Hello, and welcome everyone to our 2023 Capital Markets Day. I'm Isabel Green, Head of Investor Relations, and I am delighted to welcome all of you to our event today. Before we begin, I have a few notices to share. Firstly, Q&A. There's a lot of you here, so no more than two questions each, and please use your press to talk microphones, which are in your seats, so that everyone online can hear you. For those of you online, you can submit your questions on the Q&A box. My team and I are also available after the event if you want to email us. Secondly, there are no practice fire alarms scheduled here today, so if you hear an alarm, leave the room by your nearest available emergency exit. And finally, please take note of our safe harbor statement.
The forward-looking statements we make today are subject to the usual risks and uncertainties. Further details can be found in the risk section of our latest annual report. Thank you. We will now begin.
Frederick Henry Royce was born in 1863. His new partner, the Honorable Charles Stewart Rolls. In 1906, Rolls-Royce Limited was formed.
Today, the company that has grown from their association helps to power, connect, and protect the modern world. Rolls-Royce is at a pivotal point in its history. We are transforming our organization, transforming our performance. Building a high-performing, competitive, resilient, and growing business. Unlocking our potential and enabling us to chart our own destiny.
Okay. Welcome, everybody. Good afternoon, and if you are joining from the U.S., good morning as well. Thank, thank you for taking the time to join us today, to those in the room and to those online. I hope you enjoyed the video. Every time I watch it, I am impressed and energized. Rolls-Royce is a great company with a rich heritage, a company with so much to be proud of and so much potential.
And it is that potential and how we will deliver it, we will share with you today. We have been making progress in creating a high-performing, competitive, resilient, growing company. We delivered strong first half results, helped by transformation and performance management. We are accelerating financial delivery and raised our full year guidance earlier this year. This progress gives us confidence in the delivery of our strategic plan and the midterm targets.
First, I would like to introduce my leadership team. They represent an outstanding mix of deep technical and commercial expertise and bring a fresh perspective. Presenting today, Helen McCabe, our CFO, Adam Riddle, Defence, and two brothers there, Rob Watson, Civil Aerospace, and Jörg Stratmann, Power Systems. And here, but not presenting, we have Chris Cholerton on the front row, and Nicky Grady-Smith, blue dress lady, and Simon Burr, just next to her, our technology guru, Sarah Armstrong, our HR director, and Mark Gregory, our general counsel. You will have the opportunity to meet them during the day.
As video suggested, Rolls-Royce is at a pivotal point in its history. This year, we developed a clear strategy that will see this great company perform to its full potential. We have made material progress, but there is more we want to do.
That is what we are addressing today. Today, the team and I will take you through how we plan to do that. I will start with a strategic update and share our midterm targets. Then I will set out our clear and granular strategy. Following that, Helen will take us through the financials, including our capital framework. We will then take the questions from the room, followed by an extended break, during which those in London can experience our on-site exhibition, and those online can explore case studies and exhibits virtually.
When we return, you will hear from the three divisional presidents about our detailed strategic initiatives, which underpin our targets. We will conclude with a final Q&A and key takeaways. I want you to leave today with a powerful sense that this strategy is clear and that it is different.
It will take Rolls-Royce to a top-tier competitive performance. It will be rigorously delivered, and it is owned by the whole organization. Everyone is aligned and focused on its delivery. I am proud of what our teams have achieved so far. This is our proposition, which we shared with you before. Firstly, build a high-performing, competitive, and resilient business with profitable growth. Second, grow sustainable free cash flow, generate cash from operations, and be disciplined with capital investment. Third, build a strong balance sheet and grow shareholder returns. By doing this, we will become a stronger partner to our customers as they meet the challenges and opportunities that define the future. We will unlock the full potential as we translate engineering excellence into strong financial performance.
We will have the financial strength to invest in growth and grow shareholder returns, and we will create more opportunities for our people so everyone can be a part of an energizing, rewarding, and world-leading team. Turning to our differentiated position, we have a strong portfolio of products and technologies in attractive markets. From these positions of strength, we are transforming to become a stronger business with a high-performance culture. In Civil Aerospace, we are positioned to grow in the wide-body and business aviation markets with our market-leading, efficient, and high-performing Trent and Pearl engine families. These products power the latest and most advanced aircraft types, such as the Airbus A350 and Gulfstream's G700 and G800. In defence, we are a trusted long-term partner to the US Department of Defence and UK Ministry of Defence.
We have an exceptional order pipeline in transport, combat, and submarine, helping to secure our long-term growth profile. In Power Systems, we have a greater mix of revenue in high-power segments, where the margins are stronger. This gives us a structural advantage compared to our peers. In nuclear, our capability is unrivaled. We have the broadest capability in the industry and are leveraging it in the new markets, such as small modular reactors, SMRs, and microreactors. All of this is underpinned by our strong brand, deep customer relationships, and partnerships.
Our transformation is also making us stronger and more efficient and resilient. Transformation is driving high-quality earnings growth and more ratable and growing cash flows. To achieve this, we need to work as one Rolls-Royce with different ways of working and driven mindset to make a difference and achieve win-win solutions with our partners.
A differentiated culture, performance culture, where performance is tightly monitored and actions are timely taken. A new organization to simplify, build capability, and become more efficient. Strategic clarity that enables a more focused and aligned organization, clear on accountabilities and sharing the same ambitions. A business which is externally focused and benchmarked. All of these will make us more differentiated. So you can see why I am feeling so confident about our future.
And of course, at all times, the safety of our customers and employees will remain of paramount importance. Let me take a few moments to talk about our advanced technologies. We are experts in systems integrations. Our customers are not just buying an engine. They are buying a solution that integrates into a larger system, an aircraft, microgrid, or yacht, integrated seamlessly to create the power and propulsion they need.
Our advanced manufacturing techniques mean that we can consistently create complex and detailed parts to an exceptionally high specifications. Our expertise in controls and electrical systems underpins the high performance and reliability of our products. Our next generation developments are also advantageous. Today, I will just cover two: UltraFan and nuclear. UltraFan is distinctive, developed to be competitive in the wide-body and narrow-body segments. It has scalable thrust, ranging from 25,000 pounds to 110,000 pounds, enabled by a gearbox that delivered 64 megawatts on test, an aerospace power record. The suite of UltraFan technologies deliver a 10% efficiency improvements on the most efficient engine available today. By the way, just to remind you, probably you know, but most efficient engine is our XWB-84.
We can retrofit some of these technologies into today's engines, such as the Trent XWB, to increase time on wing and fuel burn efficiency. Next, nuclear. Our distinctive nuclear capability means we are in the best position to play a leading role in the SMR and microreactor markets. Our SMRs are based on a modular construction that reduces cost, risk, and time to construct compared to large nuclear projects. Our microreactor technology is being designed for off-grid nuclear power applications, answering the demand for energy security and low carbon solutions. Moving to our strategy. In February, we launched our transformation and strategic review to clearly set out how we could unlock the potential of the business. Our strategic framework is clear. There are four pillars. First, portfolio choices and partnerships.
The markets we have chosen to operate in, businesses we want to invest in, and the partnerships that will help create truly winning positions. Second, our advantage businesses and strategic initiatives. How we will create competitive business, expand our earnings potential, and sustainably improve our performance. Third, efficiency and simplification. The importance of a company-wide focus to drive synergies that will enable us to be more competitive and simplify the way we operate. And finally, fourth, our commitment to the energy transition and capturing the benefits of becoming digitally enabled. This granular strategy will help deliver our proposition to be a high-performing company with quality profits, competitive margins, growing sustainable cash flows, and resilient returns. Before I take you through each part of the strategy, let me share our midterm targets. We want to achieve these at pace.
They are based on our expectations for 2027 timeframe, but if we can get there in an accelerated way, we will. These are compelling targets and mean a step change in Rolls-Royce performance. They are underpinned by our strategy and demonstrate we are creating a new company, taking Rolls-Royce significantly beyond any previous financial performance. The high and achievable bar that we have set is a reflective of our new winning mindset. We will quadruple operating profit from the 2022 baseline to achieve between GBP 2.5 billion and GBP 2.8 billion, and we will expand our operating margins to between 13% and 15%, equal or better competitive performance benchmark against our peers. We aim to grow sustainable cash flows to between GBP 2.8 billion and GBP 3.1 billion, more than 100% conversion of our improved profits.
And finally, we are targeting 16%-18% return on capital, improving by more than 10 percentage points compared to 2022, creating a compelling investment proposition. Delivering these targets will mean we have created a financially and operationally strong business. They are a milestone on our journey, not our final destination. I would like to emphasize this point, and we will continue to grow into the long term. As I mentioned in August, our progress in the coming years will be progressive, but not linear, year- on- year. We will provide guidance for 2024 at our results in February. This year, we are achieving good performance improvement. Our current trading is in line with guidance provided with our half-year results, and it is unchanged. Turning to the operating margin targets by division.
The targets demonstrate that we are building a business which will perform competitively or better than our peers. Civil Aerospace has the biggest step change, moving from just 2.5% operating margin in 2022 to 15%-17%. In Defence, we started from a stronger place, but can still do better. We plan to improve to 14%-16%. In Power Systems, our most diverse business, we will deliver a step up from 8% in 2022 to between 12%-13% in the midterm. These are also all best-on-record performances and represent a significant performance improvement to unlock the potential in every division. They are underpinned by divisional strategic initiatives and efficiencies across the group. Turning now to the first pillar of our strategic framework, portfolio choices and partnerships. Our strategy is granular.
We are making choices and executing on them. This allows us to allocate resources more effectively and derive profitable growth. We have segmented our portfolio into three categories: key investment areas for performance improvement and growth, partnerships to create truly winning positions, businesses and activities we will exit. Our strategic choices will drive value creation. We will focus our investments on areas where the market is attractive and growing, where we have or we could have a differentiated position with good market share, strong customer recognition, excellent products and technology that will generate midterm and long-term value so that we can win.
In Civil Aerospace, we will focus on wide-body and business aviation, leveraging the value from our Trent and Pearl engine families, and investing for the future with the UltraFan. In Defence, we have opportunities for greater performance in transport, combat, and submarines.
We can also use our expertise in adjacent fields such as nuclear microreactors. In Power Systems, we will focus on Governmental, Marine, and Power Generation end markets, where we see the strongest demand and an opportunity for better returns from our power-dense and reliable solutions. In some cases, partnerships can help to strengthen our market positions, bring new skills, build capability and scale, as well as de-risk and reduce capital investment. In Civil Aerospace, we believe we are well positioned to reenter the narrow-body market by choosing a partnership approach for the next program.
Our UltraFan technology is a vital step towards this. At the right time, with the right partner, we will decide the next steps. For SMRs, a broad set of partners will strengthen our position to deliver the overall solution and reduce the future capital call. We have extensive nuclear expertise.
Partnerships can bring funding and skills to complement this. In Power Systems, our focus strategy in Power Gen will make this business more efficient and competitive, and drive faster profitable growth. We are also considering potential partnerships to further grow our market position, broaden our Power Generation offering, and benefit from cross-business synergies. Battery storage systems are a logical complement to our stationary Power Generation business, as we have transferable capability. We are already developing a good position in Europe. A partnership with access to additional markets could strengthen our position. But this strategy is also about making confident choices on where we will not invest. We are looking to exit non-core businesses that are not a strategic fit for us, and we believe hold more value to others.
In total, we expect to generate between GBP 1-1.5 billion in gross divestment proceeds across all divisions during the next five years. To be clear, we will only sell assets at the right time and at the right price. One point I would like to make, this GBP 1-1.5 billion obviously is not included in our midterm targets. That free cash flow doesn't include that. For example, in Rolls-Royce Electrical, we are looking at options to exit in the short run, or alternatively, for the right value, reduce our position to a minority share with an intention to exit fully in the midterm.
We believe, given the world-class capability we have built in advanced air mobility, that this will represent good value to a third party and will allow us to focus on our core electrical engineering activities in Civil Aerospace, Defence, and Power Systems. Before talking about market growth, I want to talk about the current macro environment. Geopolitical outlook is uncertain. GDP growth in the next 10 years is expected to be lower than in the past. Inflation and interest rates continue to be higher, and this may continue for longer. In the short run, we may see a recession and weakened demand in some parts of the world. Additionally, we expect industry-wide supply chain challenges in aerospace to continue for another 18-24 months.
However, despite these challenges, our focus is ensuring we are building a truly resilient business that is better able to manage this volatility and continue to grow. Our strategic initiatives will enable us to grow at a rate above the market in some spaces. In some areas, we are somewhat insulated from market volatility. For example, there is a growing need for aircraft globally.
Demand will continue to grow in data centers due to the increased demand for digitalization and AI. We expect, we expect defence budgets to continue to grow, and these are partly insulated from GDP fluctuations. Looking at market volume growth rates, I will take each of these in turn, starting with business aviation. Market growth is forecast to be 3%-5% per annum to 2030, growing above GDP, driven by an increasing number of high-net-worth individuals and new aircraft programs.
Rolls-Royce has an advantage in the large cabin market with a strong brand. Our position on the latest Gulfstream, Bombardier, and Dassault platforms is driving higher than market growth. By the midterm, we will power three of the four fastest, largest, longest range business aircraft, and we plan to have a fleet of more than 9,000 business jet engines. In commercial aviation, in wide-body, market growth is forecast to be in the region of 5%-7% per annum to 2030.
This is driven by post-COVID recovery, fleet renewal, and a growing middle class in markets such as India and China. We expect our wide-body business to grow faster than the market in the coming years, mainly due to the platforms we are on. We also have a new opportunity to grow in the freighter market due to the launch of Airbus A350 Freighter.
In defence, the market in combat and transport is expected to be flat to 2% volume growth to 2030. We plan to grow slightly faster than the market as we deliver the new, newer aircraft programs we have won. Submarines is also a growing market. Nuclear-powered submarines are critical in building strategic defence capability, and our position as the provider of nuclear propulsion and power to the U.K.'s Royal Navy is unique. Australia will require nuclear propulsion capability under the AUKUS agreement, with new boats that will be powered by our reactors entering into service in the early 2040s. Over the long term in defence, our growth outlook remains really strong, with up to 5% average annual growth expected from 2022 to 2040.
This is underpinned by our recent wins on FLRAA, in partnership with Bell, the B-52 re-engining program, AUKUS, and the Global Combat Air Program, known as GCAP. In Power Systems, overall, we expect the market for Power Generation solutions to continue to grow at an average rate of 5%-7% per year. We have a strong market position in mission-critical applications, such as data centers, where we have more than 20% market share that generate more than 70% of our OE revenues.
Data centers are growing rapidly, driven by global trends for data processing and AI. Our Power System solutions currently back up every third email sent in the world. Battery storage solutions are another growth market, where we see growth of around 20% per year and an opportunity to benefit from the demand for low carbon energy and expect to achieve profitable growth.
In mobile solutions, such as yachts, tanks, navy, and commercial marine, we expect average market growth of 4%-6%, fueled by double-digit growth in governmental segments in the midterm. In summary, our portfolio is well positioned to capture growth in these markets, and given our focus on performance improvement, we will also be more resilient business, better able to manage and respond to external shocks. Now, let me take you through the strategic initiatives which underpin our profitable growth. On the left-hand side of the slide, you can see the relative contribution of each division, with improved profitability in civil, defence, and Power Systems. We also expect profits to benefit from portfolio choices, such as in new markets where we exit electrical. The other exits are expected to have some adverse impact on profitability.
On the right-hand side, you can see the underlying drivers in each division, including the benefit of our group-wide efficiency and simplification program. The business presidents will take you through this in much more detail, but I'll give you the key points. I will start with the initiatives in Civil Aerospace, where we expect the most material uplift. In business aviation, the market success of the Pearl engine family has been outstanding, and we have a strong order book that is driving fleet growth. This positions us well to optimize commercial outcomes and grow our margin. In widebody, there are six levers to improve LTSA margins that I have talked about before. Three of which relate to cost and three to revenues.
These are extending time on wing with better product durability and greater use of digital tools, lowering shop visit costs with better working practices, reducing product costs with better buying and engineering keeping engines earning for longer with contract extensions and conversions, implementing a new value-driven pricing strategy to our new and renewing contracts, as well as addressing onerous and low-margin contracts, and finally, driving rigor on contractual terms and conditions.
We have already made good progress on these items. In this period, we continued to improve our LTSA margins due to our performance improvements on six levers. The same commercial and cost disciplines are being applied to other areas of our widebody business, too, with profitability improvements coming through in time and material, OE, and spare engines. We also see a favorable spare engine mix with more XWBs contributing to our improved performance. Growth comes on top of this.
