Good morning, ladies and gentlemen. It's 9:00, so we'll start. Thank you for joining us here at the London Stock Exchange and for those of you joining online. My name's Jennifer Ramsey, and I lead the Investor Relations team at Rolls-Royce. It's my pleasure to welcome you to the 2018 full year results presentation. The agenda for today's presentation will be, Warren, our Chief Executive, will start. He will share with you his perspectives of the 2018 year and the challenges that we've encountered. Stephen Daintith, our Chief Financial Officer, will talk through the financials. Warren will round up with an outlook for the year ahead. The presentation should take about 45 minutes, and we'll have about 45 minutes for questions.
We'll have questions in the room. For those of you who want to ask questions online, please do so through logging your questions on our webcast service. We'll endeavor to ask those in the room. Finally, can I please ask you to turn off your mobile phones? We have no plans for emergencies this morning, so if any emergency alarms do go, please make an orderly exit. With that, I will hand you over to Warren.
Good. Thank you very much, Jennifer. Thank you, everybody, for being with us this morning. I'm going to start with an overview of the group. Then we'll talk a bit about the different businesses. We'll talk about, as Jennifer said, some of the issues. Then have a little look at where we're investing at the moment for the future. In terms of a summary of results, we've summarized it as solid progress. Actually, we're very pleased with the performance in 2018. It was a year of actually quite strong growth in underlying core revenue. That revenue growth drove, when combined with good discipline and rigor that hopefully we're introducing or you're seeing us introduce to the way we're managing the business, that revenue growth has helped us translate into good growth on the profitability measures.
That's resulted in a more than doubling of free cash flow when you look at our core business. Core, we're defining as the business looking forward. There's a little bit of restructuring, which happened during the year that I'll come to in a few moments. It's a significant step on our journey towards our 2020 goals, about more than GBP 1 billion of free cash flow in 2020, and our midterm cash ambitions that we started talking about in the middle of the year at the Capital Markets Day in June. Obviously, there is more work still to be done in 2019. We'll talk about that as well. In reflection of that, more work to be done, you'll see the dividend per share held flat. Summary-level look at the group.
Civil Aerospace, good results in terms of flying our growth, good progress on reducing the cash deficit that we realize on every engine sold. We had a good year in terms of new engines launched, I'll come to some of those shortly. Obviously, the year was dominated by, or the news flow in the year was dominated by issues around the Trent 1000, which we'll cover in more detail. Power Systems had another excellent year. At the half-year, Power Systems was the standout performer, Power Systems continued to perform through the year. As we say, their strength across key markets, very pleasing to see good growth in service revenues. Come back to a bit of detail on that. Defense, we'd describe as a solid year. The standout piece there was additional new contracts, particularly in the aerospace parts of our Defense business.
That left us with a very encouraging book-to-bill ratio, a very encouraging boost to our order backlog in Defense. At the Capital Markets Day in June, the subject was a group-wide restructuring, at the end of the year, we would say we are on track with the timeline that we set out in June. On track in terms of net headcount reduction, on track in terms of trajectory to our goal of a saving of GBP 400 million per annum run rate, by 2020. When you put all that together, the financial performance showed good, strong revenue growth, more than doubling of free cash flow. It's particularly pleasing to see that happening. Although we'll talk about exceptional charges from a cash flow point of view, it's particularly pleasing to see that happening against the headwinds of resolving the issues that we faced on Trent 1000.
I'm going to talk around the different businesses. I'll start with Civil Aerospace, we've a few slides on Civil Aerospace because Civil Aerospace is half of our business. The good news is that we saw fleet growth during the year. Now, by the way, we've 4,700 large engines out there in service. That's 25% more large engines flying around than five years ago. That fleet growth-Together with the fact those engines are newer and more efficient, therefore better for the airlines to use, is one of the driving factors behind the strong growth in engine flying hours. At the same time, back at Rolls-Royce, we've been working hard on reducing the deficit that we make when we sell a new engine. We still do make a loss on average when we sell a large engine.
