MTU Aero Engines AG (OTCPK:MTUAF) Q4 2022 Earnings Conference Call February 14, 2023 6:00 AM ET
Company Participants
Thomas Franz – Vice President-Investor Relations
Lars Wagner – Chief Executive Officer
Peter Kameritsch – Member of the Executive Board, Chief Financial Officer & Chief Information Officer
Conference Call Participants
David Perry – JPMorgan
Chloe Lemarie – Jefferies
Kseniya Maslova – UBS
Robert Stallard – Vertical Research Partners
Christophe Menard – Deutsche Bank
Milene Kerner – Barclays
Harry Breach – Stifel
George Zhao – Bernstein
Aymeric Poulain – Kepler Cheuvreux
Thomas Franz
Thank you and welcome ladies and gentlemen. Welcome to our Conference Call for MTU’s Preliminary Full Year Results 2022. As usual, we will start with the business revenue from now on presented by Lars. Peter will give you the financial overview, a comparison to our 2022 guidance as well as a more detailed look into our OEM and MRO segment. After that, Lars will walk you through the guidance update for 2023. This will be the end of the presentation and we will then open the call for questions.
Let me now hand over to Lars for the review.
Lars Wagner
All right. Thank you, Thomas and welcome from my side. This is my first presentation today. Please allow me a couple of opening words from my side. I’m sure that most of you know that I’ve taken over the CEO position since January 1. I have been with MTU for the last eight years. The last five years, I spent as COO and CTO on the Board. It’s my pleasure to guide you through our business review today.
I’d like to start with a few words on the market environment. In 2022, passenger traffic improved to roughly 68% of 2019 levels with North and Latin America, and Europe leading the recovery.
In January, China lifted its travel restrictions leading to a strong upturn in air travel in that region. This rapid increase in air traffic will also trigger further MRO and aftermarket demand.
On the cargo business after reaching the peaks during the COVID pandemic traffic normalized in 2022, but overall the outlook for air traffic in 2023 looks very promising with passenger traffic reaching 86% of 2019 levels, while cargo traffic is expected to slow down slightly.
This recovery is led by the narrow-body segment, which is expected to exceed pre-pandemic levels already in 2023. And our strong exposure in this segment makes us very well-positioned to benefit from these near-term developments.
Now let’s have a look at the business in 2022. Let me start with the military business. Obviously, the key highlights here, was certainly the agreement on Phase 1B for the FCAS in December 2022. Together with Safran and ITP, we will be responsible for the development of the next European fighter engine. And this new military program offers not only attractive growth opportunities, but also a major technology boost for us — for MTU. The development work will enable us to further expand our technological expertise in this high-tech sector.
We are actually currently hiring up to 300 engineers for this phase of the engine development. Furthermore, as a result of the Ukraine-Russia war the German Armed Forces are seeking to improve the availability of their military equipment. To increase the operational readiness of the German Armed Forces, we prioritized the maintenance support for these assets and improved the turnaround times in our military maintenance.
To the commercial side of the business in the GTF program, the flight testing of the GTF Advantage engine has started on an A320neo aircraft. These tests and the certification work will continue through the first half of 2023.
As most of you know, the GTF Advantage will be the new baseline configuration for the GTF on the A320neo. Its strongest variant will be the most powerful engine for the A320neo family enabling increased range and payload.
And additionally it will offer full compatibility for sustainable aviation fuels. Entry into service of the GTF A as we call it is expected in 2024. Generally speaking, the demand in the narrow-body market has improved strongly over the past 12 months. Next to this most important segment for MTU, we are also seeking a pickup in wide-body activity which will support our continued growth plan.
On the commercial MRO, we also experienced a very successful year. In 2022, we secured new contract wins of US$3.6 billion. We see the continuous growth in flight activity translating into a strong increase in demand for shop visits.
To be prepared for this development, we continuously invest in our product and service portfolio as well as in our MRO capacity. Latest addition in our new parts — is our new parts repair shop MTU Serbia that opened near Belgrade in October last year.
