MTU Earnings: Outlook Unchanged Amid Engine Inspection Challenges

Wide-moat MTU Aero Engines MTX confirmed full-year guidance despite headwinds related to new issues with the performance of geared turbofan engines. We maintain our fair value estimate on the back of management’s preliminary assessment that these new issues will have a limited impact on EBIT and cash flow, but we have growing concerns about reputational costs affecting future share on Airbus’ A320neo.

MTU and Pratt & Whitney disclosed that they discovered issues related to the material used for their high-pressure turbines that they will address through a proactive inspection program. The affected engines, powering A320neo aircraft, were produced from second-half 2020 to the first half of 2021. New engines and spare parts deliveries are not affected. While Pratt & Whitney is the primary supplier of the turbine components, MTU shares 18% of the inspection program cost with Pratt & Whitney, in line with its risk- and revenue-sharing contract participation.

The inspections will result in a headwind for free cash flow over the duration of the program. However, MTU is still confident that 2023 free cash flow will be slightly higher than last year’s EUR 326 million and mentioned various levers the company can use to offset the cash spent for the inspection program.

Around 200 engines will be inspected by mid-September 2023, with 1,000 more in the next nine to 12 months. The impact to EBIT is low because of cost spread over time as part of MTU’s regular flying-hour contract accounting, and spare parts impact is marginal, with a low fallout rate of 1%.

MTU is confident in handling shop visits globally given that the majority of the engines in the program were already scheduled for visits and that no testing is required afterward.