That loss has come down by 13% year on year. That's in spite of introducing, as you'll hear a bit later, new engines. Obviously, on the new engines, when they're first launched, the losses tend to be significantly larger. So that 13% reflects some very good progress in things like the XWB. Coming onto the XWB, the 84K version of the XWB continues with excellent performance in service. Over 99.9% dispatch reliability. We hit the 3 million flying hours milestone a little while ago. Actually, in terms of volume shipments, that engine is going very well. It's also going out the door very reliably. Obviously, there was a little bit of news flow in the other direction around Trent 7000, particularly towards the end of the year.
The good news is that we did get the Trent 7000 into service before the end of the year. As everybody in the room I'm sure knows, we didn't get quite as many into service as we had hoped or intended to. The first couple of months of this year have gone very well for that as well. Now there are growing deliveries on the Trent 7000. Halfway through the year, we talked for the first time about the Pearl family, new family of corporate jet engines. The Pearl 15 was launched, that's going to power the Bombardier aircraft. We're looking forward to the Pearl 15 entering into service towards the back end of this year. Now, as I said, the news flow was dominated by Trent 1000. This is the engine that powers the Dreamliner.
This morning, we are talking about adding an extra GBP 100 million to the expected cash costs of dealing with this issue over the total period from 2017-2022. Most of those costs are incurred in 2018, the year just gone. GBP 431 million in 2018. We're expecting GBP 450 million this year. Notice that's a round number at the moment. GBP 431 million is a slightly more precise number because we've done that. I can't guarantee it'll be exactly GBP 450 million, but it's of that order in 2019. We do expect that to decline significantly in 2020 by approximately GBP 100 million, and it's falling materially after that. Now the thing about the Trent 1000 issues, it has, of course, caused a huge level of disruption for some of our customers. A portion of those Trent 1000 customers have been seriously affected.
Clearly, we've been putting an awful lot of effort into managing that from an operational point of view and helping those customers by minimizing the number of aircraft they have on ground. We do sincerely regret the disruption caused to those customers. That's why we're spending all this money on fixing it, because we want those airplanes all flying as soon as we possibly can. There is a bit of P&L treatment on Trent 1000, and I'm sure Stephen will cover the detail of that later. Because of the nature of the costs incurred, we have extended the exceptional P&L charge. In terms of what's happening on the ground and resolving the fixes, here's the issue. Here's an update on the fixes. We had a fantastic Christmas present, which was the Pack C version of the compressor blades, the new designs was certified.
The first airplanes with those new certified blades are flying now, which is good. That's signaling an overall increase in the healthiness of the Trent 1000 fleet. We had another Christmas present, which was sort of over the Christmas-New Year period, in that the TEN version of the Trent 1000, which has hitherto had a hard life limit on its compressor drum. That hard life limit has turned into an inspection regime. As we inspect those engines, we've discovered no issues whatsoever to date on the Trent 1000 TEN. That has saved our customers an awful lot of disruption by resolving and removing that hard life limit. There's an order here. You'll see from the dates there's an order. We've dealt with the Pack C first, because most of the 600 Trent 1000s that are in service are Pack C.
Clearly, to minimize disruption, we had to deal with that one first. Trent 1000 TEN is the new engines going into service as we speak, that's why logically, that's the next one to deal with. That compressor blade design is effectively the design bit is done, and we're now going through the process for certification. The equivalent blade for the Pack B engines is coming along behind that. The reason it's coming along behind that is because there's a relatively small number of Pack B engines out there. The incidence in the Pack B of the fault is much lower than in the Pack C. In disruption terms to our customers, this has minimal effect. That's why we're doing it in that order.
The little chart on the bottom of the slide shows the trajectory of improvement of aircraft on ground as we go through this year. Aircraft on ground on Trent 1000 is going to be a feature for at least the remainder of this year. We do expect to be in single digits by the end of 2019. Just to put that in perspective, the number in the second half of 2018 oscillated between 40 and 45 engines. As we speak, in Q1, it's around 35 engines. Today it happens to be 31. It varies according to which engines get inspected and which we have to deal with. That's the update on Trent 1000. Continuing with Civil Aerospace, the other little bit of news that cropped up in the second half of last year was the issues we had with delivering new engines.