On our product portfolio, we added not only the PW1500G and PW1900G at EME Aero, but also the PW800 at MTU Maintenance Berlin. And finally on the MRO segment, we are offering engine test runs, with sustainable aviation fuels, to our customers as the world’s first MRO provider to do so.
And this brings me, to our progress, on the technology. In 2022, we set out possible solutions for sustainable commercial propulsion systems, but also time horizons for achieving zero emission flights in three stages, in our clean air engine technology agenda.
The main rules of action on propulsion, were identified and are now followed in the two key projects, the water-enhanced turbofan, the WET engine concept and the Flying Fuel Cell. Next to our own ambition in this field, we are very proud that the Switch program under MTU’s coordination, has been selected by the European Clean Aviation Research Program.
Switch actually focuses on two revolutionary technologies, MTU’s water-enhanced turbofan concept based on the GTF, and hybrid electric propulsion. Together with our partners, Pratt & Whitney, Airbus Collins Aerospace and GKN, we are aiming to pursue a 25% reduction in CO2 emissions and a significant cut in NOx emissions and contract.
Next to these activities in our product landscape, we are also striving to reduce our emissions in our production facilities worldwide. This is called the Eco Roadmap and we expanded it from Germany into Europe and now worldwide. As one example, we are starting the projects to use geothermal energy, at our Munich site and this is our integrated part of our commitment to the Paris Climate Agreement.
2022 was again an excellent year, for MTU. The details will be provided by Peter, in a minute. Based on the good results, we will propose a dividend payment of €3.20 per share, at this year’s Annual General Meeting on May 11. Of course, this is subject to approval by the Supervisory Board.
This marks a step forward towards our targeted payout ratio of 40%. Last, but not least, a few words on the change in the management. Since February 1, 2023 Dr. Silke Maurer, supports our executive team with her excellent experience in operations and production, as our new COO. Mr. Gordon Riske, our new Chairman of the Supervisory Board, elected by the AGM in 2022 is supporting MTU very actively and with great strategic foresight. And speaking of myself, in my new role as CEO, I will continue to be in charge for the technology development and sustainability.
With this, let me now hand over to Peter, for the financials.
Peter Kameritsch
Yes. Thank you, Lars and also a warm welcome from my side. For the full year, total group revenues increased 27% to €5.3 billion. In US dollar terms, revenues were up 14.5%. EBIT adjusted increased 40% to €655 million resulting in an EBIT margin of 12.3%. Net income adjusted increased respectively 39% to €476 million. And our free cash flow was with €326 million, up 36% compared to last year’s figures.
Turning the page and comparing our full year 2022, figures with our updated guidance from October 2022. Revenues ended up a bit below our guidance. The main reason for that, for the slightness was the supply chain instability we faced, in all of our business segments.
EBIT adjusted was €655 million and a margin of 12.3% clearly, exceeded our expectations. Net income adjusted growth was in line with EBIT adjusted growth as expected. And cash conversion rate at 69% was at the upper end of our guidance range, of 60% to 70%. Overall, very positive results and a clear step forward on our recovery path.
So, now let’s dive as usual into our business segments, starting with the OEM division. Revenue increased 18% to €1.8 billion. And within that, our military segment was up slightly with 3% and an absolute number of €496 million. Q4 was a bit weaker than expected in October — back in October, mainly caused by some delays in incoming parts from our partners.
Commercial business rose 25% to €1.3 billion. And within that, new engine deliveries were up around 10%. And here the growth mainly was driven by the GTF engine platforms, while GEnx and ITT deliveries were a bit lower than expected and bizjet freight engines remained roughly flattish. Organic spare parts were up high-teens, slightly ahead of our full year guidance.
Main drivers here as you know were narrow-body engines and freighter engines on the one hand side. On the other side, we also saw good growth for bizjet engines and also for the GEnx platform. As a result EBIT adjusted of €387 million and an EBIT adjusted margin of 21%. And the main driver for that was as I said the business mix a little bit offset by higher cost for SG&A and R&D.
