Hey, good morning, everyone, and thank you for joining us here at the London Stock Exchange, and for those of you joining online. My name is Peter Lapthorn. I work in the investor relations team here at Rolls-Royce, and it's my pleasure to welcome you to our 2019 results. The agenda for today's presentation is that our CEO, Warren East, will give an overview of the year's performance and some of the strategic highlights. Our CFO, Stephen Daintith, will take you through some of the more detailed financials. Warren will wrap up and give his view for the year ahead, as well as the longer-term outlook. Our presentation is expected to take around 50 minutes, and then we'll have time for Q&A, both from the audience and online. You can do online questions through the webcast services. Finally, can I ask you to switch off mobile phones?
We are not expecting any drills today, so if you do hear an alarm, please exit in an orderly manner. I think that's all of the safe harbor and the boring stuff out of the way. With that, I will hand over to Warren East.
Thank you, Peter. Good morning, everybody. Thank you for coming along. Hope you enjoyed the video rolling while you were having coffee and pastries out there. A little bit of subliminal messaging and the picture of the electric plane on the front cover of the little handouts we've got there. We're just one quarter away from flying that now. Some exciting highlights to come in the year ahead. Before we get there, I'm going to talk about 2019 to start with. Here's a summary. We're very pleased that we ended up with very strong progress across the group. We ended up with a strong finish to the year. It was a tough first half in 2019. We saw very encouraging behavior changes around the group.
We could really see the effects of the transformation that has been ongoing within the company in some of the behaviors which were necessary to drive that performance into the end of the year. Very pleasing to have an underlying operating profit strongly up, and that is really what's underpinning the quality of that cash flow number that's delivered as well. We have, as a board, held payment to shareholders. There are some environmental risks out there, which I'll be talking about in a little while. In summary, a strong set of results. 2019 was a year of delivery. In 2019, we delivered strong trading performance. We delivered significant progress on the Trent 1000. Trent 1000 has dominated a lot of the conversation about Rolls-Royce for the last 18 months.
Actually, underneath that, and I'll show you a slide in a few moments, we've had some excellent progress on that. Restructuring has been going on for a little while, but again, we've continued with the progress on that. We've continued with delivering on portfolio simplification, and we've delivered on our forward-looking strategy to capitalize on the upcoming energy transition and the journey to low carbon for the world at large. I'm very pleased with the momentum that we established, particularly in the second half of the year, particularly in Q4, particularly around the behaviors of our people. That momentum has carried forward into 2020, and that underpins our confidence in 2020. Stepping back and looking at the market environment, I'm just going to go around the three key areas of our business.
In Civil Aerospace, which is half our business, we continue to build our installed base. It's now over 5,000 large wide-body engines. Passenger air traffic demand has settled back to a steady state rate. We have had a few years of some quite superior growth, but it is in 2019, more of a steady state long-term trend. Build rates from airframers were adjusted during 2019. As a consequence, our forward-looking projections of build rates for large wide-body engines has changed. In some ways, I think this build rate adjustment from the airframers has alleviated somewhat the concerns which were growing in the industry about oversupply. That's actually quite a positive thing from a market environment point of view. Of course, it's led by what's effectively been slower than anticipated retirements over recent years of older aircraft.
I've got a little picture later showing pictures about retirements and so on. In our Power Systems business and the sector there, we have had a cyclical downturn in the market served by our Power Systems business, particularly following a pull forward a year or so ago from some of the traditional markets. However, from our point of view, we've seen encouraging growth opportunities in new applications and new geographic regions. Defense, in our Defense business, after several years of pause, we're now seeing new programs coming through from the key Defense customers, particularly the U.S. Department of Defense and here in Europe with the U.K. Ministry of Defence as well. The new programs are getting closer in the Defense environment. Down at the bottom of the slide here, we're on our journey towards zero net carbon.
Across all of our markets, our customers, we found in 2019, getting much, much more receptive to our thoughts on this, and we're pleased to have, I think, established in 2019 a position of thought leadership. Before I go into detail of the business, I'll just build on that last point. Thought leadership in terms of leading a trend within our industry towards zero-carbon, taking the responsibility that we need to take for this. That's in products that face up to the market. It's in the underlying technologies, which feed those products, where we've seen great acceleration in our capabilities around electrification, for instance. We've seen progress on nuclear reactors with small modular nuclear reactors, great source of zero-carbon electrical power. We've seen a lot more industry engagement in the reality that the world needs to solve the synthetic sustainable fuel challenge ahead.
A little bit of practicing what we preach on the bottom of the slide here for our own operations. This is a picture of our site in Friedrichshafen, where we have installed a microgrid. We're starting to sell microgrids. We've installed our own microgrid. This solar-powered microgrid is generating about 30% of the energy requirements for our plant in Friedrichshafen. Enough of the future for the time being. I'll now have a quick update on what's been going on in the business. In our Civil Aerospace business, we've seen a year of sustaining improvement in underlying operating profit. If you look, that's been happening over the last several years. 2019 was no exception. A significant increase in underlying operating profit in our civil business, driven by the usual drivers that we've been tracking for the last several years. Customer confidence is pretty good as well.
From a forward-looking point of view, from orders coming in through the door, approximately nearly there, you see 2/3 of wide-body new orders in 2019 coming to Rolls-Royce. From an operational point of view, our operations are getting into much better shape. We're improving performance there, improving stability, improving cycle times, and generally improving performance. It's not just about our wide-body engines in Civil Aerospace. We do have some exciting programs in business aviation as well. In 2018, we launched the Pearl family of engines. The first Pearl family engine entered into service in 2019, and the second Pearl family engine was launched in 2019. That's going to power the new Gulfstream aircraft. In Power Systems, I mentioned from a market point of view, there was a bit of a downturn in the sector served by our Power Systems business.
We were encouraged to be able to grow our business into that environment, grow our business at the top line, and grow the profitability of our business. How do we do that? Well, we did that through targeting new applications, the newer applications, particularly strong in mission-critical power, backup power, and also by pushing hard on developing our business in what are new geographic regions for us, particularly in China. It was great on some of the new technologies as well to see progress on things like microgrids and hybrids. Hybrid, I'll probably come back to a bit later in the presentation. In the space of two and a half years, we've gone from concept to proposal to MOU to order to, in the next several months, delivery of hybrid rail power packs. Very solid progress from our Power Systems business. Defense.
Defense, the standouts for 2019 in defense was about orders. Another year of record book-to-bill, taking our order book to a record level as well. It was another good year for delivery of cash. In the background, I mentioned we're getting closer to those new programs. Actually, our R&D is going up a bit, so you will see the margins coming off a bit over the next couple of years in defense. We're capping off a period of four to five years of building the order book. Over the last five years, book-to-bill has been above one, and so our future in defense, particularly driven by some of the service contracts, is looking like very good shape.