Our in-service fleet is growing faster than the market. We power a third of the widebody aircraft in service today, and in 2022, more than half of new deliveries in the industry were powered by Rolls-Royce engines. However, this growth alone, at 2022 margins, 2022 margins, would only drive a small fraction of the improvements we are guiding in the midterm. We actually did this exercise. Our actions at expanding the margins this year, and in the midterm, allow us to benefit from this growth. Moving to defence. This business was already performing well, but there is still an opportunity to improve through strong performance management, commercial optimization initiatives, and efficiency. We have common growth drivers across transport, combat, and submarines. Firstly, growth from volume and mix as we move from legacy programs to new funded programs.
Secondly, the same focus on commercial optimization and value pricing behaviors as we applied in Civil. And finally, we are prioritizing investment as we focus our spend and benefit from an increase in customer-funded programs. In Power Systems, our profit growth is being delivered by strategic initiatives focused on Power Generation, Governmental, and Marine end markets. In Power Generation, we are optimizing our cost structure and focusing on key markets to drive margin growth.
We are also expanding our microgrid solutions and extending our services offering in battery storage systems, which is moving to be a profitable business in the short run. In Governmental, we are capturing near-term growth with scope, expansion, and investment. And in Marine, we are developing alternative fuel solutions to strengthen our synthetic fuel-ready portfolio. As you can see in the graph, all our businesses see sustainable performance improvement from efficiency and simplification initiatives.
This brings me onto the third strategic theme. We had a total cash cost to gross margin ratio of 0.8 in 2022, and before that, 0.9 in 2019. I'm skipping, for obvious reasons, all the COVID years. You can calculate them, but they are not positive numbers. This is around twice the best-in-class level for a business like ours. This will approximately halve by midterm, taking it to a market-leading level. To achieve this, we are tackling costs from multiple angles. Firstly, we are right-sizing the organization and ensuring it is structured to support sustained efficiencies. We have already announced plans to reduce the number of roles across the company by between 2000 and 2500. We expect this to be largely completed by the end of 2025, with an annualized sustainable benefit of around GBP 200 million.
We expect severance costs of between GBP 200-250 million, which will be taken as an exceptional charge. The new organization will be aligned to strategic delivery, removes duplication, enables simpler, more agile ways of working. It will be underpinned by upskilling, more efficient processes, better use of technology, and a common operating model. Next, procurement excellence. We have plans to deliver around GBP 1 billion of gross third-party cost savings over the next five years, which will help offset the impact of inflationary and product cost increases. We announced last month a new enterprise-wide procurement and supplier management structure to further build capability and leverage scale. One recent example of procurement improvements was a review of our building services contracts, which cover around 70 sites worldwide, and had not been reviewed for eight years.
We re-tendered this contract and achieved GBP 38 million savings over five years. Finally, zero-based budgeting. We have set a 10%-15% reduction in targeted areas. Starting next year, we are taking a clean sheet approach to spend. Both Helen and I have experience in this area. I am confident this level of benefit can be delivered. We are also aligning R&D spend to our strategy, for example, through the exit of electrical. We are benefiting from increased third-party funding. TCCGM is an important metric. We track and pay attention to it because it is a measure of the operating leverage of our business, and it is resilient.
Across the group, our efficiency initiatives and the choices we make will deliver sustainable, and sustainable is the key word here, sustainable annualized savings of GBP 400 million-GBP 500 million in the midterm, making us more competitively advantaged and fit for the future. Turning to the first part of our fourth strategic pillar, lower carbon. We are committed to becoming a net zero company by 2050, and supporting our customers to do the same. We will play our role to reduce emissions within this strategy. This will also create new growth opportunities. Our foundations to do this are already in place. We are making good progress towards making our own operations net zero, with a 60% reduction in our scope one and two emissions achieved since 2014. But there is more to do to fully decarbonize.
For aerospace and defence, the best solution to decarbonize is sustainable fuels, which can deliver an 80% reduction in life cycle carbon emissions compared to fossil fuels. All the commercial aero engines we produce and our most popular reciprocating engines are now all compatible with sustainable fuel. We are excited to announce that today we are powering Virgin to make the world's first transatlantic 100% SAF flight with a commercial airliner. I don't know if you have seen it outside. Unfortunately, it sort of had some delay, but it is now in the air, I'm told. So around 12:00, it actually took off, and given that, we expect that to land in JFK around 3:30 P.M. local time. But this is not all, because our defence team supported the RAF's first 100% SAF flight on a Voyager aircraft last year.
In Power Systems, we are evolving our engines and developing alternative fuel solutions such as methanol, hydrogen, hybrid, and battery storage solutions. In partnership with superyacht shipbuilder Lürssen, we are already working on offering methanol-powered engines for superyachts. In nuclear, I already talked about the potential opportunities with SMRs and microreactors, which will be needed to decarbonize the grid and can produce the power necessary to create synthetic fuels. In addition to the U.K. interest in SMRs, we are deeply engaged with governments, developers, and potential industrial customers in Czech Republic, Finland, Sweden, U.S.A, Poland, and the Netherlands. To summarize, we will transform our business to low carbon without requiring high levels of investment today or in the midterm, and the energy transition creates new opportunities. Second element of our fourth pillar is digital enablement.
We are focused on four areas of innovation: enhancing the customer experience, accelerating the product design, improving manufacturing, and empowering our people. Let me give you some examples of where we are already in action and where we see further potential. Starting with customers, our intelligent engine platform provides two-way communication with our engines, delivering vital health and performance data to to our secure cloud. With digital twin capabilities, we can predict the forecasted time an engine stays on wing. This is improving dispatch reliability and reducing disruptions for our customers and their passengers. Our future vision is raising the bar to 100% availability. If you imagine that world, where everything is planned and predictable, improving the service we offer customers. Secondly, digital tools impact how we design, build, and transport our customers' fleets.
Powerful virtual simulations can save up to 25% time in the rigorous development and certification testing of new engines. Taking this to the next level will accelerate product development of new technologies to market. Using AI will create new versions of existing products 15% faster, reducing the cost and accelerating the time of bringing new engine programs to market in the future. In manufacturing, we continue to improve by having more insight into operational performance. Our turbine manufacturing process leverages AI machine learning, using data science to better understand the turbine cooling hole cutting process, predicting defects before human inspection. If you want to know more about this process, here's the man, Simon, there, so, for any questions. But in the future, we will enhance this technology with visual AI to inspect parts, giving real-time results and revolutionizing routine maintenance.
Finally, we are empowering our people to transform their working environment with the right digital tools and fostering a digital culture. Looking ahead to the future, we aim to remove 20% of repetitive tasks using automation, generative AI, and digital assistants, reducing costs and giving our people more time to focus on higher-value activities. We are already in action, but there is also a lot more to do, and therefore, more opportunity in this area. Before I close, I want to share why I am excited about our long-term outlook, too. I have spent time on our strategy and shown the rigor underpinning our midterm targets. Obviously, division presidents will give you a lot more than I did. The same drivers underpin our long-term growth opportunities, too.
In Civil Aerospace, the long-term growth is being driven by the strength of our Pearl and Trent engine families, which will power the in-service fleet well into the 2040s. In defence, we will see the benefits of recent wins, such as B-52, FLRAA, AUKUS, and GCAP programs. These programs will ensure we continue to grow in these markets with engines that will remain in service for 30, 40 years after they are delivered. We also see long-term potential for our competitive portfolio of Power Systems products. Development of more fuel-efficient platforms and adaptation to new fuel sources will drive demand. SMRs have a compelling long-term growth story. We could have the first units producing power by early next decade if orders are placed soon.
There are also new business opportunities, such as narrow-body aviation, where we are well positioned to partner on the next generation of aircraft with the UltraFan, and in nuclear micro-reactors, too. In closing, I am confident and excited by the potential I see across Rolls-Royce. We have the expertise, drive, and the team to deliver this. We have a strategic plan to deliver our Rolls-Royce proposition: to become high-performing, competitive, resilient, and growing profit and sustainable cash flows. We will also have a strong balance sheet and growing shareholder returns.
We have made a good progress in 2023. We are accelerating financial delivery. Our progress so far and transformation actions give us high confidence in the delivery of our strategic plan and midterm targets. Our strategy is granular. We are clear on the choices we need to make to shape our portfolio and prioritize investment.
We have strong foundations and advantage businesses in growing markets with performance improvement initiatives, which are underpinned and owned. The organization is aligned and mobilized to succeed with a more efficient and simpler structure. Our businesses are capable of delivering low carbon solutions and digitally enhanced processes and services. All this is enabled by our new mindset, better ways of working, and our performance culture.
These elements combined will create a distinctive capability in the industry. This is evident in the targets we have set, targets which represent a step change in performance to make Rolls-Royce financially stronger than it has ever been. We are building one Rolls-Royce, a company that will be able to deliver on the potential of our world-class technologies, invest to grow, lead the next generation thinking for our customers, and play an important part in the energy transition. Thank you.
Now, I'm gonna hand over to Helen.
Thank you, Tufan. Good afternoon, everyone. It's great to have so many of you with us today in the room and watching online. Tufan has set out our strategic frame and midterm targets. I will now take you through my key priorities as CFO, our free cash flow growth, and our plans to strengthen the balance sheet and our capital framework. Before that, I'd like to share my initial reflections since I joined Rolls-Royce.
First, I'm delighted to be here. Everyone has been hugely welcoming. We are all focused on working together to deliver Rolls-Royce's full potential. Rolls-Royce is renowned for engineering excellence. In my first few weeks, I visited our sites across Europe, the U.S., and the U.K., and saw this firsthand. It was great to walk the factory floors and see some of the world's most powerful, efficient engines being built.
Our products power, protect, and connect the modern world. That's quite a nice thing to be able to tell your kids when they say, "So what is it you actually do at work all day?" I've also been struck by the passion, commitment and motivation of the people I've met. They are hugely proud to work at Rolls-Royce, and rightly so. However, we need to capitalize on our advantage positions and be more deliberate in our strategic choices.
We need to improve the quality and grow our earnings and cash flows to deliver the financial performance we are capable of, and that investors deserve and expect from us. We have made substantial progress this year. That was evident in our first half results and our full year guidance, which we reconfirmed today. We have started the journey, but there is much more to do.
Before Rolls-Royce, I spent 30 years in large, complex global businesses with engineering and technology at their heart. I was a CFO of a global business with multiple divisions, which had a profit of more than $10 billion, a business where Tufan and I previously worked together, including on material transformation programs. In the last one, costs were reduced by $3 billion, and the earnings potential of the business expanded by more than $5 billion. Transformation's not easy, but it can be done. That's the opportunity that attracted me to this role, and it shapes the 4 big priorities I have as CFO. These are: First, integrated performance management. One of the outcomes of the strategic review is the need for improved processes and a stronger culture of integrated performance management.
In my previous business, my approach was that strategic plans were linked to annual budgets, which in turn were linked to in-year performance management. We actively tracked performance and made interventions proactively. Targets were underpinned and owned across the whole of the organization. That was not done well at Rolls-Royce. That's already changing in 2023, and we will strengthen it further.
Second, commercial and cost optimization. My focus is to develop sharper commercial acumen and a more cost-conscious culture. I support a philosophy where everyone acts like an owner. They treat every pound spent as their own and make it count. That's the mindset we are driving for. We're already upping our game with new frameworks and better training in place to build skills and capabilities. Again, still more to do. Third, delivering a sustainable improvement in working capital, and fourth, our capital framework. We need a strong balance sheet.
I will come back to the last two as they are key priorities. Before that, I will turn to free cash flow. We have a clear ambition for what Rolls-Royce can deliver. It is based on extensive benchmarking, the rigor of our strategic review, and our transformation plan. In the midterm, which we see as being around 2027, we are targeting between GBP 2.8 billion and GBP 3.1 billion of free cash flow, a growth of around GBP 2.5 billion compared to 2022. Let me walk you through the main elements of this growth. Operating profit growth between GBP 1.8 billion and GBP 2.1 billion over the period is key.
We achieve that by sustainably expanding the earnings potential of the business, by being laser-focused on our strategic choices, by having all divisions firing on all cylinders, and by driving for an improved quality of earnings, as demonstrated in the margin targets we have set. We are making good progress. 2023 profits and margins are forecast to be materially above those of 2022. Our investment approach will be disciplined, with spend targeting strategic growth, including the innovation and engineering excellence we are renowned for.
We plan for CapEx and R&D to be above depreciation and amortization across the period. This compares to 2022, where it was approximately GBP 300 million below. We expect the net civil LTSA balance to grow between GBP 0.8 billion and GBP 1.2 billion per annum. This compares to a net growth of around GBP 800 million in 2022.
On working capital, we are forecasting a release over the midterm. Then, cash tax payments. These will naturally increase in line with our profit growth, and as we pay down debt and strengthen the balance sheet, our financing costs should reduce compared to the GBP 350 million outflow in 2022. Last, the cash costs of closing out historical overhedged positions, which were a drag of GBP 300 million in 2022, will be gone by the midterm. Our actions will make our cash flows more robust and ratable, with our free cash flow to operating profit ratio improving across the period. While we expect cash flows to grow in all years between that, between now and the midterm, it is important to note it may not always be linear, due, for example, to the timing and mix of shop visits.
I will now dive deeper into the civil LTSA balance. A key driver of our Civil Aerospace business model is that we receive cash inflows from engine flying hour receipts ahead of shop visit costs being incurred. The best way to understand the true cash impact to Rolls-Royce is to look at the net movement of the LTSA creditor, the offsetting LTSA asset, and the prepayments we make to our risk and revenue-sharing partners.
This chart shows that. It shows the expected growth in the net LTSA balance. As I said, we expect this growth to be in the range of GBP 0.8 billion-GBP 1.2 billion per annum to the midterm. Why? First, we have strong positions in growing markets. We expect robust growth in our engine flying hour receipts as the market continues to recover and grow, and as our fleet expands.
We expect large engine flying hours to grow between 120% and 130% of 2019 levels by the midterm. Second, business aviation. Here, engine deliveries will grow to 250-300 per year, which compares to 165 in 2022. These engines are used less intensively than wide-body ones, so the time between shop visits is longer, driving the LTSA balance growth. Third, on a normalized basis, we're also achieving a higher average rate per engine flying hour from our contracts. On top of these initiatives, we are seeing the benefit of some of our other strategic initiatives, including time on wing.
As you'll hear from Rob, and if you get the opportunity from our great teams who are managing the expos, we have a comprehensive plan to extend the time on wing of our modern engines. However, we still expect large engine refurbs to grow to 700-750 in the midterm. And finally, currency. The consumption of our legacy hedge book means our midterm guidance assumes a blended forex rate of around $1.36 to the pound, compared to $1.50 in 2022. This drives a higher sterling equivalent for our dollar-based inflows. So, as you can see, there are several factors that influence the net LTSA balance growth. As the gross numbers, such as invoiced flying hour receipts, are large, there can be a degree of volatility in any given year.
To recap on LTSA, the growth in engine flying hours, the shape and expansion of our engine portfolio, and our strategic initiatives will drive growth in our net LTSA balance each year. Working capital. It is a key focus for me, for us, as we look to strengthen our balance sheet and improve our return on invested capital. We have a detailed plan to drive a material and sustainable improvement across the period.
However, some of this benefit will be offset as we address legacy headwinds and support the business as it grows. Overall, as the chart shows, we expect a net release of working capital over the midterm, which will further increase our net liability position. Let me unpack that for you. We have completed a detailed analysis of each business, including industry benchmarking. We have detailed insights from this work.
If I shared just two, first, we found that supply chain management and production plans were not as tightly linked as they should have been, and second, that supplier and customer terms were not always clear, consistent, or adhered to. It was clear that we were, and are, leaving value on the table. Insights like these have helped us design programs that will support the sustainable release of around GBP 2 billion of working capital benefit. The largest opportunity relates to inventories.
We are targeting a meaningful reduction in inventory days. Some of the steps we are taking across the group include: improved demand planning, ensuring we order parts and materials only when they are needed, reducing holding times in our warehousing, and optimizing buffer stocks. In Power Systems, for example, we found we were holding several years' worth of stock when it was not needed.
The team are now on that. In Civil, we are reducing unnecessary buffer stocks by almost GBP 100 million this year. Across all our businesses, we are improving how sales and operations planning links to inventory planning. Mindful of current industry challenges, we are also improving our supply chain management. We are working closely with our suppliers, and we are driving tighter management of lead times, ensuring we have inventory when and where we need it. We are making progress. We expect to release inventory in the second half of this year. We also see an opportunity to improve receivables. Squads are in place to drive down unbilled debt and ensure it does not build again.
For example, in Civil Aerospace, we have sped up by more than 25% the invoice review process when engines are overhauled, and there is more. Rob's team tell me they want to get after. These improvements mean we have a clearer, quicker, and consistent view of what should be billed and when. Better for us, more predictable for our customers. We are also reviewing customer payment terms and sticking to them more consistently .