So let’s move on to the commercial MRO segment. In that segment, revenues increased strongly by 32% to a number of €3.6 billion. US dollar revenues were up 17%. This is a slight miss compared to our full year expectation and also here mainly resulting from supply chain driven longer turnaround times in our MRO shops. The GTF MRO share remains at roughly 30%.
EBIT adjusted increased 80% to almost €270 million, resulting in a margin of 7.4%. And by the way the absolute EBIT in the MRO segment already exceeds the €261 million we generated in 2019 before the COVID crisis worsened, a record number for the MRO segment regarding absolute EBIT generation.
The higher EBIT margin here in this field is especially driven by the mentioned favorable business mix of independents versus GTF MRO. And in addition, we saw healthy IGT business, as this years’ business in our Berlin MRO shop and of course the current US dollar exchange rate and the development throughout the year details and they’re very supportive.
And at this point, I would like to hand back to Lars for some words on our guidance 2023.
Lars Wagner
All right. Thank you very much, Peter. The market environment looks indeed quite encouraging for 2023 despite ongoing supply chain constraints. Air traffic is expected to be almost back at 2019 levels, the strong rebound in China should result in positive effects for the aviation industry. As a result of the developments, since November 2022, we are updating our guidance for 2023.
Group revenues are expected between €6.1 billion and €6.3 billion. This is a reduction compared to the €6.4 billion to €6.6 billion we had before. Main reason is an updated FX assumption from USD 1.05 to USD 1.10 per euro based on the recent developments.
Military revenues are expected to rise 10% due to the start of the FCAS demonstrator work and some spillover effects from 2022. The organic growth outlook for commercial OE, commercial spares and commercial MRO remain unchanged. Based on these expectations, we are able to specify our EBIT outlook and are now expecting a stable EBIT adjusted margin.
Within the segments, the MRO margin will be lower compared to 2022, as it benefited from FX effects in the year. The OEM segment margin will compensate that lower MRO profitability, even under the expectation of some FX headwind on EBIT adjusted. Based on the ongoing uncertainties in the supply chain, we will not provide a free cash flow outlook today.
And this closes our presentation. Thank you for your attention. And Peter and I are now happy to answer your questions.
Question-and-Answer Session
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of David Perry from JPMorgan. Please go ahead with your question.
David Perry
Yes. Good morning, Lars, Peter and Thomas. I’ve got three questions please. First one is about long-term service agreements it’s about new ones that you may enter into. It does look like the new engines from all of the manufacturers, not just FCAS or a bit less reliable than older generation engines and cost more to maintain. So I just wondered, what scope you might have if any to charge higher prices on new long-term service agreements.
Second question please, is on existing long-term service agreements. And I’m just curious, what inflation linked price increases you’ve been able to apply for the year just started.
And the third question please, could you just give us some guidance on your R&D for the coming year, your self-funded R&D in cash and also P&L expense please? Thank you.
Peter Kameritsch
For R&D I would say, it will be slightly up 2023 versus 2022 with FCAS engine. So I mean, as you know we had the signature of the contract for FCAS that will be something like a low-to mid-double-digit euro number regarding R&D that still has to be specified.
But for the existing R&D work I would say, it will be up in the range of 10% in customer funded self-funded and also P&L. So what’s — I mean that has still to be been seen throughout the year what is capitalized what is expensed and so on but these are details. But overall, let’s say, R&D spending will go up 10% to 15%.
Regarding LTSA, yes, sure, I mean the one thing is obviously we have to work on the existing LTSA. I mean, we finalized or we closed the existing LTSA back when — together with the sale of the new engine so you are in a competitive situation. And you have to look on the whole contract period.
You have your revenue flow coming from the flight hour payments and we have obviously the expected aftermarket cost for these contracts. And we have to work on these contracts to take cost out to improve the reliability of these engines to develop repairs and so on to manage the fleet in an intelligent way in a way to avoid shop visits.