I know that everybody wants to hear a bit more about Civil than they do about Defence and Power Systems, we're going to have a couple of deep dives on Civil. I can't stand here and not talk about Trent 1000. We did a little bit of an update in November, in the results announcement this morning, you will see no change from what we announced in December. No change in terms of projected return of AOGs to single digits, no change in exceptional costs, and so on. During the year, we made some pretty good progress. Good progress in actively managing the situation, continuing to extend our MRO capability and our MRO capacity. We are confident that that GBP 578 million of cash cost in 2019 is the peak year of cash costs for Trent 1000. We are beyond that peak.
As we look forward in 2020 to a single-digit position around the mid-year, then we'll be underpinning that with more spare engines, as we announced in November. The histogram here on the bottom of the chart is about just that reduction in Aircraft on Ground. You'll see in 2019, we had to take a step back, and we took a step back proactively because we needed to pull forward replacement of Intermediate Pressure Turbine blades on one of the variants of the engine. Having originally generated indigestion in our MRO network, and having been eating off some of that indigestion, we then generated a load more, pushed the AOGs down again. That effectively pushed out the period when we get back to single digits. There has been no further deterioration on that since we announced that in Q4 last year.
We're currently sitting around the mid-30s in terms of disruption. This slide is an update of the slide that we showed in November, which summarizes the three engine marks for Trent 1000 and the three key issues. We are now in a position of eight out of nine of the design changes are done. We've got one there, the Pack B IP compressor, waiting to be certified. There's no change to that design. We're totally confident that that will get certified. It's simply a question of priorities in terms of the fact that that's the last one. Other than the final box over there where, as we said in November, the design work for the high-pressure turbine blade on the TEN, that's still underway. As I stand here this morning, I'm a lot more confident than I was last November about that design work. It's progressing well.
In the coming weeks, we will be running an engine with that new design. We'll be going to type test and hopefully then it's on to certification. The chart's been updated, though, with these little pies to show that it isn't just about doing the designs. It's about rolling those designs into the fleet. That's what minimizes the disruption and ensures a healthy fleet. The pies on the left in each box are a snapshot of where we were 12 months ago. The pies on the right in each box represent where we are today in terms of rolling those fixes into the fleet. I hope you get a sense of momentum here of how the fleet is getting healthier as we go. Moving on. It isn't all about Trent 1000. Trent XWB has now reached five years in service.
The leading engines are surpassing our expectations in terms of durability. In terms of performance, it's our most reliable engine, and its efficiency holds up very well in service. The airlines love it. Actually, the customers love flying on the airplane as well. The A350 is a great airplane. Points on the Trent XWB, it's today just over 10% of our installed fleet, but it's approximately half of our wide-body deliveries. It's on a journey to be around a third of our fleet in the midterm. This is a very important engine for us. It's very important that it has an outstanding record of performance. There are other programs as well. I've already talked about the Trent 1000. Trent 700 is still our largest volume. It's a third of our fleet, nearly. It's the major workhorse of the Trent fleet.
We've seen great progress over the years in extending the time on wing for the Trent 700. It's a little bit of a benchmark and barometer for the newer engines that are coming along behind. It's an auspicious day today because it's 25 years to the day that the first Trent engine went into service. It was a Trent 700, 25 years ago on the 28th of February. It's still going strong after 25 years. At the newer end of the spectrum, Trent 7000. We put this up because the Trent 700 powers the A330. The Trent 7000 powers the A330neo. We're putting all the lessons we've learned from the Trent 1000 into that engine. It is based on the same architecture as the Trent 1000-TEN. Putting all the lessons in, we are confident in the performance of that engine.
Looking a little bit further forward at our installed base, because it's the size of our installed base that underpins the medium-term business confidence. The size of our installed base is about new airplanes going in. It's about older airplanes retiring. This chart shows that actually if you look at the older airplanes that are going to retire, i.e. the ones on the left-hand side of the slide at the bottom, it's dominated by our competitors. At the right-hand side of the slide, the present day, you see our market share. You recall our market share in terms of orders, approximately two-thirds of the orders in the last 12 months, for instance.
We think we are well-positioned through this retirement cycle that is going to be coming up over the next several years, well-positioned to continue to grow our market share, and that underpins the installed base. Enough of deep dive on Civil Aerospace. By the way, the clock in the back of the room, guys, has stopped working at 9:07. I've just realized that it's actually 20 past nine. Sorry about that. We're now going to move on to I thought, blimey, it's going slowly. Change and Transformation. Change and Transformation is at the heart of creating a high-performance business which is capable of delivering quality results. Over the last 18 months or so, we've seen great change in the management, we've seen change in pace, we've seen change in process, and the development of a forward-looking strategy.
We now have a very different business than we had a few years ago to face the challenges that are around today. Just recapping some of what we talked about on the Capital Markets Day in 2018, we talked about simplifying our organization structure, streamlining processes, and investing in automation to enable our people. During 2018, we sorted out the structure. During 2019, we made great strides in terms of reducing process, removing duplication, and installing automation to enable our people. That's carrying on in 2020. A&M are continuing to help us to actually deliver the benefits of this transformation. Basically, we are on track for what we set out at the Capital Markets Day, delivering what we said we were going to deliver. That's measured in some ways by achieving run rate savings.
If I look, for instance, at some specifics, product change process and end-to-end digital design, that sort of reduction in engineering hours, that sort of improvement in productivity is baked into our plans. That frees up resource to concentrate on the future. I talked about improvements in our operations earlier. There's a focus area there. I think other good indications of the change in trajectory of that inventory that we saw halfway through the year demonstrating a sharpening up in our operations. In our service business, we've had to grow our MRO capacity. The good news is we're growing our MRO capacity faster than our investment in MRO because we're getting better and smarter at doing it. Improved productivity across all these three areas, and these are the fundamental three areas that make our business tick.
We're either developing this stuff or we're building this stuff, or we're looking after it when it's in service. Why are we doing all that? Well, we're doing it to position our business for the future. At the Capital Markets Day, we talked about bending the cost curve. This is a focus on R&D, for instance, but bending the cost curve, reducing the cost as a percentage of sales. In the R&D domain, that means effectively keeping our R&D flat as the sales grows. Within that fixed envelope, you can see here how we're tilting the amount of money spent towards future-looking technology. That's why we're doing this transformation, so that we can deliver the business performance and position ourselves for the future. With that, I'm going to hand over to Stephen to talk about our 2019 numbers in a bit more depth.
Thank you, Warren.
Thank you.
Morning, everybody. I'm going to take you through the full-year results, give an update on the key drivers that we first highlighted back in the middle of 2018 at our Capital Markets Day. We'll go through a quick review of each business, and then we'll go into guidance for 2020. Just running through these. At a glance, we gave ourselves a lot to do in the second half. We're pleased to be reporting today a strong underlying operating profit growth of 25%. What's most encouraging about this is the core driver of the growth in our free cash flow. We'll see that again in 2020. Moving on to free cash flow, GBP 911 million. Driven by that growth in profits, and especially strong performance in the Civil Aerospace aftermarket.