We have implemented a new tool across the group that gives us a more granular, real-time view of customer debt than we ever had before. It allows us to be more proactive and follow up on accounts before they become overdue. We're also improving our payables performance through being more disciplined and consistent on supplier payment terms. So lots to get after and lots still to do. The team are owning and driving these changes.
But there are a few headwinds, the largest being an outflow associated with concessions totaling around GBP 800 million across the period. There are two roughly equal parts to this. First, deferred Boeing concession payments, GBP 200 million of which impact 2023, which we have already guided. Second, an impact from historical agreements with customers to delay concession payments owed to them. These deals date back several years, in some cases more than a decade.
Our focus is now sustainable and quality cash growth. Next, as group revenues grow between 2022 and the midterm, this will naturally result in a relatively small increase in working capital. But the big picture is, we expect to release working capital over the midterm. We are managing working capital differently. We are managing cash differently. We are focused on sustainable improvements, delivering a higher quality of cash flow.
With that, let me move to our capital frame. Our capital frame is focused on three clear priorities: a strong balance sheet with an investment-grade profile, a commitment to growing shareholder returns, and a disciplined approach to investments. Strengthening the balance sheet is a clear priority. We are positioning Rolls-Royce to better withstand volatility and external shocks and give us financial flexibility for the future. Better for us, better for our shareholders. Our cash flow growth will enable us to reduce our gross debt by paying down our near-term debt maturities as they fall due, namely the EUR 550 million euro bond in 2024 and the $1 billion dollar bond in 2025. The increasing strength of our liquidity position means we may also look to close some of our more expensive undrawn facilities early.
The resultant improvement in our net debt to EBITDA ratio will make our balance sheet much more resilient and should position us comfortably with an investment-grade profile, which we intend to maintain. When we are confident that the strength of the balance sheet is assured, we are committed to reinstating and growing shareholder distributions. Whilst we're not at this point today, we expect to be there in the near term, and our current thinking is, our policy going forward will be based on an earnings payout ratio. This should result in growing shareholder distributions, consistent with our expectations of profit and cash performance. Once the criteria for a return to distributions are met, I will come back and share more. The final area of our capital framework is our approach to investments.
We will prioritize the most profitable growth opportunities across all of our businesses and allocate the appropriate level of funding to them to drive increased shareholder value. These investment decisions are ranked based on strategic fit, where we can and want to win. We have strict investment hurdle rates in the mid- to high teens for our three established divisions. We also have a group-wide investment committee process, where Tufan and I review and sign off on all investment cases above GBP 25 million. To summarize, we are building a strong balance sheet, which will underpin an investment-grade profile in the near term. When we have strengthened the balance sheet, we plan to resume shareholder distributions. Thereafter, we will optimize between shareholder distributions and further investment in the business, and our investment decisions are focused on driving greater value creation.
To close, we are driving for a sustainable and higher quality growth in earnings and cash, with an improved return on capital. This is underpinned by better operating leverage. We have a clear capital frame centered around creating and maintaining a strong balance sheet with an investment-grade profile. We are committed to resuming shareholder distributions in the near term. Our investments and allocation of cash will always be returns and risk-focused and anchored in strategy. We are ambitious for the business. These are big steps we are taking. There is more we need and want to do, and we have the detailed plans to deliver our targets, and I am confident that we are building the financial strength to shape and own our future. With that, let's move to Q&A. Thank you.
Thanks, Helen.
Thank you.
Okay, now we are gonna open up for questions. David? Hi, David. David, I think you have sort of somewhere, it's. Yeah, that should work, hopefully.
Okay. Thank you. David Perry from J.P. Morgan. I've got two on, they may be the only two I'm allowed today. On Civil Aero. The first is, I'm a bit surprised by your view of engine deliveries. I think it's 300-350, which looks quite light compared to what Airbus and Boeing are guiding to. So can you just talk to that? Have you taken a haircut, or have you assumed a very low market share on the 787? The second one is more philosophical, but based on the plan outlined today, you're gonna be very profitable and very cash generative in the next few years. Are you still wedded to the LTSA business model? We know other companies are trying to encourage some of their customers to go towards more time and material.
Did you consider that in your strategy review?
Okay, thanks, David. I think, first of all, on your second point, sort of LTSA business model, I mean, I said it all along, that that business model, it actually works well if you price the risks well. So because who is complaining in a high interest rate environment, getting the cash in advance? But it comes with a risk profile that you need to price well. Second thing I'm gonna say on that, our strategy is not unbundling time and material. So by doing that, we are actually creating flexibility for ourselves, because your EFH rate effectively doesn't include time and material, and that gives us a flexibility. And that is a change in strategy, without any doubt, because that change we actually made this year, effectively.
And I'll, I know you are keen, sort of, do we have a margin on it? We definitely have good margin on LTSA, and I can categorically tell you, given the program, six levers I talk about, and frankly, Helen touched on time on wing as well, those levers will actually improve not only contract profitability, but also our LTSA margin in this period. So, I think your first question was.
The deliveries.
I think our plans, I'm gonna make it very simple, our plans are totally in line with Boeing and Airbus plans. They are totally aligned. There was one question, sort of two row behind David. I don't know if still exists, but okay, over to you.
Yeah, hi there. Rob Stallard from Vertical Research. Couple of questions. I'm only allowed two. First of all, on the disposals, GBP 1 billion-GBP 2 billion of gross proceeds. I was wondering if you could elaborate on what sort of assets you're looking to get rid of. You mentioned Electrical, but, and also what revenues those businesses might be generating at the moment. And then, with regard to the LTSA balance, the other part of that equation, of course, is the trajectory of shop visits. I was wondering if you could give us some idea of how that's gonna pan out over the medium term. Thank you.
So I think I'm gonna pass to Helen in a minute for shop visits. On divestments, I actually said GBP 1-1.5 billion. You inflated that to GBP 2 billion, but if, if we can achieve that, we will. But I think it is one and a half, one, one and a half billion, and I said it in my conversation, effectively, it is across. When you have granular strategy, day one, some of you, I don't know how you helped, when I said, "We need a granular strategy," it does many things for you. It becomes performance management and engagement tool. I won't talk about it in divestment context, but what it does is it gives you line of sight, not only at divisional level, really subdivision, sub-segment level.
Then you decide, with that kind of granularity, do you wanna invest in that business or not? You can make decisions at that level, and that's what we are talking about here. Therefore, we set it across the group. That means all the divisions, by definition, and it is true. And obviously, we specifically, why did we talk about electrical specifically today? Because it is, in a way, one division that I needed to sort of highlight, but others are actually sub-segment, subdivision level.
I'll take the question on shop visits, so thank you, Rob. So, as I said, so LTSA balance growth, we expect that to be in the region of GBP 0.8 billion-GBP 1.2 billion per year. As I said, there's a number of factors which does influence that, which is why we've given you a range. Shop visits and the mix of shop visits being one of those. If I look out towards, the midterm year, I think probably hold in your mind when it comes to shop visits in total, around sort of 1,400-1,500. That compares approximately to be about 1,000 or 1,100. And Rob, I think, will give you more detail. He's given me the thumbs up. He'll give you more details, specifically on the large engine shop visits when he talks.
I don't want to steal his thunder, but I've given you the total.
T hanks, Helen. There's. Oh, there are multiple, but you, you were the first one, then I'll come to you guys. Yeah, go for it. Can you do you mind using microphones? Because nobody. Online, they cannot hear you.
Yeah. Can you hear me?
Yeah.
Nicola Sherard from Spaincap. So, just a question on tax. You mentioned tax as naturally supposed to increase going forward. I think there's a big element regarding tax, which is the amount of net operating losses that Rolls-Royce accumulated over the year. That's a giant amount. Some is disclosed and recognized in the statements, some is not. And it's, at least for me, it's a bit complicated to understand to which extent you will be able to use those losses and offset them against profit, and it's not very detailed in the materials you provide. So do you plan to have a workshop on this? Because this, I mean, this could be quite a lot of value, to be honest, huh?
Great question, and I'm happy. We can take offline with the IR team, and take you through more detail. But a couple of things I would say on tax. You're absolutely right. I did say that we expect our tax charge to increase, as you would expect, in line with profit. I think from a modeling perspective, if you hold a cash tax rate in the mid-twenties, that reflects your geographical spread, some of the shield that we hold in relation to tax in the U.K. If you go back and you look at our half-year accounts, we do have a deferred tax on the balance sheet of about GBP 2.8 billion. And there's some of that which is not recognized on the balance sheet. That becomes complicated.
But looking as we've put the plan together, I do expect that deferred tax asset on the balance sheet to come down over the period. But it is rather complicated about how you bring on some of the new elements that haven't been recognized. So, but we have looked at that and modeled it, but that is not driving any of our, so obviously, profit and cash flow growth going forward. But happy to take you through that in more detail offline.
All right. Thank you.
Okay.
Thanks, Helen. On the third row, there is a lady and man. Let's, lady is first, then we go from there.
Thank you. Charlotte Keyworth from Barclays. I just had one question, actually, on pricing. You mentioned about the one of the factors in the LTSA balance growth was actually your engine flying hour for wide-body increases. I know it's a commercially sensitive topic, obviously, but you've seen some benefit from that already in the first half of the year. How should we think about that from a sort of tracking perspective to the medium term? Obviously, you've been having discussions. I should imagine some engines are easier to discuss than others in terms of potential uplift, but just really-
I mean, short answer is, obviously, we want, I mean, as I said, sort of, we always want win-win solutions with our customers, and that goes into also contract question. But contract improvements, the way you need to think about how do you improve profitability of contracts, we actually have six levers. Pricing is only one, right? So I'll come back to your question. I'm not sort of deflecting on it, but it is important that we have other levers.
When it comes to pricing, yes, we, we take commercial actions because we need to reflect the risks. My answer to David's question, because new engines have more shop visits and so on, this is an industry issue. Industry have more fuel efficiency, that means engines come to shop visits more often. So we need to price it in the right way.
Yes, Helen said it already, per rate, you should expect that to go going forward every year, and that is effectively what we have here. Helen, do you want to add anything to that?
No, I think you've covered it just fine.
Okay.
I think, you know, I don't know if this is behind your question, but maybe just an additional piece. I think we're saying that by the midterm, when we get to that year, then substantively, we have unwound the majority of the onerous contract provisions. So I think it's most definitely not backended by 2027, and we do expect to have worked most of that through. Yeah. Thank you.
Thank you.
Thanks, Helen. We'll go. Okay, okay, there are three. I didn't realize it is three. Okay, I thought it was two. So-
I guess I have two questions on my side. I'm Morgan Stanley. So you said CapEx and R&D are gonna increase going forward and gonna be above depreciation. Can you give any estimates on what the number might be going forward? And second question on XWB-97 engines. There has been just some press articles about Emirates complaining about the durability of those engines. Do you guys have, like, any comments on this? Oh, all right. Thank you.
You want me to repeat the questions?
No, that's fine. We will repeat. Helen, do you wanna pick up the first one? I'll take the second one.
Fantastic. Thank you. So two parts to your question. So CapEx and R&D. So we're not going to give year-on-year guidance, but I think easy way to hold the CapEx is our net investments are increasing each year, and if you use 2022 as a base, actually, over the midterm, they're going up by more than GBP 300 million versus 2022. R&D, the simplest way to hold that is we expect our gross R&D spend to be broadly flat over the period. Now, the important thing to remember there when I speak to R&D and CapEx is, because of the actions that we're taking as part of our strategic review, our portfolio will be smaller and more focused. So actually, that is on a like-for-like portfolio basis, but I think those two data points will help you with that triangulation.
Okay, I want to be done with that role, then we will go somewhere else. It's XWB, sorry. Ninety-seven. Let me tell you this, first of all, the best engine in the industry is XWB-84, right? So let's not be sort of, It is the most efficient, durability and reliability perspective, best engine. If you come to XWB-97, higher thrust engine, the same sort of family, I should say, and it is actually very good engine. It has been out there almost five years. If you look, we sell it really well, and Airbus sells it really well, therefore, in benign environments, it is very good engines. Only in very harsh environment, like sand, et cetera, then obviously some Middle East, sort of Middle Eastern countries, sort of tend to be in that category.
What we are looking to do in this period, are time on wing improvement for all the engines. That also include 97, and it will actually improve in that period significantly, and it will be like our 84, if you like. Because it will further improve benign environment time on wing, but also it will significantly improve non-benign environment. So I'm gonna move that way, because otherwise, let's go there.
Good afternoon, Charles Armitage. A couple of questions. First of all, resilient. It's on either side of you. You were the least resilient or Rolls-Royce, you were, you weren't here, during COVID. You know, GBP 4 billion outflow, GBP 1 billion of that was factoring, but so GBP 3 billion underlying, MTU had 0, Safran had cash inflow. How are you changing the way you do business to make that more resilient?
Very good. Great question, the heart of what we are doing. So, let's talk about that, right? Your total cash cost to gross margin ratio is 0.9 in 2019. So going into COVID, Rolls-Royce had 0.9. I run lots of businesses in my career. I never seen 0.9. Frankly, it is a revolution for me, right? So there is always learning opportunity in life. But, so when you are 0.9, what is it telling you? You don't need COVID. You need a good recession. You are gonna be in negative territory, right? That is a mindset. You may look at it, you may say, too funny to scale this, that. Today's target's telling you that is a mindset, and the performance improvement, and how you actually run the business, right?
If you allow that to happen, you will never be resilient. Now, you come to point four, which is I talk about, if you remember, that business enormously resilient. But, I'll give you another lens on resilience, right? What this plan is saying, because we are now creating value, not only in Civil Aerospace, but actually two more ratable businesses, Power Systems and Defence, their cash generation will be a lot more than in the past.
What does it do? Ratable break, so you not only sort of TCCGM resilience, you also create cash generation perspective, two breaks that actually not volatile as much as Civil Aerospace. And then you think, you do third thing in Civil Aerospace, you create that TCCGM, lots of room to play with when the volatility comes. That is what we are doing with this program.
So this is not a bunch of numbers, oh, they look, cash is good, profit, whatever, however you hold it. It changes the shape of the business. Therefore, I say it transforms the business, right? Those words there actually mean something for us, every one of them, and that's what we are doing. That is mindset. If actually Rolls-Royce did that in 2019, they would have dealt with COVID a lot better, I can tell you. A lot better.
Excellent. Sorry, my second question, if I may?
Oh, okay.
You mentioned about LTSAs and pricing the risk correctly. Presumably, you have, or I'm sure you have, plans on how time on wing, how the costs of the overhaul, the cost per hour will be coming down. How can we get comfortable, as external people, how can we get comfortable that those are priced appropriately, and that you haven't made, you know, on the downside, huge assumptions that time on wing is going to get up, you've priced it accordingly, and then if it doesn't come in like that, there's downside risk? How can we get comfortable with that?
So I think Rob will talk this afternoon, sort of time on wing improvements. We are planning next three-four years, 40% improvement, right? All the engines will improve, sort of at varying degrees, not, not all the same, obviously. Most improvement will come from 97 and Trent 1000, as you may expect, frankly. So I think that's there. Frankly, when we deliver that time on wing, I think there is an upside, I would say, but we put normally contingency in case it is not delivered. What it tells you is, actually, when we deliver, there is gonna be upside because of the contingency, right? So, and, and I think Simon is here at break. He can explain to you how we are gonna do that.
But I'll tell you, Trent 1000, we doubled the cycle time already. Once it is certified next year in Boeing, it is actually with Boeing. There is nothing we can do or should do. It is technically right. They know it is technically right. We need Boeing FAA certification, effectively, and that's gonna more than double Trent 1000 cycle time already. This is not a sort of new work or let's see what the engineers do. It is done. We know it works because we did the same in Trent 7000. It works. They are sort of brother engines, if you like. So-
We've also got the expo outside, actually, with the teams.
Exactly.
You'll hear the passion from them about what they're doing on Time on Wing, so that may be a nice one to visit.
I-
But you'll hear the motivation and the detail from that as well.
Very good, Helen. Good reminder. I'll go there. Sorry, I need to go to, to you, otherwise we will have a problem, so the revolution.
Thank you. Nick Cunningham from Agency Partners. I hope you don't regret allowing me to ask my question. It's a sort of technical modeling type question, really, which is that you're giving absolute numbers for 2027, some numbers. Is there an inflation assumption built into that? And if so, what is it? Or is that all on 2023 prices? And then, if you like, the sort of second, but very related question, is that the cost reductions, for example, the GBP 400-500 million total cost reduction you've talked about, is that an absolutely lower cost relative to 2022 base, or is that relative to where you would be in 2027 based on the volume expansion you expect?