So we can do that — not only MTU has to work on that. We have to do it with our partner companies with the Japanese guys with Pratt & Whitney, so that we can maximize the profitability of these contracts. But obviously we have to — we have to live with the higher maintenance costs which we are currently facing due to the as you mentioned the small reliability problems we encounter.
David Perry
And do you think, on — I mean, on new LTSA, contracts do you think you have ability to raise the prices and charge more for an hour flow?
Peter Kameritsch
Yeah. I mean, that is always the obviously ambition but you are — I mean, you can — if you look on the landscape. Obviously, when you have a follow-up contract with an existing customer you are in a better position compared to when you are in a competitive situation, when you want to sell the engine together with a flight or agreement, but the ambition is always to increase prices and to maximize profitability and they are both sides the pricing side but also the cost side.
David Perry
Okay. And then just the last one was on inflation. What sort of price increases to inflation-linked price increases you get on an LTSA this year? You told us about spares in the past. I’m just curious about LTSAs.
Peter Kameritsch
You can — typically you have also in these LTSAs regarding the labor rates incorporated in the LTSA you have a price adjustment mechanism based on the worldwide development of labor rates. I mean, it’s not linked obviously to the German labor rates it’s more a basket of worldwide labor rates. And also the worldwide development of energy costs and so on. So basically, you can pass on the price increases to customers via these clauses. So we won’t see a big headwind coming from inflation.
David Perry
Okay. Thank you. Very helpful.
Operator
Thank you. We’ll now move on to our next question. Please stand by. Chloe Lemarie from Jefferies. Please go ahead with your question.
Chloe Lemarie
Yes. Good afternoon, gentlemen. I have three if I may. The first one is on spares. Given the reopening in China, we’ve seen some traffic outlook getting a bit stronger than the 86% of 2019, you mentioned in your opening remarks. So, I was just trying to gauge how you could possibly see your spares outlook evolve on the back of this?
Second question is actually on net debt. Could you explain the €200-ish million of compensation payments that you’ve recorded at the end of 2022? What program it relates to? Essentially what those €200 million of liabilities are?
And last point in MRO, could you quantify the sort of one-off FX benefits you recorded in 2022 from the timing of spare part purchases versus sale? And what does that mean along with the higher share of GTF work for 2023 margin please?
Peter Kameritsch
Okay. I mean regarding your first question, regarding spare parts. I mean, yes, I think the air traffic will grow stronger compared to our initial expectation for the year. But on the — so on the demand side could be stronger. But on the other side, we saw already in 2022 constraints in the supply chain. So, availability of raw materials semi-finished goods and so that’s a headwind. So I mean we have to monitor that in the course of the year. But yes, you are right. From the demand side, we could see a bit stronger demand from the spare parts side.
Net debt, I won’t go too deep into that, but that is a liability, which is a compensation payment to one of our partner companies coming from the GTF engine. It was in the part of working capital, so it was a liability and deductible in the working capital. And now we have agreed with the mentioned partner company a long-term payment plan and if you agree on a long-term payment plan out to, let’s say, five years then it’s classified under IFRS to be a financial liability. And as such, it’s part of net debt and financial liability and discounted part of net debt and now it’s part of our financial net debt. But that’s only a technical issue. So nothing has changed fundamentally. It’s just a reclassification out of working capital into financial debt.
MRO, we don’t quantify that. But it was, I would say, not too small benefit, especially given the longer turnaround times, which we saw in 2022. I mean we had to shop visits especially in the IGT field where we purchased the material back in 2021 at an exchange rate of 1.20 and we built it at parity to the customer. And you can imagine that there is a significant tailwind. So we won’t see the kind of 7.5% margin in the MRO division in 2023. Again, that will be compensated at a group level with a higher OEM margin. So, maybe the MRO margin in 2022 will be something like 1% point lower 6.5% so in that field and that is driven by the mentioned the one-time benefits which we saw in 2022.
Chloe Lemarie
Thank you very much.
Operator
Thank you. We’ll now move on to our next question. Please stand by. Kseniya Maslova from UBS. Please go ahead with your question.