We're going to see shortly the civil aftermarket cash margin and how that's developed over the last couple of years. We also received, very late in the year, some insurance receipts in respect of insurance that we had in respect of grounding of our wide-body engine fleet. We could claim against that on the Trent 1000. We have been negotiating these for well over 12 months, this particular insurance arrangement. We reached the conclusion of those negotiations towards the end of the year, and hence the receipts, which arrived in right at the very end of the year as well. At the halfway through the year, limited visibility around that and not much certainty. Civil Aerospace. We saw a strong improvement in operating profit in Civil Aerospace as well. This is the first time that we've seen profit in Civil under IFRS 15.
As a reminder, that came in at the start of 2018. We no longer capitalize the losses on the OE sales, and so very encouraged to move to operating profit in Civil Aerospace. Finally, gross debt reduction. We reduced our gross debt by GBP 1.1 billion. We're reporting today a net cash position that's improved to GBP 1.4 billion. An important priority for us, we'll come onto the details a little later, to strengthen our balance sheet and return to a single A rating. Let's go to the revenue slide. Revenue business by business. Our delivery in 2019 was in line or better than guidance for every business. I won't go through the exact numbers, but you can see there in the blue, just to the right of center, what we guided a year ago, and then the middle there, the growth for each business.
Really solid growth in Civil Aerospace, 10% growth driven by both OE and aftermarket. Strong growth in Power Systems, and we'll go into the detail, in a challenging market. Defense growth in line with guidance. Good growth in ITP, which we'll go through shortly when we go through the business reviews, but largely driven by increase in Civil Aerospace volumes. Moving on to profit, there's the profit profile for each business in 2019. Again, margin guidance that we gave a year ago met or exceeded in every business. A relatively modest margin in Civil Aerospace, but moving into profitability. Power Systems back into double-digit territory. Defense increased investments in R&D, as Warren mentioned, causing that drag.
ITP, good improvements in margin in ITP, largely around our simplifying of the contractual relationship between ITP and Civil Aerospace, with ITP very much now as a full-fledged member of the group, very much a traditional parts supplier to Rolls-Royce. We simplified those contracts there. Good performance in operating profit and a strong performance, in particular, into the year-end, especially in Power Systems that delivered on much of the projects that have been built up during the course of 2019. Moving on to free cash flow. We had a strong end to 2019 following a challenging first half. Just three or four items here just to call out that helped us deliver this good free cash flow. Inventory reduction. We'll go through the detail very shortly, a very significant inventory reduction in the final quarter. Disciplined spend control as well.
You'll see that today we're reporting C&A costs down 4% year-on-year. That was another good achievement, largely around discipline around discretionary spend. Capital expenditure was also down year-on-year, and good discipline there as well, but driven largely by some large projects coming to their conclusion during the course of the year, and I'll go through that detail. As I just mentioned, the Trent 1000, we secured those insurance receipts. What's not included in this list is a strong civil aftermarket performance as well in the second half, and we'll see that when we go into the details of the long-term contract creditor and how that moved year-on-year. We also saw in our cash flow an improved quality as well. There's materially lower contribution from net receivables, payables.
Still a large contribution, but materially lower than last year, and I'll talk about that in a second. Cash return on invested capital was stable at 12%, that's despite our R&D investment being at the highest levels of cash spend of GBP 1.1 billion per annum. The chart down the bottom shows material free cash flow improvement from the low base of 2016, when we were generating just GBP 100 million of free cash flow. Bear that GBP 800 million improvement in mind, which I'm going to come to as we go through the cash drivers of performance that we first highlighted in the middle of 2018.
When we look at those drivers of cash flow and we break them down, looking at our summary funds flow statement, looking at the balance sheet movements, tying that in with operating profit, here's the composition of our free cash flow improvement of GBP 305 million. What's most encouraging is that GBP 507 million of that was driven by operational cash flow improvement, increased operating profit, the growth in the civil deferred revenue balance, that Long-Term Service Agreement credits are on the balance sheet representing deferred revenue, cash receipts that haven't been traded through the P&L account, and then lower CapEx as certain large projects have come to a conclusion. R&D cash spend is stable, so it's not through any reduction in R&D that these numbers are being delivered.
A lower working capital contribution of GBP 50 million is a headwind, the peak year for the Trent 1000 cost of GBP 152 million is also a headwind. That includes the insurance receipts as well. You put all that together, you get to your GBP 305 million, and it's color-coded there, which matches this next table, which goes through the summary funds flow statement itself to show you how we've allocated the individual lines to deliver those numbers. That's how the math all works. Working capital improvements. Now, just on this one as well, because it does attract a lot of attention, and often it's regarded as always bad, which is far from the case. First of all, in the second half, we saw a GBP 390 million reduction in inventory.
That was the task that we had ahead of us at the half year after that big build of inventory in the first half of the year. Civil Aerospace and Power Systems had particularly strong fourth quarters. There's been a tight focus on supply chain management that will continue through 2020. The buffer inventory that we built up on the Series 1600 in Power Systems, as that production moves to India, that will start to unwind. The sales and operations planning process in Civil Aerospace, I think I've mentioned previously, lot of room for improvement there. We're starting to see the signs of improvement. It's taking place more regularly with a smaller number of people, perversely working a lot better than all the various committees that often cause complications there. That's a lot more efficient as well. That's helping drive that inventory improvement.
We expect to see the vast majority of working capital contribution in 2020 from further inventory reductions. We have just over GBP 4 billion of inventory on our balance sheet. About half of that is in finished goods. It ought to flow through quite quickly. There was a GBP 574 million increase in net receivables and payables. Our Defence business had a very good year for cash flow generation, driven by that strong order book intake of just over GBP 5 billion, and GBP 200 million contribution towards that GBP 574 million. Another example here of what I regard as good working capital management, a more disciplined collection of overdue debts, reducing those from 20% to 15% of trade debtors, and driving that GBP 130 million contribution. Don't be surprised if there's more of this in future years. There should be.
This is good, healthy discipline, and these are what I would regard as durable working capital improvements. Putting this together, we have a significantly improved cash position at the year-end. We have year-end net cash of GBP 1.4 billion. That's led by that group free cash flow number of GBP 873 million. Of course, we received the Commercial Marine and Power Development proceeds in aggregate of GBP 453. There was a GBP 1.1 billion reduction in gross debt as we repaid the GBP 500 million bond, and then the EIB loan as well. We have one maturity in 2020, a $500 million bond in the second half of the year, and we'll consider whether to refinance or retire that bond in due course. That gives us, together with the cash that we have in our revolving facility of GBP 2.5 billion, that gives us almost GBP 7 billion of liquidity.
We do, though, have a credit rating challenge right now, given where we are, and we have a strong ambition to return to a single A rating. We highlighted this as a strategic priority for us in 2018, and it remains, and we are very much determined and focused to get back to that rating. The progress on the key levers. These are the three key levers of cash flow growth that we first highlighted in 2018 at our Capital Markets Day, and they remain as true today as they were then, and they will be for the next five years as well. What are they? First of all, reducing the loss on our OE wide body deliveries.