Okay. We don't do smoke and mirrors. I'll tell you that. I think, second part of your question is very clear. It is lower cost, GBP 400-500. Okay? There is no, "It could have been this, it would have been this," because this is not a financial modeling, right? We spend good time on strategy review. Then, to me, financial plans are strategic plans. You just financialize the strategy you worked. By the way, when you are working the strategy, you are already financializing, right? So what is the growth potential of this market? Are we differentiated? How much we can grow? That's, in a way, financialization already, right? Then we translate all those into five-year plan. Therefore, this is not a sort of less model things. So it is pretty much grounded in our strategic review and the financials.
Yes, it has inflation assumptions, forex assumptions, and so on and so forth. We won't share it with you, but sort of you can see where the world is going. Obviously, front end, higher inflation, lower end, sort of less so, and then that applies to cost, et cetera, and so on, as well as, obviously, top line. Yes, we do apply. I'll go here.
Thank you. Julian Cook from Atlas Capital. It seems that on the narrow body, you've already made a decision to partner, as opposed to maybe going on your own. I mean, we saw you used to be with Pratt and obviously decided not to go ahead with the geared turbofan, which with hindsight, is probably a good decision. Why, why so early a decision not to perhaps go on your own?
So I think what we are saying is, given the great work Simon and the team did on UltraFan, frankly, for some years, that and the IPs we have on UltraFan, I think we are well positioned for wide body as well as narrow body. Yes, we are saying financially, I think, a sort of to de-risk things a little bit, partnership approach will be a good approach for the next generation. Obviously, partnership needs to work. If it doesn't work, we can consider alternatives, because we are actually bringing a technology into this. So that's how, how we see it. Go.
Yeah, following up on narrow body, does it really make sense to enter in that space through a partnership? It's, it's a very competitive playing field, and, you know, is it worth the investment?
Okay, I will disagree with you. I never called duopoly a very competitive place, but economics books will disagree with you, I think. But, and duopoly it is. So, and with high barriers to entry. We can go in because of our technology and engineering, and so on. But we are the probably only one who can go in. So therefore, for the, we will, I said it day one, we will not do anything which is not gonna bring profitable growth. We are, we don't. One thing I want you to take away from this, to deliver these numbers and grow beyond that, we don't need to enter narrow body.
It is an opportunity, and given there are only a few companies, I'm not gonna name others, in the world who can actually do that, with partnership approach, I believe it can be a profitable place. If it is not profitable, we won't do it because we don't need to do it. Raja?
Can you hear me? Can you-
Yeah, yeah, Raja. Go. Go for it.
So, if your—thanks for the presentation. If your financial targets are met, you know, ballpark, not exact numbers, but something like over the next four years, you could generate, call it, GBP 10 billion of free cash flow. There are not that many high-quality, growing companies in the world with high barriers to entry that could convert half of their market cap to cash over four years. So my question is, why isn't—you talk about getting a good return on investment, why isn't buying back your stock one of the better returns on investment?
Sorry, why buying Microsoft?
No, your stock.
Raja, thanks for the. Yes, your math is not too bad. So yeah, I think we will generate cash, definitely. One thing I will disagree with you, the half of sort of market cap, because I'm hoping market cap will be a lot more than that at that time. But sort of, but I take your point. So I think, frankly, when we create strong balance sheet, which is our intent, and we will reestablish, Helen talk about shareholders' returns, and then we are already investing quite a bit in this. Frankly, one thing you should take away, our investments here, therefore, I said, midterm targets is a milestone, will actually deliver more in the future. Like, take time on wing.
You can actually interrogate my friend, Rob, in an hour time or so. You will see his time on wing and Simon's improvements will actually deliver in this period, but deliver more in the next period. I can tell you, genuinely tell you. So therefore, this is a milestone. We will keep going. That will then, we would like to be in a position to say, "Okay, depending on how we see the world, depending on share price, we can decide to give more to shareholders. It can be buyback, it can be whatever, or further investment into the business." Frankly, when I came day one, I mean, I didn't have that luxury. So, Tufan, where do you want to invest? So it was an academic question.
So, right now, it is becoming, with the delivery of this plan, it is becoming a reality. But we will be very responsible. We are not after market share. I said it many times. We are after good, high quality, profit and cash generation, but sustainable cash and profit generation of this company. So, sorry, is there one more question or not?
I was going to let the one last question come from our audience online, but if you would like to keep it in the room, that's fine.
Okay, let's get one last, and then we'll go to Isabel. Apologies, we couldn't answer all the questions, but-
I appreciate you taking it. It's Ian Douglas-Pennant, and I even moved seats in order to catch your eye line, so I appreciate you.
You did well, by the way.
So sitting in the corner, by the way, for those who want to ask a question, terrible idea. So two questions, please. Firstly, one for Helen. You said that the improvements is going to be progressive, but lot, not linear. How not linear should we assume it is? I mean, given the performance that you had in H1, is it, like, 80% in the first half of the planning period? Can you help us think through that? And secondly, if I think about the cash flow targets that you've given, at least versus my numbers, the big difference is the time on wing or the shop visit assumptions.
Could you help us break down, Tufan, just into like, philosophically, the magnitude of the different interventions that you're making and how important they are in driving the difference, just holistically speaking?
So I'm gonna ask Helen to cover the first question, but let me pick up your second question. I think this is important, okay? Because I realize, frankly, before we announce, I realized sort of, you may not get to the free cash flow that we are getting to, but there are good reasons. This is really high quality and sustainable cash flow. So what is in it? It is driven by operating profit, and in 2027, we have more cash-based operating profit in 2027, i.e., rather than provisions, et cetera, et cetera. Therefore, more of the profit converts to cash. That is very important. Second important thing is LTSA growth, and Helen talked about the drivers of LTSA growth. I'm not gonna repeat those drivers, but if you take those drivers, let's break that apart.
It is effectively your installed engine base is growing, and with an extended Time on Wing, and your commercial practice is increasing your unit rate. That is sustainable as long as you continue to increase your installed base. And if you look at our forecast, therefore, I'm saying LTSA growth will be sustainable because if you look at, for a while, probably maybe 10 years, you should expect those drivers in force and with growing installed engine base. If you actually combine the two, high quality, cash-based operating profit with sustainable growth in LTSA, and the margin profile on that LTSA balance is improving every year, that's gonna be the case, suddenly you have a pretty sustainable model for a long time. That's how philosophically you should actually think about this. Helen, over to you.
Fantastic. So thank you. So to your question on progressive and not linear. So the way to hold that is we do expect year-on-year profit and cash growth, but you can't necessarily take a straight line and draw it from 22- 27. I don't think that's our experience of how transformations have gone in the past, and indeed, there's too many variables in there. But a couple of things that I would just reinforce: year- on- year, profit and cash flow growth we expect, and in case there's any concerns, it's most absolutely not back-end loaded. I think I already shared two data points on that. Working capital, we expect a release over the period. That is not a big release by the midterm, and we already spoke around onerous contracts and catch-ups. Yep, that that is not coming towards the back end as well.
Hopefully that helps.
Thanks, Helen. Isabel, over to you.
Thank you. Thank you, Tufan, and we have got a very large audience online, so I'm gonna quickly squeeze in, a question from Georgia Meehan at Deutsche Bank, who mentioned, would we consider re-tendering for debt to accelerate our deleveraging? And also asked, now we're mentioning investment grade profile as opposed to investment grade rating, could we confirm that the latter is still the priority before resuming shareholder, payments?
So I'll let Helen to answer the first one. Investment grade, we talk about profile because that is in our hands. We, we can create that profile. We are not a rating agency, therefore, we cannot rate ourselves. That's why we talk about profile. And Helen talked about it. In near term, we expect to get there, and, and frankly, you can, y ou have nice models. You can model it. You will see that in near term, we will get there, and therefore, we talk about investment grade profile. Over to you, Helen.
Fantastic. Thank you. So to the question on debt, as I shared, we actually have plans to reduce our gross debt from our cash. So we have maturities that fall due in 2024 and 2025. We're very clear that we will close those down through cash, and we have no intent of strengthening the balance sheet and getting back to that investment grade profile by raising cash. So that is not our intent.
Thank you both. We are just very slightly behind schedule, so we're taking a break now. The schedule does say we'll return at 3:10 P.M. I think we'll make that nearer 3:20 P.M. to make sure everybody has got enough time to get through the expo. So, if you're watching online, please take this opportunity to enjoy the videos that we've shared on our website. For those in the room, you've got a map in your bag showing the layout of the exhibits. You will see we have a dedicated exhibit area on the outside of the auditorium, near where you came in this morning. We are restricted on the number of people we can have in the area, so we'll be operating that on a first come, first served basis.
Presentations and Q&A in that area will take about 15 minutes for each stand, and there are other exhibits outside the doors. If you could leave, please, through the doors down here on the right, that will help with your flow into the expo area. We're gonna be using this auditorium for two of the exhibits. These two are not repeating at the end of the day, but the presentations will be around still later if you want to ask them. So please do, some of you stay here or come back to hear that team. Our executive team will also still be on hand in the coffee area if you want to ask them questions. So enjoy your break, and see you back here in just under an hour. Thank you very much.
Here in Civil Aerospace, we are laser focused on improving our financial performance. One of the strategic initiatives we have, which will improve both operating margin and cash flow, is keeping our engines on wing for longer. We can do this whilst maintaining excellent safety, performance, and operation availability. Extending time on wing is very much like Formula One racing. To win, your aim is to keep the car on the track and operating at its peak performance for as long as possible and to minimize the number of pit stops needed.
This means you're constantly assessing and improving all the factors that require a pit stop. Our engines are complex, precision-engineered machines that have many different removable drivers, and our job is to always keep ahead of the next pacing item to maximize the time the engine stays on wing and generates revenue.
Our ambition is to improve the average time on wing for modern Trent engines by at least 40% over the medium term. To put that into context, this means relative to today's engine standard, we will extend time to overhaul by almost two years on average, from around three years to more than five years. We will significantly improve our performance through pulling three key levers. The first of those is improving our product durability.
Again, in Formula One terms, we could liken this to improving parts that see a lot of wear during a race, such as the tires, so that they can last longer. Similarly, we are continuing to improve the durability of some of our components in our new modern generation engines. For example, we have developed a state-of-the-art high-pressure turbine blade, which has improved durability and at least double the blade's time on wing.
This advanced technology has been in service since September 2022 on the Trent 7000 and is now the production standard. More than 20% of the in-service Trent 7000 fleet has this high-pressure turbine blade incorporated, and we are upgrading all engines at their next refurbishment. That same blade will be available next year for the Trent 1000-TEN and will also be retrofitted across the existing fleet. Our second major lever is extending life and component limits. Engines are typically removed from aircraft for three reasons: either life-limited part expiry, component condition, or temperature margin, and we've been working all three of these. Let's take the first one, life-limited part expiry. Engines have several components that must be replaced after a certain duration or a certain number of cycles. These are called life-limited parts.
In line with standard industry practice, life-limited parts are intentionally certified with a relatively low life when the engine first enters service. To extend this life, we use in-service sampling data and digital twin modeling to enable an extension of the life limit, which helps reduce the frequency of shop visits without impacting safety. We have also developed an approach for counting cyclic usage, which uses the specific operator profile to calculate the life of components. For example, we've safely achieved up to 40% more flight cycles for some of our engine components. In terms of component condition, we also look to extend individual component condition limits. To do this, we are investing in new capabilities that combine in-service data with manufacturing data to deliver improved high-pressure turbine blade lives. Lastly, temperature margin. We can also extend engine temperature limits through further testing.
This involves material testing and development engine testing to certify increased temperature limits that the engine can operate at before performance restoration is required through a shop visit. We've recently completed this type test on the Trent 1000 and 7000 and successfully unlocked an 8% time on wing improvement. Our teams are accelerating the fleet incorporation of these life extensions through new ways of working through digital and lean methods. Working closely with our regulators, this improved approach has resulted in higher confidence and a 30% reduction in approval times. Our third lever is around optimizing aircraft operation and maintenance. To improve the efficiency and effectiveness of the engine, we have introduced a novel core wash technology that restores engine performance through more effective washing.
Through this new technology, which can be carried out on wing and at an airport gate, we are targeting up to 10% improvement time on wing. We have now validated it for use on the Trent 1000 and the Trent XWB, and have trialed units with two customers. Our intention is to place these in hubs around the world so that we can maximize the benefits to the Trent fleets. Finally, we are also influencing how the aircraft is operated. Going back to the Formula One analogy, this is like the Formula One team using their engine data to guide the Formula One driver on how best to handle the race. Similarly, we use our advanced intelligent engine digital twin to guide customers on how to optimize the aircraft's operation and minimize engine wear and environmental impacts. We've had great success with this already.
For example, we identified that wear on a specific Trent 1000 part could be reduced by 40% through a small change in operational behaviors. Operators who adopted this advice secured, on average, 20% more flying time. We are now taking this even further by working with airframes to optimize at a whole aircraft level, and early indications are very encouraging. So extending time on wing is pulling on all these different levers to reach our goal. We are making good progress across multiple fronts, but we recognize we have much to do, but we are energized and committed to succeed.
Defence is starting from a strong place, but there is more we are going to do. There are four common growth drivers across our whole defence portfolio. We have growth, both in terms of volume and mix, as we move from legacy programs to new funded programs. Secondly, we are benefiting from the same focus on commercial excellence as other parts of the Rolls-Royce business. Thirdly, we are prioritizing investment, and finally, we have the benefits of our drive for efficiency and simplification. All these drivers are at play in the transport and patrol market. Globally, transport and patrol will see 26% of market share open by 2050 as new programs come online, creating a GBP 45 billion opportunity. Rolls-Royce is very well positioned to capture a significant portion of these emerging opportunities.
Today, we occupy between 25% and 30% of the global transport and patrol market, mostly through mature in-service products with strong growth prospects in the medium to long term. We hold market-leading positions in the tactical transport, future vertical lift, and autonomous platform sub-segments. We continue to see strong momentum in this important market with the US Army selection for the Future Long-Range Assault Aircraft, FLRAA. Partnered with Bell and the US Army, we are excited to power FLRAA with our AE 1107F engine, providing a low-risk, ready-now propulsion solution with best-in-class capabilities. The FLRAA platform will provide twice the range and speed for the US Army when compared with the existing Black Hawk capabilities. For Rolls-Royce, this creates a strong position from which to capture additional future vertical lift opportunities, not only for the US Army, but also for US Marine Corps and US Navy variants.
This sub-segment alone will create over GBP 15 billion in new market opportunities by 2050. Beyond FLRAA, our experience and advanced technologies in transport and patrol mean we are well-positioned to capture and deliver many emerging future modernization programs. Our AE engine product family and differentiated expertise in this segment position us to address a large portion of the market opportunity. This will enable us to grow market share over the medium to long term. The AE engine family is our foundation and will continue to play a significant role in the future of Rolls-Royce defence engines. With over 7,500 engines in service and more than 85 million flight hours over the past three decades, the AE product family shares an engine core that is over 80% common in their manufacture, with proven dual-use turboshaft, turboprop, and turbofan variants.
Our approach to leverage the AE product family, modifying and inserting technology to the off-the-shelf core, will continue to position us to deliver a differentiated value proposition to our military and commercial customers, allowing them to field much-needed capabilities faster, cheaper, and with lower risk than other options. For turboshafts, the AE 1107C has surpassed 1.4 million flight hours on the V-22 Osprey, with over two decades in service. The AE 1107F, a close relative of the AE 1107C, will continue to leverage this capability and expertise for decades to come on the U.S. Army Future Long-Range Assault A ircraft. Our turboprop engines power all models of the C-130 aircraft, giving us a market-leading position in the tactical transport segment. In addition to servicing existing C-130 operators, we are well-placed to support the US Department of Defence for their future tactical transport needs.
The tactical transport sub-segment represents roughly 20% of total transport and patrol market share, with a nearly GBP 6 billion opportunity by 2050. For military turbofans, variants of the AE 3007 power the US Air Force RQ-4 Global Hawk, US Navy MQ-4C Triton, and MQ-25 Stingray aircraft. Rolls-Royce continues to be very well-placed for emerging US Air Force, US Navy, and US Marine Corps autonomous platforms, positioning us well for additional market growth opportunities in these very important sub-segments. Transport and patrol is a strategically important market for Rolls-Royce. We are very well-positioned on mature in-service platforms and have recently been selected to power FLRAA, a generational program, and one we expect will lead to significant additional future global growth opportunities across all services of the US military, as well as internationally.
We are in a strong position today, and looking into the 2030s, new growth from the recent major wins will start to have a more substantial impact on our financial performance.