Kseniya Maslova
Hi. Hello. Thanks for taking my question. I guess I just have one on spares. So your performance came ahead of your guidance in 2022. I was just wondering if you can please give us more color on platform-by-platform basis, in particular how GTF and GEnx has been ramping up? And also, if the spares activity in 2022, has there been any one-off impacts like, shop stocking up with spares since demand visibility improves? Thank you.
Peter Kameritsch
Well, it’s not one and only the reason, so which — where we saw that, this one engine program was the reason for the better performance. So, it was across the board narrow-body engines, in part also BizJet engines were quite strong in 2022, but also GEnx. And it was not really let’s say, destocking. So we didn’t see effects like that. I wouldn’t say, that now.
Kseniya Maslova
Thank you.
Operator
Thank you. We’ll now move on to our next question. Please stand by. Robert Stallard from Vertical Research Partners. Please go ahead with your question.
Robert Stallard
Thanks so much. Good morning.
Lars Wagner
Good morning.
Robert Stallard
To start off, I was wondering if you, could elaborate on these supply chain issues you experienced towards the end of last year, and what your expectations are for these challenges going forward in 2023?
Lars Wagner
Yes. Basically, we say, we do see continuing supply chain hiccups throughout the year 2023, but it’s certainly improving. The majority of the issues are coming with a big structural parts, where we usually see have a duopoly in the US, and they were struggling to compensate the loss of employees that occurred during the post pandemic or with COVID. So meanwhile, they’re stepping up their personnel. They’re back in recruiting. But it takes some months, maybe even one year, depending on the level of know-how to qualify and certify the employees. Industrial capacity from my point of view is available. Shortages are on labor, and this is to be continued and to be improved over the year of 2023.
Robert Stallard
Okay. And then, as a follow-up this might be for Peter. You mentioned that you’re not giving any guidance for cash flow, at the start of 2023 here. I was wondering, if you could maybe elaborate on your thinking there and what the puts and takes could be in cash flow this year?
Peter Kameritsch
I mean on the one hand, side we expect higher earnings compared to a quite obvious. So that is obviously, a tailwind for cash flow. So CapEx, should be rather flattish. I think the unknown part of the equation is the working capital development. So how fast does the supply chain recover throughout the year. So, it is already stable middle of the year then, I think we’re going to see a quite good cash flow cash conversion. But if it recovers, let’s say in December, or even in the beginning of 2024, then we’re going to see some drag on working capital.
I mean — and it’s — I mean it’s, touching every business segment, we saw in 2022, delayed deliveries in our military segment. So raw material supplies semifinished goods supply, was not very stable in the commercial OEM segment, in the MRO segment. So, spare parts supply, but also the performance of outside vendors providing repair parts for shop visits was — we faced higher turnaround times.
So that all resulted in, let’s say, a higher level of work in progress in the shops so you cannot finally, put the engine on the test cell and ship it to the customer bill it and to receive the money. We have to wait for the last, and final — both the last and final part, until it can be shipped. And as a reaction to that, we try to counter that with a higher level of spare parts or spare parts pool in the MRO shops, that means also higher working capital to be able to deliver at least, some engines to the customer.
So — and unless that situation has not cleared up, I think it’s not, we don’t have a solid basis to give a cash flow balance at the beginning of the year. I think we’re going to look at the situation, mid of the year and decide then, we will give a free cash flow guidance then or not — the ambition is obviously, at least to reach the same cash conversion rate as in 2022.
Robert Stallard
That’s great. Thank you very much.
Operator
Thank you. We’ll now go to our next question. Christophe Menard from Deutsche Bank. Please go ahead with your question.
Christophe Menard
Yes. Good morning. I had three questions, if I may. The first one more detail. Hedge rates in your presentation has moved down from 1.16 in 2023 to 1.13. Can you explain how you manage to do this? Because if I recall in the CMD you were at 1.16. So that was the first question. The second question is on the guidance for commercial OEM new engine deliveries. You’re still in 30% plus. I was wondering what assumption did you take? I mean is it the same assumption at the CMD in terms of number of deliveries, or should we — I mean, basically is it — I mean I’m struggling with this. I’m trying to understand, what you base this on in terms of delivery expectations, because since we met at the CMD, the consensus has come down on delivery expectations for Airbus and Boeing. I just wanted to have your view on this and whether there was more pricing embedded in this.