There was a further improvement in the year of around GBP 200,000 per engine in the reduction of the loss. The Trent XWB-84 leads the average loss reduction. There has been a GBP 400,000 improvement per engine since 2017, which was the base year that we are comparing against from when we first unveiled these drivers in 2018. Let's just use 500 engines, GBP 400,000 improvement per engine. That's around a GBP 200 million improvement from this particular initiative. The wide body aftermarket cash margin delivered a further GBP 300 million improvement, moving from GBP1.6 billion to GBP1.9 billion aftermarket cash margin. That's a GBP 500 million increase over the 2017 base. It's worth reminding ourselves as well that in 2018, our 2022 goal for the aftermarket cash margin was GBP2 billion, and we are already at GBP1.9 billion.
This should grow further as aftermarket flying hours grow, but also as we extend time on wing and the gaps between shop visits as well, a core priority for us in Civil Aerospace. Then finally, bending the fixed cost curve on the right-hand side there. This is the aggregate of commercial and admin costs, R&D, and CapEx put together. Right now, we are 280 basis points lower as sales reduction during the course of the year, which in aggregate brings us to around 400 basis points lower since the 2017 base. Put all that together, that's about GBP 100 million contribution there.
The math isn't quite exactly the same, but the point is, if you add up the GBP 200 million, the GBP 500 million, and the GBP 100 million from those three key drivers, you get to an GBP 800 million improvement over the last two years, which happens to conveniently be the free cash flow improvement as well. Although there is a mixing things a little bit here, but it gives you an idea of the direction and the contribution from these three key drivers. Here's a bit more detail on the wide-body engine deliveries, 510 in 2019, a record year for deliveries. That's how the profile of losses has improved over the last three years in the top right there. Worth pointing out as well on the deliveries, the big pickup in volumes of the Trent 7000 in 2019 versus 2018.
Very small, just 2% of the pie down there, Trent 7000. On the right-hand side, 21% Trent 7000 deliveries. Just calling out on the left-hand side here, the Trent XWB-84, we saw a 22% reduction in OE losses. By the end of next year, we expect the XWB-84 to be a break-even engine. The aftermarket cash margin has now moved from GBP 1.6 billion to GBP 1.9 billion. This is driven by on the above the horizontal line there, is the cash coming in. It is wide body 15.3 million engine flying hours. From the 5,000 installed engine base. Down the bottom there are the cost that go out during the course of the year in respect of the major refurbishments. That's the scheduled every five years, also shop visits.
The check and repair visits are the sort of more the cases ad hoc, depending on specific instances. This one, for example, is where most of the Trent 1000 check and repair visits in respect of the issues that Warren ran through is going through that line in there. There's various other costs as well. Delivering ahead of our Capital Markets Day ambition at GBP 1.9 billion and within touching distance of the 2022 goal. On the right-hand side there, the key drivers of growth, 7% engine flying hour growth in the year. Strong time and material growth as well. We'll see this shortly in the Civil Aerospace profit and loss account, 14% growth. Yield improvements as well, and growth in pay at shop visits events. This is important.
There are many of our customers who prefer to be paid at the shop visit rather than through the flying hour process. That has a higher yield per flying hour than had they just paid as the hours were generated. It's an important dynamic. This is an important slide, and it's a reminder of the trajectory that Rolls-Royce is on to become increasingly a services business. It's a reminder of our installed base. When you add up the Civil Aerospace installed base of 14,000 engines, the Power Systems installed base of 146,000, and then 16,000 in Defence. 176,000 engines driving this service revenue. You can see the makeup there of Long-Term Service Agreements, GBP 3.8 billion and other services are GBP 4.1, growing at 13% and 8% respectively. Now representing 52% of our revenues and a growing source of revenues with recurring, visible, higher margin business.
There's a lot more certainty around these revenues from this large installed base. Key initiatives for us to drive higher returns, extending the time on wing in Civil and Defense Aerospace, the point that I mentioned earlier, which will only help improve that aftermarket cash margin. Optimizing repair technologies and increasing use of digital capabilities. Better predictability about the health of the engines and when they're going to be required to be serviced and how quickly to turn them around. Bending the fixed cost curve. C&A costs were down 4% year-over-year. Capital expenditure was down GBP 158 million year-over-year, beating the guidance that we gave as those large projects came to completion. C&A costs, I've mentioned. You can see the charts there. Just as a reminder, though, R&D is at its highest levels at just over GBP 1.1 billion of cash spend.
You can see the progress that we've made as a % of sales for each of those lines of the cost curve. Trent 1000 in-service cash costs. 2019 is the peak year of those cash costs. Gross cash costs of GBP 578 million before the benefit of that GBP 173 million of insurance receipts. You can see the profile that we're expecting and guiding to over the next three or four years. A quick run-through our businesses. Operating profit of GBP 44 million in Civil Aerospace, driven by OE revenue growth of 4%, services growth of 14%, and equal measure across LTSA and time and material. Still a very healthy source of high margin business for us, delivering that 10% overall, driving gross profit improvements, and subsequently, the operating profit that we're reporting today. Our Power Systems business, good revenue growth in what are challenging markets.
You'll see some of the others in this sector, I think, reporting much lower revenue growth than Power Systems has experienced. Good growth in Power Systems and power generation, and good opportunity in China, where we see a good progression there as well. Our Defense business, pretty much as we guided. Underlying revenue broadly stable at just 1% growth. A little bit of a margin decline given that increased investment in research and development, but some good opportunities for that business in its pipeline. We were hopeful for even more big order wins in 2020 for our Defense, but a really knockout year for our Defense business. I should call out here the very high cash conversion in our Defense business, driven by those big order wins and a big contributor to the cash flow performance for the group. An outstanding year for our Defense business.
Finally, ITP is a business now, fully-fledged member of the group. Reported very good revenue growth of 21%, largely driven by aerospace volumes. As a reminder, ITP is a risk and revenue sharing partner on certain Rolls-Royce engines, but also on Pratt & Whitney and GE engines as well. It's a partner to various players in the aerospace sector. The operating profit growth was partly driven by a GBP 25 million one-off benefit in respect of the adjustment of those trading terms between Civil Aerospace and ITP to better simplify arrangements between the two companies. Moving on to the guidance for 2020. Underlying revenue. We're looking at Civil Aerospace revenue being stable to low single-digit growth, very much driven by that revision to OE volumes 450-500 or so engines in 2020. Power Systems, low single-digit growth anticipated there. Defense, stable to low single-digit growth.