Our teams are relentlessly focused on execution and improving our work practices to reduce costs across our global MRO network, and we are doing this at an unprecedented pace. For example, on the Trent XWB-84, we will have achieved more than a 50% cost reduction over the medium term and will reach that point in half the time of the Trent 700. And across the Trent 1000 family, we're also planning to reduce costs by over 20% in the near term. One key part of this journey is our Practical Best initiative. This is an enabler for pan-network sustainable cost reduction and performance improvement through data, insight, and action. It's a great example of how we're harnessing the power of our digital tools and applying a performance mindset on a daily basis.
There are a number of ways we're controlling and improving our shop visit costs. Firstly, through optimizing our work scopes for engines and ducting into our overhaul shops. Before an engine even comes into the shop for refurbishment, we use all of our in-service operational and maintenance data, captured dynamically by our Intelligent Engine, to tightly control and optimize the maintenance work performed. Doing so ensures we only focus on the necessary work, which keeps costs to a minimum. This also means that we can confirm customer requirements upfront and ensures sufficient billing. We are continuously improving our work scope control by harnessing our digital capability, and we are getting better control over time. This year, we've already achieved a 20% improvement in our Trent 1000 mid-life shop visit work scope planning capability.
Secondly, we are innovating our work practices around how we disassemble and reassemble engines, with one of our successes being the horizontal build approach, as showcased in last year's Investor Day. This method helps with setup investment costs, makes operations more efficient, and gives us wider access to new or current capacity within the MRO network. Also, under the Practical Best initiative, we are establishing a should-cost for labor hours through time and motion studies across engine manuals and repairs to establish and share best practices across our network. Another way we're driving shop visit cost reduction is repairing and reusing parts, which extends the life of our parts and reduces waste. There are two aspects to this. Firstly, we can reuse through component limit extensions.
As we gather in-service and in-shop inspection data to upgrade our component design model assumptions, we're able to extend component limits, so basically how long we can use that part for. This means that we can reuse those parts instead of replacing them. A great example of this is the low-pressure turbine stage one nozzle guide vane on the Trent XWB, where, by extending the limit, we've gone from refitting 100% of these parts at first shop visit to just 40%. We are also conducting in-service engine disassembly and layout events at component level to gain even more insights by comparing current original equipment to service run hardware to identify even more limit extension opportunities. Finally, if a part can't be fitted as is, our next best option is to repair.
We are constantly challenging our technical understanding in line with the latest technologies to make great progress on new repairs. As an example, a recently validated combustor rear inner case repair has provided a 45% saving compared to replacing with a new part. We're continuing to develop advanced repair technologies, like direct laser deposition on turbine seal segments, as showcased at last year's Investor Day. We're also investing in new repair capability, like our high-pressure nozzle guide vane, with recent investment made in our joint venture with Chroma lloy Turbine Repair Technologies. The HPNGV is one of the highest component scrap costs on our Trent engines, so with this repair capability, we're expecting at least a 10% saving versus replacing with a new part. Of course, if a part can't be repaired, then we fit with new.
To do this at the lowest possible cost, we're using enhanced digital capability to identify and assess serviceable used material stock levels that can be reused back into service. Over the past two years, we've increased the quantity of serviceable used materials made available to our overhaul bases by 60%. To supercharge all of these initiatives even further, we have recently launched our digital cost ecosystem to truly harness one of the greatest assets we have, a data lake of all the cost information that we own. This will give us even more insights into further cost reduction opportunities and enable us to maximize our efforts on driving action to reduce shop visit cost. Suffice to say, we are still in the foothills of what we believe can be achieved. As our engines continue along their maturity curve, we know we can secure a lot more cost reduction at pace.
Through our ongoing optimization activities, innovative repair, and reuse approaches, combined with our cost ecosystem, we will continue to innovate and establish the best practices that can secure even more sustainable improvements for years to come.
Rolls-Royce is focusing on areas where we are advantaged and can create winning positions. We are well-positioned to do so in the business aviation market, with our already installed base and the market-leading efficient and high-performing Pearl engine family. This year, Rolls-Royce is celebrating its 65th anniversary in business aviation. From the beginning in 1958, which was marked by the first flight of the Dart-powered Gulfstream I. Through to today's Pearl family, Rolls-Royce has taken an innovative approach to offering its customers extraordinary engine technology and services. Over the last six decades, Rolls-Royce has become the world's leading engine supplier in business aviation, powering some of the largest, fastest, and longest range business jets available. Today, about 4,000 of these aircraft are in service worldwide. That's 8,000 engines, helping companies to improve business efficiency, productivity, and enabling economic growth.
They offer flexibility and connectivity, flying heads of states around the globe, supporting humanitarian efforts, and connecting families by making the world a smaller place. Our engines enable airframers to offer the perfect combination of speed, range, size, efficiency, and reliability. Rolls-Royce is advantaged in the business aviation market. We have a deep understanding of the top end of the business jet market, which we have led for decades. Our customer base consists of global corporations, high-net-worth individuals, and governments, and this customer base has been steadily increasing over the last two decades. The top end of the business aviation market has a market size of about $34 billion, and this is exactly the market we are serving with our engines. It has also proved to be resilient to business cycles.
Engine flying hours had already recovered in 2021, and today we stand at 110% compared to pre-COVID levels. The Pearl engine family, purpose-designed for the latest generation of business jets, exemplifies our approach to creating a completely new engine family for a wider range of business aviation applications, setting new benchmarks for performance and efficiency. A formula that has already proven to be a success with the BR700 family that was introduced in the 1990s and is still in production today. More than 5,000 BR700 engines have been delivered to date, with more than 4,600 still in service. When we launched the Advanced 2 technology demonstrator program a few years ago, we set ourselves the goal to develop the most efficient engine core in business aviation.
It forms the heart and the backbone of the successful Pearl engine family and features a whole string of innovative technologies, all of them aiming at delivering world-class environmental performance. We also wanted to deliver engine maturity from day one, which we were able to do as the demonstrator program gave us the platform to mature architectures and technologies before the first Pearl engine went into service. This strategy paid off, as the Pearl is today's engine family of choice in the very long and ultra-long-range market. The family won the last three commercial campaigns. It has been chosen to power the Bombardier Global 5500 and 6500 with the Pearl 15, which is already in service. The Gulfstream G700 and G800 with the Pearl 700, which will enter into service soon. And the forthcoming Dassault Falcon 10X with the Pearl 10X entering into service in the middle of the decade.
The new two-shaft Pearl was created with a clearly defined mission. The aim from the beginning was to design an engine family able to deliver more power while further improving fuel consumption and maintaining a class-leading, low-noise, and low-emissions performance. I'll give you just one example of the performance and efficiency of the Pearl family. Gulfstream recently announced a higher-than-expected top speed of Mach 0.935 for the G700. That makes it the fastest aircraft in the Gulfstream fleet, an increase from Mach 0.925, and gives it a longer range of 7,750 nautical miles, an increase of 250 nautical miles. This is made possible by the excellent performance of its Pearl 700 engines. They are outperforming the specification.
At the moment, we are in a transition phase from current programs, BR710 and the BR725s, to new ones, the Pearl family, and OEM production numbers are significantly increasing year-on-year. The order books for Rolls-Royce-powered products look healthy, and airframers are seeing very high demand from customers, resulting in a rebound of book-to-bill ratios in quarter two to approximately 1.2. With Corporate Care, we also have a highly profitable and differentiated services model, and its latest version, Corporate Care Enhanced, provides even greater opportunity. We therefore expect to fully capitalize on our OE performance via our global service business. Our large installed base of more than 8,000 engines in service today builds the base of a strong and highly profitable aftermarket model.
About 2,500 aircraft are covered by Corporate Care LTSA contracts, with 76%, as of AP 9, of new deliveries being enrolled into the program. To date, our fleet has recorded 44 million engine flying hours, and through the growth of the Rolls-Royce powered fleet and the high utilization, we expect an annual growth of our aftermarket volume of about 3%. Aircraft availability and averted missed trips are key determinants of customer satisfaction, and this is where Rolls-Royce excels. Rolls-Royce offers its business aviation customers the most capable global service network in the industry. The powerful infrastructure of 85 authorized service centers is complemented by 80 on-wing services specialists, who are located at strategic hubs in the U.S., Europe, Middle East, and Asia, as well as a number of spare parts and leased engine storage locations around the world.
Business aviation engine technology is also being used in the defence market. Many reconnaissance aircraft for the defence market are based on the business jet platforms of Gulfstream and Bombardier, including their BR700 and Pearl engines, which result in additional application and market chances. Examples for applications are the publicly known US Air Force E-11A communication platform, based on a Bombardier Global 6000, or the US Air Force EC-37B electronic warfare platform, which is based upon a Gulfstream G550. There's a growing international community of operators, which will increase the annual usage from approximately 90,000 engine flying hours today to over 160,000 flying hours. Our MissionCare premium service solution is gaining increasing popularity with military operators. Another example is the BR725 engine, which has been developed to power the Gulfstream G650 and 650ER.
Due to its outstanding combination of efficiency and reliability, a BR725 derivative, the F130, has been chosen to replace the existing power plants in the B-52 fleet, with over 600 new engine deliveries expected. Let me leave you with these key messages. We have the leading brand, along with leading products and technology capability in the attractive large cabin market. Given our advanced position and the platforms we're on, we expect our growth to exceed market growth. We continue to create a high-performing, competitive, resilient, and growing business, and have a significant opportunity to expand cash generation and profitability. We're on track to deliver returns above the industry average in a resilient and growing market. To achieve this, we will further optimize our commercial base. We're working on our pricing strategy and are further reducing unit cost.
With the entry into service of the third Pearl family member, the Pearl 10X, we also see a reduction in spending on R&D for the Pearl family. As I hope you can see, we are well-positioned in business aviation, and it is just one area which will help us create a high-performing, competitive, resilient, and growing Rolls-Royce.
The governmental business within Power Systems is very well positioned in the market, with a market share of greater than 30%. How does this success come about? The governmental business at Rolls-Royce Power Systems is divided into land, defence, tracked vehicles, wheeled tanks, armored vehicles, and naval patrol boats, corvettes, frigates, submarines, minesweepers. The market for land defence is forecast to grow at more than 10% a year in the midterm. We expect Rolls-Royce Power Systems to achieve sales growth above market level. The Ukrainian-Russian war has changed the perspective of governments, especially in Europe. They are now questioning whether their existing forces and equipment are sufficient to deal with the new political reality. European governments are setting up land defence programs to improve their capabilities. To achieve this, armies are turning to systems that are already developed, available on the market, and highly proven in existing fleets.
In many cases, these are MTU-powered vehicles. Some of the most notable are Boxer armored transport vehicle, equipped with MTU Series 199. It has been ordered by the armies of Australia, Germany, Netherlands, Lithuania, U.K., Ukraine. To date, 1,500 of these wheeled armored vehicles have been delivered. Other countries are currently adding to their procurement orders. Leopard 2 main battle tank, equipped with MTU Series 873 engines. Over 3,600 vehicles have been built to date. The vehicle is in service with 14 European countries, including Germany, Hungary, and Norway. K9 self-propelled howitzers, developed in South Korea and equipped with MTU Series 880 engines. These are successfully in service with armed forces from South Korea, Australia, Estonia, and Poland, amongst others.
Puma, the world's most modern infantry fighting vehicle, equipped with ultra-compact and powerful MTU Series 890 power packs, in service with the German Federal Armed Forces. These vehicles and their fleets will be increasingly operated, maintained, overhauled, and reordered in coming years due to a significantly increased operational exercise and the global political situation. All have MTU propulsion systems. These are the world's most powerful, compact, and modern propulsion systems, which have been proving their worth on the market for decades under extreme environmental conditions. We are also represented in newly launched programs with MTU Series 199 engines, such as the American M-10 Booker armored fighting vehicle. So far, 96 engines have been ordered, and we expect to deliver further engines when series production begins.
To produce the high volume of Series 199 engines needed and to meet the requirement to have local content in some cases, we assemble the Series 199 engines not only in Friedrichshafen, where we recently set up state-of-the-art production line, but also in East Grinstead in the U.K. and Aiken, South Carolina, in the U.S. In the naval application space, we are also excellently positioned with a market share of over 30%. Rolls-Royce Power Systems has unique products with the highest power density, as well as extensive system integration expertise. MTU engines are particularly favored in highly demanding applications, such as fast, highly compact ships, such as frigates and corvettes, as well as minesweepers and submarines. Some of the most notable are for the future F-126 frigates of the German Navy. We are supplying the on-board power and state-of-the-art ship automation solutions.
The Type 31 multipurpose frigates of the British Royal Navy are each powered by four MTU Series 8000 engines. The onboard power is also supplied by Rolls-Royce, as is their ship automation system. The US Navy Constellation Class FFG-62 frigate new building program relies on MTU Series 4000 marine gensets to meet high military requirements. In the naval sector, the current global political situation also suggests increased growth, but lead times are longer. We do expect to see increased fleet expansion or fleet renewals. In addition, governments and armed forces are considering future war scenarios and the need for land and sea defence systems. To continue to be represented in these programs, we are continuously developing our products. For example, we are continuously increasing the performance of our engines and are working intensively on the electrification and hybridization of military vehicle drives.
For Navy customers, we are focusing on expanding the engine portfolio and extending our system prominence, including automation solution and the electrification of drives. In 2020, we acquired Servow atch, a specialist in integrated ship automation solutions. With this acquisition, we have renewed and further expanded our NautIQ automation portfolio. Today, we already offer our customers not only reliable state-of-the-art automation solutions, but also complete life cycle solutions from a single source with the help of onboard data acquisition and analysis. This can increase the availability of ship and optimize maintenance. We work purposefully on solutions that make a decisive difference for our customers. For the future, combustion engines will continue to play a central role in both land and naval defence due to the demanding mission requirements. On the way to CO₂ neutrality, these engines have been approved to operate on sustainable fuels.
Our position is robust because MTU propulsion systems are regarded in the industry as extremely reliable, robust, compact, and powerful. We have a dedicated organization within the company that focuses exclusively on governmental business and its requirements. We are perceived as the leading expert for future propulsion systems in the market and are well-networked within the defence market. We are in constant dialogue with both navies and armies, as well as with OEMs, to offer customized propulsion solutions and servicing. We are a trusted partner for successful defence programs. Finally, three key factors for successful growth. The global political situation suggests increased growth in governmental business in the coming years. Due to our position on existing vehicles and ship platforms, Rolls-Royce with MTU products will benefit directly from this. Due to our long-standing customer relationship and comprehensive domain and system expertise, we are the first choice.
We can continue to develop innovative products and service concepts that will be in demand in the market and set us apart from the competition. By expanding our system and automation portfolio, we can grow strongly in the medium term.
Settle down. We are, I think, live again online. So welcome back everyone in the room and online. We will now continue with the formal part of the afternoon, with presentations from each of our business presidents. There's more time for Q&A with all of the presenters at the end. So now it gives me great pleasure to welcome my colleague, Rob Watson, President of Civil Aerospace, to the stage.
Good afternoon. Welcome back. I hope you had a great break and took the opportunity to explore the expo, either in person or online. For those in the room, I also hope you had the chance to talk to some of our inspiring colleagues to learn more about the actions we're taking to turn Rolls-Royce into a high-performing, competitive, resilient, and growing business. I'm Rob Watson, President of Civil Aerospace, and I've been at Rolls-Royce for 13 years and have worked across all the divisions: in Defence, with Power Systems, and in global and operational roles across the group.
I'm going to build on Tufan and Helen's presentations and take you a little deeper into the civil business, our view of the market opportunity and the strategic levers we're focusing on to drive the margin improvement Tufan mentioned, taking us from just 2.5% to 15%-17% in the midterm. Firstly, most of you know our business. Put simply, we make and service gas turbine engines for airplanes. You'll see in the civil fact sheets that we power more than 35 types of commercial aircraft, and today we have more than 12,000 engines flying around the world. On this slide, you can see how we think about the core product portfolio for the business. In business aviation, we have roughly 70% market share of all aircraft in service in the large cabin business aviation market in 2022.
We actually have closer to 85% share of the very long range and ultra-long range aircraft, which is the most valuable segment of the business aviation market. This position's important because while the very long range and ultra-long range segments is forecast to grow between 3% and 5% by 2030, our growth will be between 8% and 9% per year as we bring new engines into the market. In the midterm, we expect to see engine flying hours for Rolls-Royce powered business aviation aircraft, increasing to between 120% to 130%, measured against levels from 2019. In wide-body, we had a 55% OE delivery share in 2022, and 36% market share of installed engines. We power 4 out of 5 new generation wide-body aircraft, and we're sole source on 3 of those.
