challenges there? Or is it just more broadly on the acceleration of the delivery required across the board? I was also wondering about price increase on spare parts. Could you remind us in which months those were effective in 2025 and in 2026 and whether we're still on a mid-single-digit level for this year?

The supply chain issue, as you rightly said, it's a really broad spectrum across all programs. So there is not a specific program, whether it's new or it's more mature that is sticking out there. So this is something that is not addressable to a single topic or geopolitical jurisdiction or whatever. So that's really a broad topic that we are dealing with. And it was like that also for the first half of the year. So there's also nothing new in the structure of the challenges.

Maybe I'll take the pricing question, -- so overall, pricing power in the market is strong. You know that there are differences from program to program on how prices really develop. As in the last year, the impact of price increases have started to materialize in the third quarter of this year. But we even had individual programs that came in even a little bit later than last year, and that will materialize to the full extent in the fourth quarter of this year.

So just to follow up, fair to assume that you will have a little bit more pricing tailwind in Q4 on spare parts than you had in Q3?

That is a valid assumption.

We are moving to the next question. And this one is from Christophe Menard from Deutsche Bank.

I have 2. Sorry to labor a little bit into the commercial OE guidance. If I understood you well, the new engine being delivered to Airbus, you are in line with the expectations. So if you lower the guidance, it has to do with the spare engine ratio. So the normalization you're talking about, is it coming faster than expected on the spare engine ratio than what you expected basically at the start of the year? The second question on MRO. You mentioned MLS growth as part of the 18% core MRO growth. Can we have an idea of how much that represents in this very strong growth? And do you see MLS growing faster than what you guided us to at the Paris Air Show? I mean, it was moving from EUR 500 million to EUR 1 billion between 2025 and 2030. Is it going faster?

Yes, maybe I take them, so to say. On the commercial OE, we have no reason to see that there is any reduction in the absolute number of spare and engines being supplied compared to what we had originally anticipated. We spoke about a normalization in the second half, so a pickup of the OE installed deliveries, yes, so that the ratio in the second half would be less favorable to our mix than in the first half of the year. Now we do see overall supply chain constraints that hit the overall engine deliveries. So specifically the spare engine deliveries going forward. The supply chain challenges me both -- I'm sorry, Christophe means both categories. On the core MRO growth, I will not specify explicit growth rate, but we are very satisfied with the growth that we are able to see in this specific business. And the MLS contribution definitely is a positive contribution going forward, but not exceeding what we originally anticipated. We are very well on track with our growth rate towards our targets for 2030.

I would add to that one. If we are -- as you see, we entered in Fort Worth on the LEAP side. So there are, of course, also contracts coming under our belt that are supported by LEAP engines LEAP spare engines that we then support our customers with. So that's as per plan. And as the revenue on the MR side growth, especially also in these new capabilities, it's natural that they, of course, take the opportunity in the market and support our customers with these engines, but all in line of our business cases, I would even put it the other way around. If we would not be that way, that would mean we would not be as successful in the market as we are, and that's why I'm very happy that both the MLS development and then the Fort Worth capability expansion is moving on and is on track.