ITP stable at GBP 936 million. Operating profit, Civil Aerospace growing by 50-100 basis points improvement in margin in Civil Aerospace. We're guiding today that our R&D, capitalized R&D, will be between GBP 100 million-GBP 150 million lower in 2020 than in 2019, and that will mostly be in Civil Aerospace. One might think that that's a slightly low margin improvement in Civil Aerospace, but we should bear that into mind. Further margin improvement there of another 100 basis points. Defense business stable, ITP, a small margin improvement there as well. Operating profit growth, putting all this together, of at least 15%, and that gets you to around GBP 1 billion of operating profit in 2020. Core free cash flow of at least GBP 1 billion.
I should call out that this guidance excludes any material impact from COVID-19 in 2020. How does that bridge to cash flow, profit and Oops. How does that bridge from profit to cash? Here are the big moving parts. GBP 1 billion of operating profit, the core driver of the free cash flow growth. The LTSA deferred revenue we think will be broadly stable year on year at around GBP 750 million. Capital spend above depreciation and amortization, again, broadly stable at GBP 600 million. Working capital contribution of GBP 600 million in 2020, but reinforcing my earlier point that that will be led by inventory unwind. I think around sort of three quarters or so of that GBP 600 million being an inventory unwind. Movements in provisions, around GBP 500 million. That's largely the Trent 1000 that you would expect.
Other, tax, interest, pension, broadly stable at around GBP 250 million. That's how we get to our GBP 1 billion of free cash flow, at least GBP 1 billion of free cash flow in 2020. With that, I should add one more thing. There's other more detailed guidance, by the way, in the appendix of the slides that you've got here around various other drivers. With that, I'll hand over to Warren. Thank you.
Thanks, Stephen. Thank you. I'm going to look forward a little bit more. Earlier I talked about momentum, and I talked about momentum around changed behavior and changed levels of performance. That continuing momentum, coming in from the second half of 2019 is what gives us the confidence in 2020. As Stephen said, a little footnote here on the left-hand side of the slide, and the guidance that he just stepped through, and in fact all the guidance that we have in our earnings release, is subject to the fact that it excludes material impact from COVID-19 in 2020. That said, we would expect our operating profit growth to be around 15%, the number that Stephen mentioned, and at least GBP 1 billion free cash flow in 2020.
Importantly, we look through COVID, because we see the fundamental drivers of the business and that's what's driving our confidence in GBP 1 of free cash flow per share in the midterm. I'm not going to ignore the COVID situation at all. We're taking it very seriously. What's important is what we're doing to manage the situation as far as our business is concerned. Our priority is, of course, our own people. We have daily monitoring of the situation in all of our locations, and that's coordinated and comes into our chief medical officer, who reviews that situation every day. We're also doing daily monitoring of the business risks. The business risks break down into what's happening potentially to our revenue.
Importantly, although we're not a business that is subject to lots of just-in-time deliveries and that sort of thing, it's important that we keep a daily track on our supply chain. That is what we're doing at the moment through our supply chain leadership. This is clearly one of those known unknown situations. The things we don't know are how long the disruption is going to go on for, and to what extent the disruption is going to spread around the world. Here on the bottom of the slide, we've got a few data points so that you can scope out some of the potential impact to our business. I say potential impact because, of course, the third unknown is the extent to which we're able to mitigate the damage, should there be material damage. Here are some parameters.
Chinese airline customers, it's about 10% of our backlog today. Flights touching China is about 20% of our engine flying hours. How much of that should we take into account? I can't tell you. What I can tell you is that year to date, flights touching China are down by approximately between 15-ish% in January and 50% in February. I can also tell you from our daily monitoring of the supply chain and our daily interaction with customers through our Power Systems business, that operations in China are getting back to normal. Our key suppliers, we have a handful of key suppliers in China. These suppliers are all back at work, and we have had actually no interruptions in our Civil Aerospace supply chain as a result of the shutdown there.
That's kind of the scope of the situation, the monitoring of the situation that we're doing. In terms of contingencies and how we can mitigate against that, well, we're the same as any other business. We look at the financial impacts and what can we do about deferring expenditure? What can we do about deferring investment? What can we do about deferring or freezing hiring? What can we do about the actual staff costs that we take on a day-to-day basis? Like any other business, we're pulling on all of those levers. That's the situation as far as COVID is concerned, for our business. COVID is a reality, and we have to manage through that.
I say manage through that because though it is a reality, and I mentioned earlier, I think we're in better shape than we ever have been to deal with that reality, we must look beyond. Looking beyond takes us to our priorities for 2020. Customer priorities are very clear about meeting our commitments and about getting the Trent 1000 AOGs down. From an operations point of view, we need to continue the improvements that we've made over the last 18 months or so, particularly driving towards achieving the GBP 400 million of run rate savings. Having successfully changed the trajectory on inventory, we need to continue driving that forward. From a financial point of view, obviously, the emphasis is on quality of cash and strength of operating profit. From a people and culture point of view, we need to build on the fantastic changes that we've seen.
Embedding those behavioral changes, building on the encouraging momentum that we have seen so that in the longer term, we can be a leader. We can be a leader in terms of behaviors. We can be a leader in terms of business performance. We can play a leading role that we want to play in the energy transition over the coming decades in all of the sectors in which we operate, because we see that as a fantastic business opportunity. With that, I'll stop, and we'll hand over to Q&A. Who wants to go first? We've got one. We got one over there, that side.
Thank you very much. Sit down here. Morning. Rob Stallard from Vertical Research. Couple of questions, if I may. First one, easy one for Stephen. 2020 guidance. What sort of embedded commercial aerospace aftermarket growth rate have you built into your forecast? If you could break it down by long-term service and the time material, that'd be great. Perhaps one for Warren, and a longer-term question. You have cut your forecast for wide-body engine deliveries, going forward. You're coming down from roughly 500 last year to potentially 400 in the out years. What sort of impact does that have, particularly in terms of your targets for reducing the loss per engine on OE? Thank you.
Okey-doke. The civil drivers, well, we talked about 450 or so, 450- 500 engine deliveries. That's a key driver. The average loss per wide-body engine, we'd hope to get that to around GBP 1 million per engine. A further GBP 200,000 improvement. That's the goal for us there. XWB, clearly on the road to break-even by the end of the year. The average on that number will be sort of 0.2- 0.3, I would expect. That's what we're looking for. Engine flying hour growth, you should be thinking high single digits. 8%- 9% Engine flying hour growth is a key driver for us.
In number of shop visits, we did just short of 1,000 shop visits in 2019, and I would suggest that using something around 1,100- 1,200 shop visits is a good guide. Major refurbs, roughly as it was in 2019, of between around 300- 350 or so, and then about 800 or so check and repair visits is the rough composition. Those are the key drivers of the civil profits and cash flow in 2020.
Coming on to the wide-body deliveries. Yes, the wide-body deliveries that we would expect to make over the next several years is lower than perhaps the estimates we had a year or two ago. What drives our business is actually the size of that installed base. So we will still be at north of 6,000 wide-body engines in a few years. The size of the installed base is about the retirements and the rate of retirement, as well as the rate of new airplanes going into the market. That's the key point. The other point to bring out, of course, as you saw in Stephen's presentation, our midterm ambition is underpinned by that aftermarket margin growth, the total aftermarket margin contribution, which we estimated at GBP 2 billion in 2022. As Stephen just showed, we're at GBP 1.9 billion in 2019.
