MTU Seeks Cost Cuts as Weak Spares Sales Curb Profit Growth

MTU Aero Engines Holding AG said profit would be little changed this year, causing the shares to fall the most since 2008, and has started a program to boost earnings and cash flow at the German aircraft engine maker.

Efforts to boost performance will stretch into next year with no plans for one-time charges, Chief Financial Officer Reiner Winkler told reporters today. Jobs will not be cut, because business volume is increasing, he said.

MTU’s adjusted net income for the year will probably rise about 0.7 percent to 235 million euros ($311 million) from 233.4 million euros in 2012, the Munich-based engine maker said in a statement. The previous forecast was for profit to advance as much as 12 percent while 19 analysts surveyed by Bloomberg estimated an average full-year profit of 246.6 million euros, an increase of 5.7 percent.

The company’s shares fell as much as 10 percent, the most since October 2008, and were trading 8.4 percent lower at 67.92 euros as of 10:39 a.m. in Frankfurt. The stock has declined 1.54 percent this year, valuing the company at 3.5 billion euros ($4.5 billion).

MTU has been investing in new aircraft engine programs, including the geared turbofan that Pratt & Whitney is developing for planes such as the Airbus SAS A320neo and Bombardier Inc. CSeries. Outlays are hampering profitability before more than 3,500 orders are delivered. Engine spare parts sales, which could have been an earnings bridge, have been slowed as carriers look to control cost and defer some repairs.

Lifting Cash

“We knew the second quarter wasn’t going to be stellar, but the profit warning is a clear negative surprise,” said Sebastian Hein, an analyst at Bankhaus Lampe in Dusseldorf, Germany. “The crucial question now is when will the spare parts business come back? Or is someone else filling those orders?”

Hein has a hold rating on MTU shares and expects them to rise to 76 euros within a year.

Details of the improvement plan, which aims to lift free cash flow to the “mid-double digit million-euro range” by the end of the year compared with 24.2 million euros at June 30, will be given in October or November, Winkler said. “Our target is to improve our earnings and cost structures as well as the other cash position.”

Adjusted earnings before interest and taxes will be around 375 million euros compared to 374.3 million euros last year, the company said. Revenue should advance about 10 percent to 3.7 billion euros, it said. The previous forecast was for sales to rise 10 percent to 12 percent.

Engine Work

The spare parts business was hurt as the U.S. Department of Defense cuts spending on engines powering the Boeing Co. C-17 airlifter and carriers Delta Air Lines Inc. and United Continental Holdings Inc. sought savings on 757 engine work, Chief Executive Officer Egon Behle said. Spare sales for V2500 engines powering some Airbus SAS A320s advanced, he said.

Profitability was also affected by non-aerospace gas turbine activities which have been “stagnant” with low energy prices slowing investment, Behle said. He will leave the company at the end of this year and be replaced by CFO Winkler.

Revenue in the first half advanced 19 percent to 1.85 billion euros, driven largely by sales of new commercial engines, MTU said. The company has set a goal of 6 billion euros in sales in 2020, which Behle said remains intact.

Adjusted net income for the first-half fell 4.2 percent to 105.1 million euros.

Paris Orders

The order book backlog advanced 0.7 percent in the first six months to 11.6 billion euros, bolstered by bookings at last month’s Paris Air Show, which Behle said reached around 1 billion euros.

Orders and commitments for geared turbofans now top 4,500 engines, with the backlog for General Electric Co. GEnx engines powering Boeing 787 Dreamliners and 747-7s above 1,400 units, Behle said.

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