And the last point was on that increase due to compensation payment for program. So I understand this is coming out from the working cap, is €40 million a fair number to assume that you took out of the working cap and this is now classified as a liability. And just wanted to also to understand is it something that you may see re-happen in the future or we offer in the future, if there are further improvements on programs?
Peter Kameritsch
So first the evolution of our hedge book. I mean, if you look on our hedge book in Q3, we had a little bit below €1.1 billion of hedges at the rate of 1.16. You are right. And now we have €1.5 billion at a rate of 1.13. So we added more than €400 million of hedges in 2023 and obviously with a far better rate compared to 1.16. So we did that at the end of the year, where the FX rate was not exactly at parity, a little bit above parity and that brought the average hedge rates are down to from 1.16 to 1.13. So it’s a cost averaging effect in the hedge book. But we added a lot of hedges.
So that is — so the 30% growth in commercial, I mean if you look on our 2022 performance, we will miss the guidance also for OE deliveries in 2022. So the basis is lower. So we had — we initially guided for more than 10% OE growth and some deliveries slipped it was GTF and also GEnx engines and IGT engines which moved to the right. And so the basis is lower. And based on a lower basis, we still expect something like a 30% increase.
And your third question was, yeah, I think it’s in the net debt page in the appendix. You see that on Page 22, you see the compensation payments due to program participation. These are €219 million which are in the net debt and they were moved out more or less out of working capital. So it obviously increased the working capital number by the same amount because the €219 million was deductible in the working capital.
Christophe Menard
Okay. Okay. Okay. And is it something that could reoccur in the future?
Peter Kameritsch
In the normal course of the business not.
Christophe Menard
Okay. So it basically means that your partner has improved this part, but you need to pay on this some — I mean not — I mean it’s a liability that hasn’t been cashed out, but you need to contribute?
Peter Kameritsch
Yes. We need to contribute, but in a first step, you also receive more. So it’s a little bit — it’s a balancing payment from — so you have to always compare what is your program share and what do you deliver into the program? What do you receive? So it’s a balancing payment.
Christophe Menard
Okay. So…
Peter Kameritsch
And that’s the normal course of the business. We receive 18% and provide 80% of our costs according to our program share.
Christophe Menard
Okay. Clear. Thank you very much.
Operator
Thank you. We’ll now move on to our next question. Please stand by. Milene Kerner from Barclays. Please go ahead with your question.
Milene Kerner
Yes. Good afternoon. Thank you for taking my question. I would like to come back to the question Christophe just asked, on your commercial series growth outlook and in fact, Peter that you mentioned the lower 2022 base.
If we go back 12 months, you had expected a much higher growth that actually turned out to be the case last year. So I just wonder, what’s your confidence level around this 30% growth? And why you’re more confident given the current supply chain challenges? That’s my first question.
And then, my second question is on, your EBIT performance for the OEM segment in Q4. I mean, yes, your military sales are always Q4 loaded and that’s a help. But your margin performance in Q4 was well ahead of our — sorry of your nine months performance, despite the fact that you had a weaker mix due to higher series business growth relative to your spare parts growth. So I was wondering if you can comment at all on what might have driven that. Thank you.
Lars Wagner
Peter that you commented on it several times, obviously we expect that growth what we mentioned in the market environment, everyone wants to go back flying. And the latest discussion on the ramp COSO II Framework, we believe there’s going to be a lot of push to reach the deliveries that might be forecasted in today’s — obviously from Airbus.
So though a tremendous focus on this ramp, because the market is expecting it, the market demand is clearly there. Might be even bigger than what we can deliver. So that’s our optimistic view on the year 2023.