We're an awful long way through that process already. In fact, we're probably going to exceed our assumptions, and it's those assumptions which underpin our midterm ambition. As for the volume and its impact on that trajectory of OE loss reduction, I don't actually see a material impact by the difference in volume. This is not a hugely high volume activity anyway, and the costs are dominated by the cost of those components, and the cost of the components is dominated by the design of those components. We continue to spend engineering effort on modifying designs to take costs out. We take costs out on an annual basis. Those plans are proceeding according, just unaffected by volume. You saw in the numbers that Stephen talked about, it's led by XWB. I said XWB is half of the total volume.
We will ship our first breakeven XWB in the fourth quarter of this year, which takes us to the average that Stephen mentioned, and we are confident of achieving that.
I didn't answer your question about the LTSA split and the time and material split. I'd say time and material, been a great performance in 2019, probably high single digits or so in 2020. The LTSA, the volume of shop visits clearly is a key driver there, but one thing to watch out for is that, and again this was true in 2019, where we have Trent 1000 shop visits, check and repair visits that are related to the exceptional cost activity. We trade those costs through the provision that we've. It won't therefore hit the LTC, the long-term credits balance. The deferred revenue is not reduced. The LTC balance is not reduced by those shop visits. If you see my point. Which is a slightly accounting point, and that partly explains the growth in the long-term creditor this year.
Okay. Céline.
Hi, good morning.
Good morning.
Céline Fornaro from UBS. I was just wondering if you could explain the mechanics through the civil trading cash, which had a nice improvement this year to GBP 400 million. How do we think about that for 2020? Because potentially it could be slightly worse, depending on all the dynamics you've assumed. My second question would be on the 787 overall market share, in terms of the recent announcement from ANA to go with GE, and thoughts there on your assumption on potential volume on the TEN. Thank you.
Okay. Do you want to have a go at the mechanics also? Shall I do the ANA one while you're just.
Yeah, sure.
On 787, we look at it from a fairly macro position, and it isn't just about share on 787, it's about share of wide-body orders. I think approximately two-thirds of the wide-body orders in 2019 is a reasonable result. We are taking orders on Trent 1000 as well. Obviously, we are disappointed with the decision from ANA. We're disappointed but realistic. ANA already, 83 of their aircraft are powered, of their 787s, are powered by Rolls-Royce. To be 100% dependent on Rolls-Royce when you have the choice is perhaps an unrealistic assumption when you get to a fleet that is growing at that sort of size. To have 15 aircraft and a few options going to GE is not something that particularly surprises us. Of course, we're disappointed. We retain a very close relationship with ANA.
I think if you talk with them, you'll find that they're very pleased with the way in which we've handled the situation for their fleet, the importance of their fleet, notwithstanding COVID, for the Japanese Olympics this year. In fact, in the next several weeks, all of their Trent 1000 powered aircraft will be in the air rather than on the ground.
Sorry. On the improvements in the Civil Aerospace trading cash flow, well, again, going back to those drivers of cash flow growth generally across the group, original equipment losses coming down and lower volumes at the same time as well. There's going to be a contribution there. The aftermarket cash margin will continue to grow. Maybe think a couple of 100 million or so, maybe GBP 100 million or so from the first one that I mentioned. I haven't yet mentioned business jets as well. Business jets had a very strong 2019 and is well placed for 2020. We're going to see some further improvements in the business jet contribution. Trent 1000 costs coming down as gross cost, of course, we don't have the benefit of the insurance receipts, that is a headwind there.
We are expecting further improvements in C&A costs generally across the group in 2020, building on the momentum that we developed in the second half of 2019. Most of the headcount reductions that we're announcing today, the cumulative reductions of 2,900, I think 2,000 of those are Civil Aerospace. You're going to start to see that full year benefit of that 2,000 headcount reduction flowing through in Civil Aerospace. Putting all of those together gives us confidence around further improvements in trading cash flow in Civil Aerospace.
Okay, I think we've got one in the middle. Yeah.
Thank you so much. Nick Cunningham, Agency Partners. I apologize in advance because this is in grave danger of being nerdy. Both my questions, in fact. Thank you for the disclosure on factoring, which is really interesting. I just wanted to try and understand it better in terms of how it moves across the year and what the rationale of using it is. Does it reduce the cost of capital and so on? Second, probably equally nerdy, but possibly more generally interesting. If we look at the decarbonization, if you like, roadmap, how do you see that playing out in very broad timescales and route to market? What kind of mode of power source do you see developing? Thank you.
Okay, let me cover factoring. As you know, we've been very keen over the last few years to add transparency to our numbers, and our guidance is pretty detailed, and we explain our numbers at length as well. An extra piece of transparency that we're bringing today is our details of around invoice discounting or factoring, as it's otherwise known. Let me just explain where we are on this. Factoring is a commonplace activity in the aerospace sector. We've been doing it for over a decade now. I would say 2016, though, was the first time that we materially got into invoice discounting, and that was largely around the time when the airframers changed their own settlement terms. We introduced it to normalize the cash flows with physical delivery of engine volumes. You've got a symmetry around those cash flows.
The last three years, it's averaged at the year-end at just over GBP 1 billion, as it does in this year. The way to think about it is that if we hadn't done any invoice discounting this year, our cash flows will be GBP 95 million lower, which is the delta between this year's activity and last year's activity. The average over the last three years has been, as I said, just I think it's GBP 1,037 million over the last three years. That's the rationale for why we do it. It works well for us. You're right, there is a cost of capital attached to it, but it's pretty modest. It's only for a short period of time as well because really you're just advancing November, December invoices into current year rather than waiting until January and February.
It's only in place for a very short time.
Okay. The other one around the decarbonization roadmap. Obviously, I'm not going to be too specific on dates here. The basic principle is that the smaller the aircraft, the more electric. We see an opportunity in the helicopter size market disruption, new products for all electric to hybrid. Then in the regional space, we see an opportunity for hybrid coming sooner than we do into the narrow body space. Hybrid designs in the mid to late 20s moving through to larger airplanes in the early to mid 30s. Then in the larger space, we don't see an alternative to kerosene in terms of energy storage, but we do see opportunities for sustainable synthetic fuels. There, the decarbonization bit is all about the source of the electricity that's used in the synthesis process.
Clearly it's not very sustainable if the electricity comes from a carbon-rich source. As the world electrifies in a cleaner way, then there will be opportunities for clean electricity to generate synthetic fuel. We do see a potential role for hydrogen in that mix, and we are spending effort with some of our partners on exploring the opportunities for hydrogen, but it is going to be about the challenge of storing that hydrogen, and again, about the clean source of electricity to produce the hydrogen in the first place. Synthetic fuel is going to be limited by the ecosystem, and the rate at which the ecosystem can develop. The faster it develops, the faster the cost will come down. The more the cost is up there, the more delay there is in that.