It's a great position to be in. While the total wide body market is forecast to grow between 5% and 7% per annum to 2030, we expect to grow above the market rate, due predominantly to the growing installed base of Trent XWB engines and the related growth in engine flying hours that drives our revenue. In the medium term, we expect to see engine flying hours for Rolls-Royce-powered wide body aircraft recovering to between 120% to 130% of 2019 levels. Our competitiveness has been proven this year as we've won major orders, for example, from Air India and Air France, more recently with EVA, Egypt Air, and Ethiopian Airlines, and we also see further upside potential from freighter orders, too. I'll talk more about that later.
As I mentioned, we also have a strong presence in the regional market and with the V2500, with 2,000 regional aircraft in active service and more than 35-40 million engine flying hours still ahead of us. We also see an opportunity to continue to support the V2500 into the 2030s. To recap, we're in valuable market segments, we're building on a strong industrial base, and our installed base strength and forecast for new deliveries means we expect to grow materially above the market rate for both business aviation and the wide-body market. Let's talk a little about how we see our growth in the medium term. Our operating margin target range is 15%-17%, and judging by the reaction on people's faces when Tufan shared this, you appreciate it's a big improvement.
So how will we get from 2.5 to 15%- 17%? We'll achieve this by executing granular, focused plans that will underpin profitability in our business aviation and wide body businesses, as well as the enterprise-level focus on transforming our business into a simpler and more efficient operation. I'll explain each of these initiatives over the next few minutes, but in essence, the market success of the Pearl engine family in the business aviation market has been outstanding, and as a result, aircraft deliveries will grow 9% per year over the midterm, and we'll see aftermarket growth, and we'll focus on commercial optimization. Then in wide body, we focus on six levers, which underpin delivery of the margin growth, keeping our engines flying for longer, value-driven pricing, contractual rigor, and then staying focused on controlling shop visits and product cost and extending time on wing.
These commercial and cost disciplines will drive our aftermarket margin improvement. And finally, we're leveraging the power of one Rolls-Royce to simplify our organization and drive efficiencies. We're already seeing tangible benefits in areas such as third-party spend and disciplined capital allocation. All of this activity is underpinned by our culture. It's our people who will deliver this improvement, and we'll retain our focus on product and people safety that you would expect from a world-class engineering organization. And the great news, we're already seeing tangible results. Our margin in the first half of this year is already double digit, and we have clear plans to continue to build on that progress for the midterm. So, business aviation. Let's talk a little more about how we're on track to deliver returns that are materially above industry average, and basically, there are three drivers.
First, we're increasing our market share with our new Pearl engine family, which is seen as today's engine family of choice in this growing market segment. We've won the last three major campaigns due to the engine's superior performance, and if you've not already, Dirk and Eleanor are available to talk at the expo about this fantastic engine family. By 2030, the main platforms in this market will be Rolls-Royce powered. Bombardier's aircraft with the Pearl 15, Gulfstream with the Pearl 700, and Dassault with the Pearl 10X. And why are these wins important? Well, we're playing in the biggest business jet segment, which accounts for more than half of the total value of the business jet market. Second, is a similar growth story in the aftermarket. Our installed base is growing.
We delivered 165 engines in 2022, and we see that growing to 250-300 engines in the medium term. That's growth of 80%. We're seeing continued growth in flying hours. Business aviation bounced back strongly. We're currently at 110% of 2019 levels. And we also have a very popular and differentiated services model, Corporate Care, which provides comprehensive support and maintenance for our customers. And here, we're seeing 2%-3% annual growth on top of an already large installed base of BR710 and BR725 engines. Finally, to maximize this market growth, what really matters is our commercial and cost discipline. Over the midterm, we'll deliver 100% operating profit growth by reducing our unit cost, improving our commercial terms, and implementing value-based pricing.
Okay, for wide-body, as I referenced, we have six levers to improve our margin performance. Let's talk about the first three. Firstly, we have a significant installed base, which is incredibly important to us. We're absolutely focused on keeping our engines flying and earning for as long as possible. For example, with the Trent 700, our most profitable wide-body engine today, we're focused on contract extensions and transitions, basically the transfer of ownership from one operator to another. And in addition, the A330 passenger-to-freighter conversion market, a rapidly growing market, is a really good opportunity for us. Our Trent 700 has 80% market share of all committed freighter conversions on the A330. This is important, as the engines are likely to fly much longer as freighters than as passenger aircraft. Commercial optimization is also critical.
As you would expect, we're also reviewing our contracts and working hard to get better value propositions for ourselves and our customers, and we're doing this by creating win-win opportunities, identifying areas where we can provide additional value to our customers, such as additional service coverage or enhanced engine availability, while securing better terms for Rolls-Royce. By doing this, we aim to increase our operating margin, and in some contracts, release some of our onerous contract provisions. We're also adopting a value-driven pricing strategy for new contracts, spare engine sales, and our time and material business. This ensures we capture the maximum value from our engine and the aftermarket services that we sell. Our strategy takes into account market trends, customer needs, and competitive dynamics. It also sets the right price for our aftermarket service contract based on the risk and service we offer over the contract duration.
This is hard work for the team, but we're already having an impact. And importantly, our teams are confident that they have my and the wider management team's support in driving these negotiations to successful outcomes. Finally, engine volumes and mix drive a lot of opportunity. We plan to grow ahead of the total wide-body market growth through to the end of the decade. There are some significant metrics behind this growth. Over the medium term, OE deliveries will increase from 190 to between 300 and 350 a year. Major refurbishments grow from nearly 250 to between 700 and 750.
Annual total shop visits grow from just over 1,000 to between 1,100 and 1,200, and our LTSA engine flying hours grow from 10 million to over 18 million over the same period, growing to between 120% to 130% of pre-COVID levels by the midterm. The next three strategic levers really focus on how we underpin profitable growth. First, let's start with Time on Wing. Put simply, this is extending how long our engines stay on wing and therefore lowering the number of shop visits. The real determinants of Time on Wing are the operational profile of the engine, where it flies, at what rate, for how long, and the consequent durability of the engine's parts.
To keep engines on wing, we're continually investing in product developments to drive durability across the fleet, and we continue to forecast at least a 40% improvement in time on wing in the medium term. For example, we've been improving the design of HP turbine blades in our Trent 1000 and Trent 7000 engines to give them a longer operating life. Where we have life-limited parts, we're focused on extending that lifing, as it's often the expiry of these parts that drives a shop visit. Secondly, when we do get to a shop visit, we are focused on reducing the cost of each shop visit across all engine types. By midterm, we'll have halved the cost of a Trent XWB shop visit.
In fact, at that point, the XWB will be the cheapest of the Trent overhauls, a major opportunity for us, given its position in the product portfolio towards the end of the decade. We're achieving these cost savings through multiple initiatives, including using AI tools to manage the work scope of a shop visit, optimizing how we strip and build the engine to keep time in the shop to a minimum, investing in technology to improve our repair capabilities rather than replacing parts, and where possible, making better use of service-used material. Finally, we're continually focused on product cost reduction. Here's two examples that bring that to life. Firstly, focusing on our high-performing suppliers. We're transferring work to them from underperforming parts of the supply chain.
Of our total GBP 2.5 billion spend in the external supply chain this year, GBP 685 million is spent with this group, and since 2020, we've awarded GBP 3 billion worth of work to our high-performing suppliers. Secondly, we've roughly 200 engineers focused on driving technical cost out, identifying how we can reduce costs through better parts design, manufacturing methods, and reducing scrap and waste. We continue to wrap a digital thread around our operations, whether this is using our IntelligentEngine to support in-service engine performance or our smart factory, which connects supply chain data to create a manufacturing digital twin. This enables data-driven decision making to minimize capital expenditure, working capital, and waste. In summary, this laser focus on our six strategic levers will improve margin performance and profitability.
If you've not already, I encourage you to speak with some of our brilliant team in the expo or watch the videos if you're joining us virtually, to learn more about some of these exciting initiatives. As well as focusing on operating margin improvement, we also remain focused on our future. Critically, the energy transition and the drive to reduce emissions in our sector. Our starting point is to maximize the efficiency of our current fleet, as many of these engines will remain in service for the next two decades and beyond. The Trent XWB-84 really sets the benchmark here, with 15% better fuel burn than the original Trent engine and great reliability to match. I think as Tufan mentioned earlier, it's delivering 99.94% on-time reliability for departures for our operators today.
The Trent 7000, powering the A330neo, is the latest addition to the Rolls-Royce wide-body family and has a similar step up in efficiency. We've demonstrated that all our production engines are 100% SAF compatible. Excitingly today, as Tufan mentioned, and hopefully you saw out in the expo, we're powering the world's first commercial transatlantic flight, fueled by 100% SAF. My customer director, Ewan, is on board. I spoke to him before the flight took off, and he said the buzz was electric. This is a big step forward, not just for Rolls-Royce, but the whole of the aviation industry and for Ewan's selfie collection with Richard Branson, I imagine. Part of the SAF story is around achieving scale in production volumes, which is not within our control.
What we can do, though, is continue to focus on ever more efficient gas turbines, because whatever the fuel source, it will be a gas turbine powering large aircraft for decades to come. Here, our UltraFan technologies play a critical role. Earlier this year, we started testing our UltraFan technology demonstrator engine in Derby, and we've now run the engine at full power. It's another major milestone. As the engine architecture is scalable, it can be considered for both wide-body and narrow-body applications on future platforms. While we expect this geared architecture will be 25% more efficient than the first Trent engines, and therefore a critical step in our sustainability roadmap, some of the technologies can be used in today's engines to play an important role in driving time on wing for our current fleet.
So as well as continuing to invest in technology, we're embracing earlier opportunities to exploit this technology in our current fleet. So to recap, we're in valuable market segments. We have a strong installed base, and we expect to grow materially above the market rate for both business aviation and the wide-body market. We're focused on commercial and operational discipline, and the levers outlined today will ensure we deliver 15%-17% sustainable operating margin growth over the midterm. We've already made good and tangible progress, as you saw in our half-year results, and fundamentally, enabling the energy transition remains a priority for our future. If you were to ask me what's different and why I'm confident our plans to deliver this level of performance improvement will deliver, my simple answer would be: we're clearly aligned as one Rolls-Royce.
We've got detailed, granular plans, and we're rigorously performance managing our operational execution. We know what we need to do and how we're going to do it, and as you've seen in 2023, we've already made a great start. I hope you found this session informative and insightful. I'll be happy to answer any questions in the Q&A, but now I've got great pleasure in handing over to my esteemed colleague, President of Power Systems, Jörg Stratmann.
Yeah. Thank you, Rob, for handing over, and congrats on the flight today. I think this is some kind of historic. So also, a very warm welcome from my side, or guten Tag, as I would say at home. It's really a great pleasure for me to introduce Power Systems, which is a substantial pillar of the Rolls-Royce Group. But before I start, I'd like to say a few words about myself and also my passion. I joined Rolls-Royce about one year ago, coming from the automotive supplier industry, which is known for its emphasis on continuous improvement, process optimization, and also rigorous cost management. My goal when I joined Power Systems was to transfer this knowledge and experience. I'm happy of all the improvements we have already today implemented, and the momentum we have generated for the changes to come.
This is exactly why I wanted to be part of Rolls-Royce. I'm often asked if my expectations have been met, and I can tell you they have been exceeded, and this for many reasons. Our great markets with diverse applications and our extensive customer base. Also I'm impressed by our outstanding technology and by the continuous efforts of our highly engaged employees, who enable us to achieve successful and sustained business performance. So today, I want to set out our strong positioning in highly attractive growth markets, our strategic initiatives to capture market performance improvements, and how we are already transitioning to lower carbon solutions. So let's talk about how we will explore the full potential of Power Systems.
Power Systems operates in highly attractive growth markets, and based on our strong product portfolio and our unique sales and service network, we are a leading player with double-digit shares across our markets. In Power Generation, we are a leading supplier for a variety of applications, such as the rapidly growing data center market. In governmental, our propulsion systems are well-placed for the current investment cycle into military vehicles and naval vessels, with a strong market share of above 30%. In marine, we have a market-leading position in the highly profitable yacht market and also a strong position in commercial marine. In industrial, we are a key supplier to service-intensive applications with high running hours, like rail and mining. All our markets show an excellent outlook with an annual growth rate of 2%-7%, and often, and this is important, often decoupled from GDP development.
So, for example, our Power Generation business benefits from the global digitalization growth, leading to significant investments into new data centers and resulting in an average growth of 5%-7% per year. And in governmental, the current investment cycle leads to a market growth of above 10% per year in the next three-four years. Our broad positioning in different industries further makes us resilient to market volatility in individual sectors. And across our markets, we can leverage an installed base of more than 160,000 units, and this installed base is the basis for our service revenue, which represents about one-third of our total business.
Compared with our peers, we have structural advantages, and these include a higher share in the more attractive high-power segment, a unique and great mix of products, systems, and solutions, and a very good market understanding through direct customer access. So building on these advantages, we have defined clear strategic initiatives to outgrow the markets and significantly increase our returns. So, again, I would like to set out our plan, how we build on these advantages, and how we will significantly improve our performance. So we will deliver our strong profit growth through four key strategic initiatives and additional efficiency and simplification measures across our business. So first, in Power Generation, we are focusing on optimizing our cost structure and further scaling the business, benefiting from our strong position with key data center customers.
These scale effects will also create additional benefits as the engine platforms are the same across our different markets. Second, in governmental. In our governmental business, we are aiming to capture strong growth through our leading market position and also expanding our product scope. Third, in marine. We will strengthen our market position and realize further growth through our system strategy. And fourth, our battery energy storage system business complements the Power Generation business, which is strong data center segment, and it expands our markets towards new applications such as utility scale storage. We expect that the demand for battery storage will grow at around 20% per year, and we will continue to leverage our existing system capabilities and market access to even outgrow this market. And finally, we will increase efficiency and drive simplification in our business.
So to give you some specific examples, we will streamline our organization, we will reduce third-party spend by an optimized supplier portfolio, and we will create additional synergies with Rolls-Royce. And we believe these strategic initiatives will unlock our potential and bring us to an operating margin of 12%-14% midterm. And yes, there's a lot to do, but our teams are unified behind this. So next, I will give you further details on the first three initiatives, starting with Power Generation. So Power Generation is a highly attractive growing segment with a huge profit pool and also significant margin improvement potential. With a 9% revenue growth per year, it's also one of our biggest growth drivers. And this growth comes particularly from more than 20% increasing annual spend into AI-ready data centers.
thanks to our strong position in this market today, we will capture this significant growth. We also see great potential in service through additional offerings, such as upgrade and retrofit kits or also digital services. We are planning to double our service business midterm. Significant potential also comes from an increased focus on commercial optimization. First, we are optimizing our internal cost structure and investments. Second, we will benefit from volume effects. And third, we will leverage our global production, production footprint. For example, we will benefit from an increased localization of our engines by 40 percentage points in China. On top of these measures, we are investigating to further broadening our offering and improve our cost structure through strategic partnerships. This will help us to share investments, capture market share, and also lower our cost base.
So just on a side note, might be interesting, so do not worry about any blackouts today, as this building and also this room are backed up by by our Power Systems engines. So there are 8 of them on on the roof of this building. So let's talk about our governmental business. The governmental market is highly attractive for us, with strong growth, good margins, and a leading market position. And here we are a key supplier for tank programs of the NATO partners, and we also see increasing demand of the NATO allies. So in fact, we serve major tank platforms around the globe, such as the Leopard, the Puma, the Boxer, or the Ajax.
Current geopolitical tensions have resulted in increasing security needs globally, and therefore, we see more than 10% annual market growth in the coming next three-four years. We are in a strong position to capture that growth and even outgrow the market from both the sale of new equipment and also higher service revenue. In addition, we see opportunities to provide our customers not only with the perfect propulsion system, but also with more integrated solutions, such as ship automation products. We are well-positioned to triple our revenue in this area. We are also focused on disciplined investments in technologies to strengthen our longer-term opportunities and to underpin our leading position. Now let's come to our Marine initiative. Marine is a key profit contributor for us, with even further potential for profitable growth.
Here, we plan to strengthen our number one position in yachts and improve our position in commercial marine through the following key levers. So first, we will create profitable upsell potential and differentiation by providing our customers with fully integrated solutions, from bridge automation to propulsion systems. And as part of this bridge-to-propeller approach, we acquired the company Team Italia this year, a high-value player with strong automation capabilities, enabling us to offer integrated bridges for luxury yachts. And let me tell you, when you are on a ship, or even better, on a yacht, and you look into this engine room and hear the engines running, Power Systems engines, this is spectacular. It's really spectacular. It's fantastic. Whenever you have the opportunity, please do so. Second, we will secure our leading portfolio position by offering alternative fuel-ready engines to support our customers' transition towards sustainability.