Peter Kameritsch
Yeah. I mean, regarding Q4 margin, I mean, it’s not dramatic. I mean, regarding Q4 we had in the OEM division 23.5% margin versus the full year of 21%. So as you said, I mean, we had a very, very strong military business in the quarter almost — it wasn’t exactly €200 million, but €190 million.
We have a high-teens growth in the spares, a little bit ahead of the low-teens and mid-teens growth in spares. So I think that the business mix is more or less the explanation for a little bit above average growth.
And if you compare Q4 2022 with Q4 2021, we are even a little bit below, the margin we had in 2021. We had in the fourth quarter a 25% margin and that is due to the a little bit lower margin in the OE segment.
So we had less — we sold less spare engines. We sold less IGTs. Also a little bit less business jet engines which are profitable. So that expands more or less a little bit lower margin in 2022 versus 2021.
Milene Kerner
Thank you.
Operator
Thank you. We’ll now move on to our next question. Harry Breach from Stifel. Please go ahead with your question.
Harry Breach
Yeah. Hello, hello, Lars. Hello Peter. Hello Thomas.
Peter Kameritsch
Hello.
Lars Wagner
Harry, Hi.
Harry Breach
Hi Lars. Can I maybe move over to — maybe commercial MRO a little bit. I guess, thinking back to the CMD and the second half of last year you spoke about large numbers of engines waiting induction of Hanover and around the network.
Can you give us some sense about the kind of waiting and demand on the MRO side, at the moment, whether it’s about the same as it was a few months ago or even more engines waiting?
Can you also just maybe touch a little bit on work scopes, whether you’re seeing those sort of expand a little bit or more or less the same and on the expected GTF versus core MRO mix in 2023 please?
Peter Kameritsch
Yes. I mean we still see a quite healthy induction pipeline. So a lot of engines are waiting for shop in. I mean we are a little bit cautious. I mean it does not make sense to induct engines into an already congested shop. So we are a little bit cautious there until the — let’s say, the situation clears up a little bit unless we have stable supply chain regarding spare parts.
Spare part supplies also outside pent up performance. I mean these were the reasons for the situation which we had in 2022. So, I mean work scope it has been already on a — I think airlines currently do full shop visit, that’s clear. It’s not — I mean, we have a certain level of pent-up demand in the global engine fleet coming out of Corona and we haven’t recovered that yet. So we’re going to see the same situation in 2023.
And if indeed, new engine deliveries move a little bit to the right in the narrow-body space but also in the wide-body space, we’re going to see an additional demand for MRO work. And because, let’s say if RPKs recover and new engine or new equipment deliveries move to the right, we’re going to see increased demand for aftermarket. Well obviously, because the existing fleet or the older fleet will have to serve that higher demand in 2023. So, we are not very concerned regarding demand for MRO work in the next — in the coming one, two years or so.
Lars Wagner
Maybe Harry to add. We have now done a great focus on our operational excellence performance inside our factories, especially in Hanover our biggest factory, but also at the other worldwide shop to make sure that we are prepared and we are improving our turnaround targets in order to increase capacity. Obviously, like Peter said, we are relying somehow on the outside vendors and the general supply chain but at least, the focus is on in our internal performance to perform as best as possible.
Harry Breach
And the mix of core and GTF?
Peter Kameritsch
Should stay roughly stable, mid to high-30s.
Harry Breach
Yes, great. Thank you. Thank you, both.
Operator
Thank you. We’ll now move on to our next question. Please standby. George Zhao from Bernstein. Please go ahead with your question.
George Zhao
Yes. Hi, everyone. So, first question on freighter. So, given the some of the softening in cargo demand and the return of our wide-body Boeing cargo capacity, do you still expect the spares for your dedicated freighters to grow this year? The first question.
And the second question, coming back to the GTF. For a few of the quarters this past year you’ve talked about the lower than expected GTF MRO work and you talked about some of the improved performance with driver of that. So, I mean how do you reconcile that with the comments from airline operators and lessors that these engines have been coming wins earlier than expected? What’s driving the differences in the outlook and the commentary here?