I suspect, as with any new technology, there will be a bit of a hysteresis, a tipping point, then we'll get there. It's important that we do things like our UltraFan and more efficient gas turbines, because whether we're burning hydrogen or whether we're burning synthetic fuel, there's still a cost associated with producing that. The less of it that we can use, the better. We see a very firm role for UltraFan and more efficient gas turbines, whether they're used directly for the UltraFan propulsion or whether the core out of UltraFan, the more efficient core, is used in a hybrid application in a smaller aircraft. The project is absolutely vital. Thanks. Hi.
You want to grab the mic?
It's Harry Breach here from MainFirst . Could I just ask you, Warren, you touched on coronavirus in the slide earlier on. Can you just say, have you had any deferrals of delivery dates for on-wing or spare engines that have been cited to be coronavirus capacity-related? Secondly, if I remember well, and I probably don't, back in July at the interims, if I remember, you were saying that the break-even date across the large engine deliveries, including spares, if I remember, was 2023. Firstly, have I got that number right? Secondly, is there any change given your lower wide-body delivery expectations? Then just final one, maybe for Stephen. Stephen, just in 2019, for the Civil Aero LTSA revenue stream, is it possible for you to give us an idea of the pay-at-shop visit versus the paper flying hour monthly settlement please?
Yeah.
Sure.
Let me kick off. We haven't seen any deferrals attributed to the impact of COVID yet. Of course, that is a phenomenon which is in the realm of our planning and our scoping the size of the potential impact from COVID. As of today, we haven't seen any of that. The break-even point and the volumes. First of all, the volumes don't make any difference, as the answer to the previous question. You're jumping in, I think.
Our public goal on this one is a GBP 400,000 average loss per engine by 2022.
Sorry, what was the number you quoted? 2023?
I thought it was across the portfolio for installed engine deliveries.
Break-even in 2023.
I'm not sure.
If I remember that date well.
We haven't actually I think I remember a little bit the conversation where there was a slight bit of miscommunication from the presentation. As Stephen says, the line that we're sticking to is just under half a million pounds across the portfolio by 2022. The other data point that we're sticking with is break-even on XWB 84K by the end of 2020. As I said, we will achieve that second one. It's close. We're going to get there in 2020.
Okay. On the mix of shop visits as well, and I'm talking here around the major refurb shop visits.
LTSA revenues by pay-at-shop visit versus
Sorry, say that again?
Sorry, I think my question's been.
Revenues
I was trying to get at, for Civil Aero LTSA revenues, what the mix there was between the pay-at-shop visit part and the
I would say 20% pay-at-shop visit, perhaps mid-high teens, and then the rest would be with flying hour.
The important point dynamic in 2019 was we had three times the number of pay-at-shop visits in the second half of the year than we had in the first half of the year, which somewhat explains the strong second half performance from cash generation on the long-term contract that we're seeing in the numbers today. That's an important dynamic.
Thank you.
One Yeah, just pass it along, I think is best answer.
A couple of questions. First of all, presumably the 97K is one of the big loss makers at the moment.
Is there any reason why it shouldn't get to break even like the 84?
You're right. The 97K is two years younger than 84 in terms of entry into service. That is one of the loss-making contributors. It will follow the trajectory. I can't commit today that that will actually get to zero. What you've seen, because it depends how far out you take these things, and we put a lot of effort into extending the time on wing. It's possible that we don't want that to get to break even, because it's possible that we actually want to spend the money and have the components that improve the durability and the time on wing for service of a given engine, because we actually make more profit out of that than we make from trying to squeeze a technical profit on the OE. Generally, it's a good idea to make as little loss as possible on the OE.
When you get in the detail and you get to the smaller numbers, then it might actually be better not to do that economically for the program and for our overall profit.
The next question is A group of questions. You've tripled the number of spare engines on the Trent 1000. How come it was so low?
Capacity.
Yeah, capital.
Simple as that. It's a new engine. It's obviously had issues. The reason that we were able to improve the spare engines a little bit last year, and we're going to take another big step forward this year, is because we now have the capacity to do that.
Maybe related to that, it must be a pretty tough job being the Trent 1000 salesman at the moment. Why on earth would any airline sign up to buy one right now? This comes back to the swings question.
Is there enough in your backlog to see you through to H1? Is there any chance of us seeing a Trent 1000 order this year?
Yeah. There are Trent 1000 opportunities for us this year, and we do hope to take orders this year. Why would anybody do it? Well, because of the overall performance of the engine, the overall actual reliability of the engine, and the fact that actually our competitor, while having spare engines to protect against the disruption that we've seen, when you get in the detail, there are issues with our competitor's engine as well. I'm not going to stand on a platform and talk about that. You can talk to Boeing, you can talk to airlines about their experiences of the engines on 787. The answer is, we wouldn't be taking the orders we're taking now, if our engine was so bad that it was such a tough job being the salesman.
The final one's a bit of a philosophical one. A couple of years ago, you said that you typically had four in-service problems at any one time. It would take a couple of years to sort out each. One would solve one and another one would pop up. There was probably GBP 200 million-ish of costs underlying. With the Trent 1000s, you've had three problems, and it cost you GBP 2.5 billion. There will be undoubtedly in-service problems with your other engines at some stage. How can you give us any reassurance that it's going to be a GBP 100 million problem, not a GBP 2.5 billion problem?
The answer, of course, is that we can't give any guarantees. We can give assurances based on the very data that generated that original assumption in the first place. It wasn't based on thin air. It was based on our experience of 25 years of the Trent engines. That is the experience we've had. Some of it does come of our own making when we're trying to actually sort of extend the life of a time on wing of the engine, and we've made great progress on Trent 700 over 25 years in doing that, but it hasn't all been linear. Sometimes, we end up with a great idea to extend the life or reduce the cost. Then two years later in service, we find some issue, and those are the sorts of issues that I'm talking about that crop up regularly.
The Trent 1000 has been absolutely unprecedented in our history. That's what everybody tells me. We are grinding through it. Obviously, we've spent a lot of time and effort learning from those lessons. We can take steps to minimize the probability of that happening again. I think if you look at the later engines, XWB is our example of the later engine, as I said, we're fleet leaders at five years now, achieving the number of cycles that they set out to achieve. The airlines are seeing excellent reliability during that process and excellent hanging on to the engine performance as well as it goes through time.
If I could, yeah.
Yeah.
Quickly here with a couple from the webcast. We've had two on the LTSA creditor inflow, from David Perry and from Zafar Khan, both asking, as an encouraging inflow in 2019, we're guiding to a similar level in 2020. What might 2021 look like, and what are the drivers around that being a bit higher than previously thought? Secondly, a second one from David on delivery guidance and whether we think 400-450 is a floor for wide-body deliveries. Thanks.
Okay.
Do you want to do the first one, or shall I do the second?