Alternative fuels will play a key role, especially in short and midterm transition, and our key engine platforms are already being released step by step to run on these. In the long term, we see methanol as the prime decarbonization path and are therefore also developing methanol-based solutions for our engines. Finally, our high-margin service business provides us with great growth opportunities. With a revenue share of more than 40%, it is a substantial profit contributor. To capture additional potential, we are developing new digital solutions, such as equipment health monitoring, which provides our customers with higher availability of their equipment. One further topic that we are driving is energy transition, and here we have made already significant progress towards offering lower carbon solutions, enabling our customers' journey to net zero. The speed of transition and customer demand strongly varies between our market segments.
Many of our customers, such as data center and governmental clients, will continue to use combustion engines well into the future. Combustion engines will remain highly relevant for many years, but increasingly powered by sustainable fuels. So by the end of 2023, I'm really pleased to say that all our major engine platforms will be released to run on these fuels. And we already see first customers, such as the mining corporation Rio Tinto, using our engines with a sustainable diesel substitute, HVO. In Marine, we are developing methanol-based solutions, and for Power Generation, we see hydrogen-based engines as a future solution. These developments are based on existing engines, and given the progress already made, we are well prepared to deliver this transition. Hybrid solutions will be key in various segments, so we already offer them in the yacht or the rail business.
In the U.K., for example, you can enjoy our hybrid rail system by taking the Chiltern Railways line from London, Marylebone to Aylesbury. In our important Power Generation business, engine-based systems will continue to dominate the market. Yet, we are also very well prepared for the gradual transition towards battery-based solutions, as we have the required capabilities and products already today. Finally, digital solutions will contribute to the decarbonization by increasing efficiency of our products. Digital products like asset and fleet management and equipment health monitoring will enable us to generate additional value streams. Let me conclude. In summary, Power Systems will contribute significantly to the success of Rolls-Royce. We have a resilient business model with strong market positions and opportunities ahead in growing markets to unlock the full potential of our business. We have a clear strategy to deliver this.
It's built on a resilient business model and the combination of cost efficiency and substantial growth in attractive markets. This will significantly contribute to the profit and cash improvement of Rolls-Royce. In addition, we are well prepared for the energy transition to secure future business opportunities. So all Power Systems employees, including the management team and, of course, myself, are aligned and mobilized to deliver on this strategy and to succeed with the One Rolls-Royce mindset. So together with Tufan's leadership and the entire company worldwide, we are really looking very positively forward into our future. And now, with all these great opportunities in front of us, I think you can understand why my expectations about Rolls-Royce and Power Systems have been exceeded. So we have achieved a lot, but we are just getting started.
There's much to do, but we are all really excited to continue our journey. With this, I will now hand over to my dear colleague and friend, Adam, for defence. Thank you.
Thank you, Jörg. Jörg and I have now worked together for a year, and I have great admiration for him. His passion and dedication to Power Systems is always on display, is highlighted in his remarks. I also want to acknowledge Rob. He was one of the first people I met in defence when I joined Rolls-Royce 10 years ago, and it is a real pleasure to be here with him today. Good afternoon, and thank you for attending. Today, I'm going to discuss how defence is playing its part in creating a One Rolls-Royce that, as Tufan outlined, delivers on its potential. For me, it also marks the culmination of the strategy review that I worked on in my previous role, so it's a big day.
I plan to take you through a quick overview of our business today, show how transformation is improving our mid-term performance, and highlight how our recent program wins can unlock the door to long-term growth. Before I start, I would like to acknowledge my 11,000 defence teammates. As a former US Army officer and longtime member of the defence industry, it is a real honor to represent them. All of them are dedicated to our customers and to ensuring they can accomplish their missions, providing assistance when natural disasters strike, providing deterrence in the air and sea, or medevacing those in need of medical care. All those customers depend on us every day, and we take our role in delivering for them very seriously. We also take our role in delivering to our shareholders very seriously, which I will address shortly.
As you'll see in the fact sheets, the defence business largely includes aero and naval gas turbines and nuclear submarine propulsion. Indianapolis is the mainstay of our transport engines. Bristol is a center for combat. Raynesway in Derby is home to our nuclear submarine business, and our sites in Mississippi, Massachusetts, and in Canada focus on our naval capability. In all, we have over 16,000 engines in service with around 160 customers globally, and we work in close partnership with the U.K. MOD and the U.S. DOD. I've spent most of my career in strategy here, at Boeing, and Anheuser-Busch, so I concur with Tufan's analysis of how we make decisions about our portfolio. Is the market attractive? Are we differentiated? Can we generate competitive financial returns?
And when I look at our defence business, I believe there is strong evidence that we tick all three boxes and therefore enjoy advantaged market positions. Our financials have demonstrated that the defence market is resilient. We maintained our customer and shareholder commitments throughout the COVID pandemic, and the global security situation that has developed since has led to governments increasing their commitment to defence. Our half-year results showed strong revenue growth and order pipeline. Our customers continue to invest in capability in our core markets, and we have demonstrated that we are differentiated. The versatile AE engine family has enabled us to win positions on the C-130J, V-22, and the MQ-25 in transport, and 13 others, if you're counting. Our full engine combat capability enables us to power today's aircraft and position us as an international partner for the development of future platforms.
Our capability in nuclear submarine propulsion is unique. We are the only company that can design, manufacture, and support naval reactors. The high power density of our naval gas turbines brings real advantage as mission systems require more space on modern warships. In helicopters, we've accumulated huge experience in military and civil programs. We also believe our business model is differentiated. Defence programs typically generate positive financial returns throughout the lifecycle to include design, development, production, and service, and the lifecycle lasts 40, 50, perhaps even 80+ years. In transport, we are still making T-56 engines for the Hawkeye over 60 years since they first rolled off the production line. We are proud to have enabled the U.K.'s continuous at-sea deterrent to operate since 1969, and our Model 250 remains a mainstay of the small helicopter market over 60 years after its first deliveries.
Our customers have benefited from the technology and capability that we have developed in partnership with them. Our shareholders have benefited as well, and that continues. Products we are designing today will be generating sustained and profitable returns for this company many decades into the future. But we know we can do more to contribute to the Rolls-Royce transformation in the short to mid-term, through a combination of prioritizing our growth markets and delivering improvements in areas that are within our control. Our half-year results demonstrated margin improvement through work already underway. This will help us unlock our full potential. Looking forward over the mid-term, we aim to grow that margin to 14%-16%. Revenues are increasing in our core markets of transport, combat, and submarines, which has a positive impact on our operating profit.
I will take you through some of the growth drivers on the next slide. As with our other divisions, we believe that transformation will deliver tangible efficiency and simplification benefits in the short term. I've already mentioned the significant margin improvement we have realized through its early stages. The work we are doing on organization design, third-party cost, inventory reduction, and other work streams will further improve our financials and sharpen our competitive edge. For example, I believe we will find synergies as a result of consolidating our engineering and procurement activities that will enable us to prioritize resources and generate significant financial benefits. While we will experience some legacy retirements over the mid-term, the actions I have mentioned will enable us to improve our overall operating profit performance. We are targeting key areas to provide margin uplift over the mid-term.
For instance, on volume and mix, the overall transport fleet is growing, generating higher flying hours and more shop visits. For example, AE shop visits increased by 22%. In combat, changes to the product mix yield higher profit due to the scale of newer programs. It's a similar story in submarines, which will see an increase in volume, funded development, and infrastructure. All this is underpinned by our exceptional order pipeline, GBP 8.5 billion at the end of 2022, which provides high certainty to our mid-term revenue projections. On commercial optimization, all of our major contracts will be renewed over the mid-term, which provides us with the opportunity to work with our customers to offset external impacts, such as inflation, and ensure we capture the fair value for our products and services.
From an investment prioritization standpoint, the strategic review process enabled us to take a more focused view on where and how we invest. Our major customers strongly support our core differentiated strengths in transport, combat, and submarines, and as a result, our customer-funded R&D is due to increase by 150%. There are more opportunities for funded programs in these areas. Our choices are customer-led and reflect their priorities. On cost management, our half-year results demonstrate that defence is already making progress in this area and will capture additional benefit from the group-wide transformation activity. In the mid-term, we are improving performance largely through being smarter about how we operate, making sure we are doing all we can to achieve our potential, and this is positioning us to better execute the new generational programs that we have won.
Early in the last decade, we realized that our portfolio was maturing. We needed new programs to replace anticipated fleet retirements, or our competitors would replace us. So we focused on winning big programs in our core markets, and we did this by utilizing our strengths. We leveraged our partnership experience to secure our position with Bell on the US Army's future long-range assault aircraft, and also on Tempest and the Global Combat Air Partnership. We worked as one Rolls-Royce to win the US Air Force contract to re-engine the B-52, and our capability enabled our selection to power the new AUKUS submarine fleet. All of this underpinned by the innovation, which is in our DNA. These wins start to increase our volumes just beyond the mid-term horizon, and our position on them can unlock even greater growth over the long term.
We are anticipating a CAGR between 4%-5% between now and 2040, which will be faster than the market. In transport, the US Army's FLRAA program is just one element of the future vertical lift market. With this win, we are in good position to capture other DoD and international sales that are likely to follow. If you would like to learn more about these opportunities, please talk to John Shade and Jenna Wright in the expo outside. They led our FLRAA team and are excited to tell you how we did it in partnership with Bell. In combat, we are very proud of our B-52 win, which enhanced our reputation as a major U.S. defence supplier and has opened many doors as a result.
As we re-engine an aircraft that has been in service for around 70 years, we are also positioning to power the Air Force's future autonomous combat platforms. We can offer military variants of civil engines in this space. We also have proven rapid development capability through the MOD-funded Orpheus program, which offers international opportunities, and which, again, you can learn more about via the online expo. In the U.K., our leading partner status in Tempest has led to our participation in the Global Combat Air Program, which has further international export potential. While our full engine capability is providing other opportunities to partner with governments seeking to develop their own combat capability. It's also worth pointing out that digital capability was crucial in winning B-52, and continues to be a key game changer for us as we develop our GCAP Power System.
In submarines, what we always thought of as a U.K.-only market, has now expanded to include Australia through the AUKUS agreement. It represents a large expansion for our submarines business in Raynesway. The unique capabilities that we have developed there have the potential to be leveraged into other growth markets. For example, microreactors can play a big role in helping energy security and resilience, and energy transition, both in the defence and civil environments. Again, you can learn more about this in our online expo. In summary, we have a strong and resilient business today. We know we can do more and are taking specific actions to realize greater value and grow our margins tomorrow. We are transforming as part of one Rolls-Royce to deliver even better performance in the mid-term, through improving volumes, commercial optimization, investment prioritization, and cost management.
We are leveraging our recent wins to deliver an exciting future with long-term growth in programs that will run for decades. Finally, I want to finish where I started. That last picture shows the importance of what we do. It is the inside of a Rolls-Royce powered aircraft during an evacuation, taking people in peril out, out of harm's way. We are here today because somebody, somewhere, is keeping us safe. They are relying on us to deliver each and every day, and we are exceptionally committed to our duties. Thank you. I will now hand you back to Isabel.
Thank you, Adam. So we're now gonna welcome all of our presenters back up onto the stage for our second Q&A. We've got about half an hour for that. As a reminder to those of you in the room, firstly, don't sit in this corner, 'cause Tufan can't see you, so I think Ian has now moved. But make sure you use your microphone. Everyone online does want to hear your question. If you are online, if you put a question into the Q&A box, we are monitoring that. I hope we will get time for one or two questions from online at the end. Over to you, Tufan.
Thanks, Isabel. I'll try to pick people who weren't actually able to ask questions in the first session. So but anybody, let's go, let's start there, then we'll go there.
Yeah. Hi, everyone. It's Ross from Morgan Stanley. A couple for Rob, please. Firstly, on your shop visit assumptions, you've said 1,100-1,200 total shop visits, 700 or 700-750 of which are large overhauls. That implies that CNR shop visits are actually lower in 2027 versus 2022. Is that math correct? And if so, what's driving that? Secondly, on fleet size, how many large engines do you expect to have in service in 2027? And what proportion of that is the new generation programs? So, T1000, XWB, and the 7000. Thanks.
So, Ross, just check you can hear. Thanks for those questions. So, yeah, your math is correct. So we see a significant increase in our, in our large refurbishments, and therefore, there is a corresponding slight drop in CNR, about 10%. That's largely driven by Trent 1000s coming out of a more intense program of check and repair by the end of the medium-term plan. Second question was, what's the distribution? I mean, around 60% of that large engine fleet in 2027 is, is XWB, so 84 and 97. And then I would say probably about 80% of the total fleet are those new engines, with the balance, the 700, 800, and 900. I'll have to get you the absolute number.
Thanks, Rob. There was one question there, if I can go there.
Thank you. Couple of questions. First of all, this morning, earlier today, you mentioned that electric air mobility is something you're not basically gonna pursue. Is that because you don't believe in the overall opportunity, or it doesn't reach certain thresholds in terms of, you know, profitability that you think you can make out of it? Curious to get your views. It's obviously an area that's getting a lot of hype. There's some very highly valued company, which obviously we, we wonder where the value is, but so, your thoughts on that? And the second question has to do with the engine issues that you faced when you came out with the 787s, with the Trent 1000, I believe. And obviously, the problems that Pratt is facing today with the GTF. What are the lessons learned?
How will Rolls-Royce look in the future to mitigate and not have these issues? 'Cause as we know, these are multi-billion-dollar cost issues for a company like yours.
So I'm gonna ask the second one Rob to answer. Let me pick up the first one, electrical. I think I don't want to say more because there are confidentiality around some of the conversations, but one thing I will say, if you look at what the team presented, we have great growth opportunities in our business, in our core businesses. Then in addition to that, we are actually, like, take microreactors. Given our distinctive position, we should be natural leader, not a player, leader in microreactor. Battery storage in Jörg's team, that's highly transferable skill set. And in this time period, you have seen it from my chart as well as Jörg's chart, that business, in a very short period of time, will be profitable, then grow from there.
In this period, actually, it is becoming profitable. And not to mention the growth picture in the core businesses that Adam, Jörg, and Rob talk about. So it is really simply to say two things. We have great growth opportunities, and we need to actually allocate our resources more effectively there. Second thing, we believe we built very good capability in advanced air mobility. We believe it is gonna be a better value to a third party. But having said all that, people need to understand, we are not ruling out, like, regional aircraft with hybrid. I mean, I can totally see our technologies is there, so I need to be careful.
But, I can totally see hybrid, and we are actually working on it, hybrid solution in regional setup, and that business, already established business, it needs to be transformed to lower carbon version, if you like. And I can totally see us playing there. Therefore, in the presentation, I talked about keeping the capabilities to support aerospace, defence, and Power System businesses. Rob?
So on the Trent 1000, I think there are two elements to consider. I think the first lesson learned was around just making sure that when we bring an engine into service, that we're satisfied with the maturity of the technology in the engine, and that we've done the right level of maturity testing to support it once it's entered into service. So the right testing regime in advance of entry becomes really, really important, so you properly understand, and you have a stable set of product attributes. The second point, learning specifically for Rolls-Royce, I think, was our reaction to the Trent 1000 after we had an issue that we needed to respond to.
We learned a huge amount in how we need to scale up and prepare as an organization for that kind of in-service events. Alongside making sure when we do new NPI programs, that we've got the right testing schedule and that we're pacing that program properly, the second element, which gives us greater confidence, is we absolutely understand what we need to have around us to support that engine at EIS and in the early years of its service, so that we can respond quickly and intervene if we need to, rather than we end up with something of a larger scale magnitude.
Thanks, Rob. I'll go sort of same name, sort of faces, so why don't we start with you? It seems like.
All right, Rob from Vertical Research. Couple of questions. First of all, Adam, that margin increase in the defence division, in the industry, that would generally come from a mix shift. But I was wondering if your split between cost plus and fixed price is altering materially, in this medium-term time period. And then, so bigger picture question for you, too, Tufan, and Helen as well. Both of you have spent a lot of time in the energy industry, obviously. What would you see as the key similarities and differences you've identified coming over to aerospace and defence? Thanks.
Okay, Adam, do you wanna start?
So in looking at the margin, I think it's important to look at all the contracting types we have throughout the globe. So when specifically focused on FAR 15, the U.S. SSRO in here, that is a place where we have to make sure that we fully substantiate our costs and maximize reward. Specific to your question, there is volume growth in combat, transport, and submarines. Within that growth, there are places where we are benefiting from mix. And then on the margin and margin point, we also have to focus on, as I mentioned, the presentation, transformation, reducing costs, focused investment, being as efficient as we possibly can, TCC-to-GM ratio, and being good stewards for our customers as we run our business.
