Dear Shareholders:
I am very pleased to have assumed the helm at MTU Aero Engines as President and CEO on January 1, 2005. MTU’s business model, its excellent technological position and the outstanding performance of its employees have impressed me from the outset. Around two-thirds of the company’s sales are derived from the profitable aftermarket business, that is, from commercial and military engine maintenance and from the spare parts business. These combined strengths offer outstanding potential for the future.
In the company’s nearly 100-year history there have been many significant changes, one of which certainly was the acquisition of MTU by private equity firm Kohlberg Kravis Roberts & Co. (KKR) on January 1, 2004. Another significant date in the year under review was June 6, 2005, when MTU’s shares were listed on the Prime Standard segment of the German stock exchange.
And on September 19, 2005, the company was included in the MDAX, the index for mid-size companies.
The decision to go public was made in February 2005, and was implemented in less than four months. For MTU and its employees, the placement of MTU’s shares thus became the most significant event of the past financial year. The seven-fold oversubscription of the shares at the issue price of €21 and the 25% increase in the share price by the end of 2005 marked a great success.
KKR’s decision to resell its shares came as no surprise, as this type of exit strategy is common practice for “short-term” investors.
Hence, at the beginning of February 2006, KKR sold the 29% share it still held after MTU’s IPO. Once again, demand significantly outstripped the number of shares on sale. Placement with a large number of institutional investors is further evidence of the trust the market has in the company’s economic and technical capabilities. MTU has thus achieved an important strategic goal: it has become a stand-alone company.
MTU now presents its first consolidated financial statements as a listed company, compiled in accordance with the rules of the International Financial Reporting Standards (IFRS). They document the strong position MTU has in all of its business segments. Order volumes grew by about €240 million to more than €3.65 billion. Sales increased by 12% to €2.15 billion and the result (expressed as adjusted EBITDA) rose by 35% to €233 million. Cashflow from operating activities reached €290 million, compared to €73 million in the previous year. The excellent cashflow position and the successful placement of MTU’s shares enabled the company to repay more than €500 million in debt.
As a result, we are pleased to announce that our valued share-holders will enjoy a dividend payout totaling €40 million – or 73 cents per share – for the financial year 2005.
MTU’s individual business segments saw a favorable development.
In the commercial engine business, sales in the year under review increased to €943 million, from €880 million in the previous year. This positive development – and above all the high number of orders received – reflects the strong growth in the market for new engines. The cyclical upturn in the aircraft industry gained strong momentum in mid-2004, leading to a 26 % increase in the number of modules and components delivered by MTU in 2005, compared to the previous year.
In the military engine business, financial year 2005 sales amounted to €491 million, nearing the level of the previous year (€496 million). The increase in sales generated by the EJ200 Eurofighter engine was, however, offset by the gradual retirement of the Tornado fleet from service. The Cooperative Model, which was finalized in November 2005 and provides for long-term maintenance of a number of engines operated by the German Air Force under the direction of MTU, will have a stabilizing effect in the coming years.
The commercial maintenance business showed particularly strong growth in this reporting year. Sales increased to €732 million from €576 million in the previous year. The fact that profit margins could be improved as well is a particularly welcome development.
With its well-balanced portfolio of products and services, MTU finds itself in an excellent position for the aviation industry’s continued growth. Experts forecast the biggest increase in the number of future aircraft in the narrowbody segment. In this segment, MTU relies on the proven market success of the V2500 engine, in which it participates as a consortium partner. The company will also be deeply involved in the production of successor models. As a consortium partner in the GP7000 engine to power the Airbus A380, which is now entering production, MTU will also benefit from growth in the wide-body segment. Deliveries of new engines, which are expected to increase also in 2006, are investments in the growing installed base of MTU engines, which will yield long-term, profitable spare parts sales.
The cyclic upswing in the aviation industry is expected to continue unabated through 2006. Steady increases in passenger kilometers flown and in worldwide cargo volumes are also expected. Internally, MTU will continue to pursue its efficiency improvement programs at all locations. Against this backdrop, the company anticipates an increase in sales and further improvements in earnings for the business year currently underway.
The 2005 Annual Report now being presented is based on the results of the work of the entire MTU team. For this reason, I would like to express my thanks to all employees for their commitment and dedication.
Together with my colleagues on the Board of Management, I thank you, dear shareholders, for your trust and your investment in MTU. You have made it possible for us to strengthen and expand the company’s market position. The future is promising, our markets are growing and MTU is profiting from this dynamic growth.
Sincerely yours,
Udo Stark