I'll do the first one. I'll get the long-term credits are out of the way. As a reminder, this is the balance on our balance sheet, the credit balance that's the deferred revenue from flying hour cash going in there, and then revenue gets traded through as the shop visits take place. We had a very strong second half, GBP 500 million better than the first half, in fact. There's three or four key drivers of it. First of all, engine flying hour receipts, good flying hour growth
We also, as you know, we reconcile at the end of each quarter the actual engine flying hours compared to the invoiced engine flying hours, and we do often see upside there. It's not so straightforward as just number of flying hours flown. It's the type of flying hours as well. There are different prices around different parts of the flight experience, that is a pretty complicated reconciliation. We ran that through, we saw some good upside from that activity in the second half. Pay at shop visits. We had three times the volume of shop visits in the second half as we had in the first half. I talked to you about the high yield. That was a driver of growth as well. Particularly strong business jet performance in the second half, which gives us encouragement for 2020.
Finally, penultimate point, the GBP 100 million revenue catch-up that we had, that suppresses the pull-out of revenue as well that we reported. The final piece is the number of Trent 1000 check and repair visits in the second half that goes through the provision, again, which isn't hitting the creditor, but you're still getting cash generation from those flying hours flowing through in any event. Those are the four or five key drivers. 2020, you'll be thinking about the same sort of drivers. I think it's too early to talk about 2021. What I would say, though, is that flying hour growth, high single digits, sort of approaching double-digit flying hour growth remains the fundamental principal driver of cash flow generation in 2021.
On the question of build rate and is our current estimate the floor? Well, what I can say is that the current run rate supports the demand, the final demand. We have seen the demand fall to what appears to be more of a long-term run rate growth in demand. I think if I go back 6, 12, 18 months even, there was a lot more noise about overcapacity in the industry, and that overcapacity being ahead of that underlying demand, and therefore there's been a little bit of an overhang. I think the build rate adjustments have been pretty well expected. Obviously, short term, we don't know the impact in 2020 of the virus outbreak and the disruption that results from that and to what extent that might spill over into some deferrals. I already answered that question.
Technically, there might be a little bit of deferral there. Actually, I can see more indicators to increase that demand for build rates. The underlying demand is going to carry on growing along with economic growth. I think with the changes in sort of public opinion around flying, airlines are going to want to deploy cleaner, more efficient airplanes as and when they can afford to do so. If anything, I can see a little bit of a sort of demand increase signal, but we're not going to call that just yet. I think we got one. Oh, we've got the microphone over there, so we'll come back to you. We've got about four minutes.
Yeah. This is really swift. Just Andy. If I've paid you for a flying hour, is there any way I can get the money back from you?
No. Not technically.
Well.
See him around the back of the bike shed.
No, it's a very good point because I know what you're getting at here with the question, because there is some commentary that we should regard the credit balance as debt. Well, the cash is contractually ours and remains ours, even if the airline stopped flying the planes forever. The cash is still our cash contractually, so that's the way we should regard it.
It's not even a creditor, let alone debt.
No, it's deferred revenue. It's on the balance sheet. It's deferred income. Yeah.
Yeah. Hi, guys. It's Ben from Bank of America. Just one on the credit rating. You said you want to get back to A rating. What sort of metrics do you think we should be looking at in terms of that path and what you think you need to get to A? Thank you.
We've had a lot of dialogue, as you might imagine, with the rating agencies, with both Standard & Poor's and Moody's on this one. What is very clear, their priorities align with our priorities. Operational performance improvement, delivering a high-quality operating profit growth and cash flow generation. If you're looking for a metric, Standard & Poor's in particular, looking for a 14%-15% EBITDA margin. That to get us to sort of move us into that single A rating category. What I can say is that when we look at our plans, and then we look at the numbers that we're talking around in the mid-term, we can see good progress over the course of the next two years on that ambition. What is critical, though, is clearly de-risking the Trent 1000.
Warren talked about delivering that final fix on the high-pressure turbine blade on the TEN, getting the design through in 2019, then certified in early 2021. Then we can start installing those blades, and we get the Trent 1000 back to a healthy engine. That's very much how the rating agencies are looking at it, and we know what we need to do, and we're absolutely focused on it.
We had one in the middle.
Hi, George Zhao from Bernstein. Could you talk about the CapEx spend needed in 2020 to build the spare lease pool engines to support the Trent 1000?
Sure.
Given that not all the fixes will be done by 2020, is there concerns that you may need to continue to build more spares beyond next year? Thank you.
Our CapEx was around GBP 750 million in 2019, and that included an element, about GBP 100 million in round numbers, of investment in Trent, in spare engines, a large proportion of which is Trent 1000. In 2020, we're going to be maintaining the underlying spend. That's before the Trent 1000 build. We're going to be increasing overall capital expenditure by GBP 100 million, GBP 150 million or so in respect of that additional engine build for the Trent 1000. The way to think about this is that, let's use a proxy of GBP 4 million, GBP 5 million per engine. That's about 20 engines or so that we're building in addition in 2020, in addition to the 20 or so that we built in 2019, if that makes sense.
To answer, is there a danger that we're going to have to build some more?
Yeah.
What we're effectively doing is pulling forward spares that we would otherwise have built anyway as the size of the fleet grows. I don't think we're going to need to do an extraordinary number of spare engines. Certainly from an operational point of view, if we do the spares that we plan to do in 2020, we should be able to protect the fleet, over the subsequent years, we'll grow back into that volume, we will continue to build spares as the size of the fleet grows. I don't anticipate any 2021 enormous step up in the CapEx for more Trent 1000 spares.
As it stands today, this build of Trent 1000 engines will be a very good return on capital when we consider the cost that we're currently seeing for every day that an aircraft is on the ground.
Okay. It's 10:30 on the clock, so let's assume the clock is now telling us the right time. Thank you all for coming. The key takeaway messages here are I think it's a strong set of results for 2019. Our performance to deliver on that, particularly after a very tough first half. As Stephen said, we left ourselves a lot of things to do in the second half. The team has delivered and shows what this organization's capable of doing in terms of delivery. I think COVID-19 and the disruption which flows from that, this is a macro for everybody. It's a known unknown at the moment. We will keep you updated with the implications. We're in pretty good shape on that at the moment with daily monitoring of the situation, daily contact with the supply chain.
We're already seeing our suppliers and the customers with whom we deal in regions which were first affected by the virus, i.e. greater China, we're seeing a return to levels of normality there. We look through that, and we can see the fundamental drivers of our business performance having improved. The fundamental levers that we talked about at our Capital Markets Day and before, we can see progress on that, we can see momentum, and we can see those drivers continuing. That's what underpins our confidence in the medium term. We also want you to take away the fact that we're not ludicrously short-term focused on GBP 1 billion in 2020 and a GBP per share of free cash flow in 2023. We are thinking beyond that as well, and developing a future for this business to build on that platform through the energy transition.
With that, we'll be back in July, late July, to tell you about how we've got on in the first half of this year. Thank you.
Thank you.