Peter Kameritsch
I mean regarding freight, we have incorporated in our planning already a little bit a weaker freighter traffic. I mean we last spoke about that in the introductory remarks in this review. And looking at our portfolio, I mean it’s basically the CF680, which is the engine with the highest footprint in the freighter market. And there we expect a broadly stable development. I mean in the hot phase of the freighter development, we couldn’t serve all shop visits, which we were approached to.
So, a lot of customers we have to really to reject a lot of customers. So, I think we are now in a situation where we see a better balance of supply and demand regard of freighter shop visits and as a consequence also, the sale of spare parts in that field. But not to forget, I mean, it’s only let’s say 50% of the spare parts in the CF680 coming out of the freighter market.
PW2000, I mean the freight — yes, there is some freighter footprint but that is neglected. So the major spare parts for the PW2000, they come from the military fleets from the C17 and also from the two major operators Delta and United, which operates the 757 the PW2000. So the freighter footprint here is not very important. So it’s all about the CF6-80. And as I said, we expect a stable development in 2023 versus 2022, but we don’t expect the growth here in this field.
George Zhao
And on the GTF?
Peter Kameritsch
On the GTF MRO what you see is we are in a phase where we work through the program where we put in the latest technology into the shop with it, which indeed also take longer than usually. And this — in addition to the strong traffic uplift in the utilization of the aircraft leads to this disbalance in communication I would say. It’s nothing surprising these days. The engine that’s coming offline or from the new engine line today are on a different setting and compared to what we expected in the shop visit the part utilization is lower than what we thought 12 months ago. And that is what led to a lower share of GTF revenues in the year 2022 and a lower share of GTF revenues in our MRO segment for the coming years. And that’s part of the guidance.
George Zhao
All right. Thank you.
Operator
Thank you. We’ll now move on to our next question. Please stand by. Aymeric Poulain from Kepler Cheuvreux, please go ahead with your question.
Aymeric Poulain
Yes. Thank you very much for taking my question. My question I must follow up from the previous ones. On the hedging 2023, could you remind us of the dollar gain that you would expect as a boost to the OE margin in 2023? And secondly, on the military side you obviously now include the contribution of the FCAS R&D contribution. But what would be the margin to assume for this R&D revenue stream? And as we move into 2024, how much bigger do you expect the FCAS contribution to be on the military revenue side? Thank you.
Peter Kameritsch
Obviously, we don’t give away margins for a single contract, but you can be sure that it’s a positive margin as I said low to mid double-digit number regarding revenues contribution in 2023. And then I would say a mid to high double-digit number in 2024 for that development work at the FCAS contribution going forward for the Phase 1B, which spans until 2025.
Regarding contribution from the US dollar, I would say on group level. So given the — that we have currently something like 75% to 80% hedge rate in 2023. So the dollar sensitivity is only, let’s say, something like €2 million per cent. And it’s — I mean the exposure is more or less half in the commercial OEM division, half comes out of the MRO. So that is a little bit the framework for the hedging in 2023 now.
Aymeric Poulain
Okay. But specifically on the OE margin improvement?
Peter Kameritsch
No, we don’t give away that number. We don’t look at that way. So what is the contribution of the hedging. We do hedging as a, let’s say, a measure to protect us from US dollar volatility. So we don’t speculate. We don’t put hedges in place in order to improve margins, but to give a reliable guidance to the market.
So on the one hand side, if you have a lot of hedging benefits on the other side, we have compensating negative impacts in the base business. So the hedges cover our US dollar exposure in part. So that — you have to look on the hedge as I said as a measure to avoid the US dollar risk and the US dollar benefits you generate out of the unhedged exposure. And so for 2023, we have something like sensitivity of €2 million to €3 million per cent allocated, let’s say, half and half to MRO segment and the OEM segment.
Aymeric Poulain
Okay. Thank you.
Operator
Thank you. There are no further questions at this time. So I’ll hand the call back to you.
Thomas Franz
Perfect. Yes. Thank you. So this marks the end of the Q&A session and the end of the first results call 2023 — in the year 2023. Thank you all for your participation and have a great day.
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