So on the second question, I'll start, and Helen, please, jump in. I think couple. I mean, I'm not sure. Some of it are energy trans- energy, sort of driven, but most of it is really similarities coming from- One aspect of it, large, complex, multi-business, multi-divisional, global business. Managing that business is very different, because, obviously, when I was coming through the ranks, I, first business I managed was not a global business. I know the differences, right? So it is very different. You need to know how to think about that. It is very different. And that's common. Second common is, this business is driven by technology, engineering, and safety is very important, including obviously our customer safety and the people safety who use our products. Again, those three are very critical.
Frankly, I come from the businesses, all technology we use as a differentiator, okay? Same thing, is obviously happening here. And I think those are big similarities. And then, Helen and I come from sort of customer end of downstream. So we deal with customers, and all the airlines were my customers, right? So just to give you an Air BP, all the, Air BP was in my portfolio, all of them were my customers. So sort of you have a view about B2B, B2C, branded business and customer management aspects of it is very, very sort of important. And energy transition is the last one I'm gonna say. You come obviously spending lots of time on energy transition, and it comes handy on some areas right now because you have a view.
Like I talked about SAF versus hydrogen, for example, and so on. Helen?
Thank you. So I'll be additive. So couple of similarities. So when Tufan and I worked together, in a previous life, we did, a couple of transformations together. I think two we did together, this is our third. And I think the rigor and the success of transformation is quite transferable, and there's a couple of things which are fundamental to how you think and go about transformation. The importance of being really clear as to what your strategy is, and take that to a granular level, cannot be underestimated, which is why you've heard us today all talk about the depth and the detail and the process that we've gone through. I think, Tufan, you talk about 400-500 people being engaged in this process. It's not just us sitting up here. So the clarity of strategic thought, direction, very, very important.
Your ability then to galvanize the organization behind that and to align the organization behind that strategic clarity is incredibly important, so that everyone knows what they're working in service of, and the objectives are aligned, and we saw that in our previous transformations. And then two other things: I would say the importance of execution discipline and the rigorous performance management around that is very important. Things always happen that you don't expect, so having that fleet of foot of ensuring that you are rigorously performance managing your strategic performance day in, day out, and that's why I talk about integrated performance management, that you link it from a strategic objectives through to your annual plan, through to your in-year performance management.
Because some things always don't work as you expect, the importance of resilience, ensuring that your strategy has to have the right balance between top line and bottom line growth, and that you actually build up that very, very solid base from which to grow, so that as you capture margin improvement, that actually falls to your bottom line, and you're building on very, very strong foundations. So those are a couple of additives.
Very, very good points, Helen. Thank you. I'll go there, then, then one.
Yes. Hi, George Sherwood from Bernstein. So, a lot of discussion on margins so far. So I wanted to ask about the revenue side. If I take your midpoint of the operating profit and margin guide, now, that implies about GBP 19 billion of revenue by 2027 at the midpoint, about a 7% CAGR from where we're this year. So if we assume Civil Aerospace above that, you know, Defence and Power System, somewhere in the low- to mid-single-digit, is that what you're assuming in the targets there? And related to that, given the plans to dispose some of the electrical business, what is the 13%-15% margin target assumed for the absolute losses for the new markets division? Thanks.
So, I'll very briefly answer it. I mean, sort of we are not gonna give you sort of numbers, because this event is not about that. But I think you can calculate the revenue the way you did. Obviously, that would be a perfectly legitimate way of calculating. Effectively, in new markets, if you actually think about this period, it is benefiting effectively from 2 things. Obviously, exit on electrical, although we will keep some capabilities, as I said, to support our businesses. Second thing it is gonna benefit from, effectively, we are planning in a value-creating way. We will still be the biggest shareholder, but we are gonna be less than 50% on SMR. That is sort of our thinking in this period, and that happens not immediately, but in this period.
Those two things, effectively, you may want to think when you think about new markets. I won't give you numbers, but you will sort of figure out what that means. Okay, let's go there.
Thanks very much. It's Ian Douglas-Pennant at UBS. Jörg, could you help us understand within the power business, which of the subdivisions within your business where there are greater or lesser synergies with businesses outside of power, let's say? And Helen, inventory release and the cash flow that comes from that, what allowances have you made for the supply chain getting better or worse from here, especially given the ramp up in volumes?
Jörg, do you wanna put-
Yeah. Question number one, if, if I got the question right, you are asking for synergies Power Systems with Rolls-Royce, right? So, and, you know, I would say the beauty of our business model is that we are using the same engine platforms across our applications. And we do then application engineering to have them ready for the different markets. And with some, we have some large volume business, some smaller, but the large volume business gives us the scale to be very competitive in the smaller markets, in the niches. So when we talk now about synergies, it's across the platforms. This is what I want to say.
So it's not in single applications, but it's, for example, if we look to ETNS, it might be in software, it might be in electronics, it might be also in the arena of procurement, in part—in particular, indirect, but also some direct. And of course, across the board for processes, methods, tools we are using. These are actually the synergies we are looking for.
Thanks, Jörg. By the way, ETNS, you may not-
Oh, sorry.
You may not know.
Our R&D, so engineering and technology, basically. So engineering.
We now created new organization-
I'm sorry
As you know, which is gonna serve all three divisions. We call it Engineering, Technology, and Safety, and-
Yes
- Jörg was referring to that. Thanks, Jörg. Yeah, sure.
So one thing to highlight on synergies, Jörg's business, the defence business, is commonality of customers. So we often work together in working with our customers. For instance, our two teams were just together in Washington, D.C., at the AUSA conference. That's a place where there is overlap and synergy between the two orgs.
So to summarize, I think you will see sort of synergies at customer level. Definitely, engineering and technology synergies you will see. Then the procurement and supply chain synergies is the third area which we haven't really explored before. None of the things, except the customer one, which we can get better and better, others actually will be new, new synergies, if you like.
Inventory. Thank you for the question. Actually, we were just as a leadership team, discussing risks last week, and supply chain and inventory risks was something which, Adam, Jörg, and Rob all spoke to. Yes, we are mindful for those. We see the next, particularly probably 18-24 months remaining challenging. However, that said, as I mentioned earlier, we still expect to release inventory, the second half of this year. Why? Because we've identified areas in the supply chain where we weren't being efficient. Rob and the team getting after pockets of buffer stock that they were holding, which were not required, GBP 100 million. Jörg has had his team out looking at sites, factories, where they were actually holding inventory of quite a few years of stock, which was not required.
So there are some areas of, I don't want to say low-hanging fruit, but areas of inefficiency that the team are getting after at the moment, where they're improving processes and systems. And we will continue to do that, but we are mindful of the industry supply chain challenges out there. Despite that, we have a detailed plan where we do expect to release inventory over the midterm. And to your question on growth, have we built growth in for inventory? Yes. If you go back to and have a look at the chart that I showed when I spoke to working capital, you can actually see that we have built some growth in, both for inventory and as we think about our debtors and creditors. So we have built growth in to support our revenue growth going forward.
Thanks, Helen. If I can go there.
Yes, good afternoon. It's Christophe from Deutsche Bank. Two questions. The first one is on the shop visit cost reduction on the Trent XWB. Last year, I think you mentioned -40%, which was a good target. It's -50% this year, so what enabled that further improvement, and what headroom do you further have on this? And the other one is on Power Systems. Services seems to be one of the areas where you can do some improvements. It was highlighted already in the CMD in 2018. You were looking for a target of 40% of the total sales. Do you have similar targets now, or is it more specific to power? I think you said a lot on Power Generation, but is it other areas as well?
Okay, Rob, then Jörg.
So I think on shop visit cost reduction, I think a good, good example of the progress we're making, I was in, I was in Singapore a couple of weeks ago, and we have a joint venture there, with Singaporeans. And we've been investing in some repair technology, that we'll use in that shop, so we need to build capacity across our MRO network. We're looking at how we scale that up for the midterm. And we're being really thoughtful about how we use that opportunity to address cost.
So Singapore, partnered with EDB, government agency, which provided some funding to allow us to focus on developing some technology, some R&D activity, that would drive some short-term benefit for the group by looking at introducing repair technology, repair technology cell on the shop floor with the shop, that allows us to identify and repair components rather than just replacing them with new parts. What that does is bring the cost down. It means we don't have to wait for the, for a part to be delivered, to the shop, so we're speeding up the amount of time that the engine spends in the shop.
It's that kind of example, where we're getting some good government gearing, we're prioritizing our R&D spend for those short-term returns, and we're thinking about how we improve time in the shop and the scope of the work that we do on an engine, to give us access to that kind of improvement on shop visit cost.
Thanks, Rob. Jörg?
Yeah. On service, service is obviously a very important part of our business. I said this, this is roughly one-third of our business. And, so we have some areas where the service share is higher. I mentioned this for marine, where we are above 40%, but we see the, let's say, the opportunity to grow here, actually, in all the different applications. So I mentioned Power Gen. There will be retrofit solutions, there will be upgrades. We see this also in governmental. So don't forget, governmental is very important on the new equipment, but also in the, in the, in-field service. Also, here, we see product upgrades. So we stay on the same platform, but we upgrade the product, and with this comes additional service. Industrial, high running hours applications, I mentioned, rail, I mentioned mining.
We have here really opportunities across the board in service. And it's not only—it's very important to grow it and to take this opportunity, but if you offer a great service, it's also a competitive advantage you can play in the new equipment, because this is the reason why customers want our products. So service will gain importance in the midterm.
Thanks, Jörg. Yes?
Thank you. Yeah, Nick Cunningham again from Agency Partners. Couple of questions. One, on the LTSA balance, that's increasing GBP 800 million-GBP 1,200 million a year through the five-year period. At what point do you expect that to neutralize, or do you indeed expect it to neutralize? Because from memory, I think it was, that was expected to have happened before that point. So sort of, kind of what's going on with that, if you like. And then the other thing is, we used to talk a lot about the unit loss on large engines, OE, $1 million or GBP 1 million, you know, whatever. That's not been specifically brought up in this presentation, although I guess it's covered by product cost.
But do you foresee a point at which, at least in terms of direct costs, an OE engine can get to break even? Thank you.
So I'm gonna ask Rob to answer the second question. But obviously, Helen and Rob, feel free to add to the first question as well. Frankly, LTSA balance, like you, I was thinking, "Okay, well, how should I think about this, sort of going to the future?" It is actually more straightforward than you think. So a short answer, for a long time, therefore, you need to think about LTSA balance increase as a sustainable increase. Why? I think Helen covered that. But it's very—I mean, it's very simple and very complex, but I'm gonna simplify it.
So as long as your installed engine base grows, right, and you are increasing your unit rate, not to mention time on wing improvements we will be making, but even if you don't make, let's say, steady time on wing at some point, if your installed engine base continues to grow and your EFH rate improves because of your commercial optimization, LTSA will continue to grow, especially if your engines are young, and that is the case in our case. Therefore, I said earlier today, that actually you need to think about our cash delivery is effectively better quality operating profit. Better quality in the sense that it is more cash based. Okay? It's good quality right now as well, but it is more cash based in midterm, in that sense, cash terms.
And LTSA, which is actually sustainable beyond this period, because our engines will grow well beyond this period, right? Our installed engines. And, and because we are actually capturing market share, Rob talk about it, I talk about it, sort of. And that's how you need to think about it. Those are the drivers in force here, effectively. Rob, on the second one.
Yes, sir. You, you're right. I mean, product cost is the focus for us, and it's one of the biggest drivers that underpins that margin improvement. We have made huge progress the last five years on that OE cost reduction. And we're always focused on it, both because of the OE benefit that it brings, and also in our services business, if we're bringing the cost of parts down. So we continue to target improvement in that. We're more or less around the industry benchmark. I think it's about 3% gross product cost out each year, and we continue to prioritize allocation of engineering resource and CapEx to continue to drive that cost reduction program.
Sorry, we're running out of time. I'm gonna take the last question. Online, if I may. Okay, go for it. So, the question comes online from Michelle Peter, from JO Hambro, saying: "Your slides in the first section indicated SMRs could be bigger than Defence and Power Systems in the long term. Please, could you comment on the clarity you've had from the U.K. government on plans there, and where internationally you could take the Rolls-Royce SMR technology?" And I think you did give a list of some of those nations in the-
Yes
in your earlier presentation.
So I think, that's a revenue chart, I just remind everybody. So yes, I think if you go to the future, I mean, you need to think about big picture. Some of us say, I came from energy industry, so I have a view, right? I always took a view, frankly, Europe will never go to net zero unless nuclear plays a role, right? U.S. has few other options. I'm not gonna dwell on it here, but the, that's the big picture. When you come to nuclear, you have choices. You have SMR or nuclear projects, big nuclear projects. Their risk profile is very different, and history demonstrates that that's true. So then you conclude SMRs need to play a big role. And we are actually bringing knowhow from our submarine business.
It is a proven technology in that sense. So let's go to your question, but big picture, it makes lots of sense. Yes, U.K. process continues at this point. I think it is important that, frankly, if you think about how advanced we are in generic design assessment, we are probably two years ahead of anybody else for Europe and U.K. because technology is sort of specific for U.K. and Europe. That is, w e are actually ahead of anybody else. So second thing is, therefore, it's not about we will be selected or not. I would be very surprised, frankly, if we are not. So it will be hard to explain to anybody, to myself as well. But the point is not that.
Point is, actually, in this process, I said this to the government, frankly, very openly, "You need to come with committed projects at the end of it, so that we go into execution and with some funding." So but, given latter part of that question, what other countries you are working with, I actually listed there. I'm not gonna give you the same list, but I'm gonna say, Chris and the team is working very, very closely with Czech Republic, so that we have actually joint work streams and so on. And we also have even a sort of, an opportunity in the, in the U.S. as well, that Chris is progressing. And other countries I mentioned, Scandinavian countries like Sweden and Finland, et cetera, they are actually genuinely interested.
Once this thing, sort of gets on the ground, people can touch and feel, because with new technologies, there is always some hesitation. When you start to touch and feel, frankly, this is gonna be a, a little bit like, again, energy, sort of, co- industry talking. Offshore wind, this is gonna explode. I actually say to Chris, "Worry about the supply chain catching up with you," but he's working with, on supply chain already. So I think there is the opportunity set here in the period that I was talking about. With that, I think we are gonna-- I'm gonna make some sort of closing remarks, given that, Isabel disappeared, that's my cue to say, actually, maybe it is time to conclude. So first of all, thank you for your questions, and thanks for coming here.
I think, unfortunately, there were more questions in some sessions than we could answer, but hopefully, we answered many questions you had. If you have more questions, Isabel and team, definitely they are waiting for you, so we can help you there. But before we close, I would like to remind you of the key messages from today. Rolls-Royce is at a pivotal point in its history. We are transforming our performance, and we have a clear vision for the journey we need to make. We have a strategic framework that will deliver a step change in financial performance in the midterm. We are making choices about where we will invest and the shape of our future portfolio, where we should partner, and where we should exit. We have advantage businesses in attractive markets with differentiated technologies.
Our strategic initiatives will unlock our potential and create more value for our, all of our stakeholders. Our group-wide efficiency and simplification program will deliver sustainable benefits, making us more resilient and competitive. We are becoming a lower carbon and digitally enabled business, playing our part in the energy transition and benefiting from the advantages AI and data can bring. We are already in action, and there are lots of opportunities for us here in the future. I think this part, we haven't spent lots of time, but the second part of, lower part of this slide, but that is a very key part of key difference, which is actually causing these outcomes that I would like to sort of summarize very quickly. We are working as one Rolls-Royce. All of our people are aligned and mobilized to succeed. We have a new mindset and stronger performance management.
We are embracing new ways of working, and over time, this will develop into a distinctive performance culture. We are executing with strategic clarity. This strategic clarity, combined with granular strategic plans, focuses and aligns the organization, and makes strategy delivery relevant to all our, our people. So everyone has a role to play, and we will manage performance closely to ensure delivery. We are externally focused and benchmarking our business against the competition, commercially and financially, so that we constantly improve our business to world-class levels. We have simplified our organization and are strengthening our capabilities in key areas. I am confident and excited about the opportunities we have at Rolls-Royce. Now that I laid out our plans, I hope you are, too. We have the expertise, the drive, and crucially, the team that can deliver.
All of this will help us deliver our Rolls-Royce proposition: to become a high-performing, competitive, and resilient business with growing sustainable cash flows, a strong balance sheet, and growing shareholder returns. This Rolls-Royce will be able to do things tomorrow it wasn't able to do before. We are transforming our business, ready for our changing world, fit for today, tomorrow, and the future. Thank you for joining in the room and online today, and I hope to see you all in the near future in our February results presentation. But before we close, I would like to also thank whole leadership team. It is a very strong leadership team. It is actually privilege and pleasure to work with them, not only because what they have done today, but what they have delivered so far, and more importantly, what they will deliver in the next couple of years.
One last word, these events don't happen without lots of people working really hard behind the scenes, and I would like to thank, really personally thank, all of our employees who make this happen. Thank you very much. Have a great day.