We did expect to deliver, and we updated guidance, actually, even shortly before the end of the year. We expected to deliver approximately 500 engines. We actually only made 480. We made 480 deliveries. We made more than that, but we didn't get them all tested and out of the door. We did actually manage to minimize disruption to customer deliveries. 96% of the aircraft flew away on time to their customers during 2018. The reason for the shortfall is shown up on the right-hand side of the slide. There were some very well-known issues in the aerospace supply chain, which affected us, affected our competitors. That was a little bit of a capacity issues with some key suppliers. The thing that particularly affected us was a mix of engines in the second half of the year.
The newer engines played a more significant role in the second half of the year. When you're introducing new engines into production and coming up that sort of period of industrialization, then you do run into issues. Indeed, we did run into issues, particularly around the Trent 7000, where we had some initial learning curve, basically poor yield on final test. Just to sort of quantify that a bit, you can see that in the second half of the year, we were shipping significantly more, a greater proportion of those new engines. To put it in perspective, the Trent 7000 in particular, on the bottom right of the slide there, in the whole of last year, 32 engines. In January this year, 11 engines. 11 engines is roughly at rate for the year 2019.
In fact, if we could do 11 engines every month, that would exceed the number of engines we need to supply this year on Trent 7000. We are confident that we have those learning curve issues behind us. Just a little bit sort of post the end of 2018, but relevant I think for this morning, some recent announcements. A week or so ago, a fortnight ago, actually, it became public that Emirates had been doing a fleet review. In conjunction with Airbus and ourselves, they were looking at effectively de-risking their business, and they concluded they needed a different mix of airplanes. They made two decisions. To cancel some of the outstanding A380s and order some more smaller airplanes.
The good news is that the more smaller airplanes that they ordered, a mix of A330neos and A350s, of course, they are Rolls-Royce powered aircraft. Broadly, this is good news for us. As far as the A380 is concerned, obviously the A380 and the canceling of the A380 program is a matter for Airbus and not a matter for Rolls-Royce. You have to talk to Airbus about that. What we do know is that we have a good number of airline customers who operate the A380 and whose passengers enjoy flying on the A380. We are totally committed to supporting those customers and keeping those Rolls-Royce powered A380s in service for the next 20, 25 years, as long as it takes. That's the message from us on the A380 cancellation.
This morning, we have announced that we have made a decision to withdraw from Boeing's proposed NMA platform. Many of you have heard me talk before about the NMA being potentially an attractive proposition from a strategic point of view. It was all a matter of overlapping our UltraFan development program with the NMA requirements and seeing if we could achieve a sufficient overlap there to make a sensible answer from a commercial and a risk point of view. We have concluded that there is not sufficient overlap to create an engine out of the UltraFan architecture within the Boeing timescales at a sufficient level of maturity to tick those boxes in terms of risk and commercial common sense. We have made a decision to withdraw from that program, and we have notified Boeing. We actually notified Boeing shortly before the end of 2018.
It's all a matter of our conclusion that we could not achieve a sufficient level of maturity in the time available. If you don't achieve the sufficient level of maturity, you lay yourselves open to all sorts of in-service issues, potential customer disruption, and that's not a good place to go from a risk and a commercial point of view. We remain, of course, completely committed to the UltraFan architecture and creating that architecture, all the technologies behind it, and I've got a bit more on that to say later. Just having a quick look at the time there. We'll step on it a bit here. XWB-84K, very pleased with that. This has been an excellent engine. Great reliability in service. Customers love it.
We have made significant steps in closing the cash deficit on every engine that we ship there, we still expect to be at cash breakeven in 2020 on XWB-84K. The 97K version entered into service in February last year. So far, our customers are telling us that is also doing very well. Later this year, we expect the first shop visits for the 84K version. Moving on from Civil Aerospace. I had a great weekend last weekend. Went down to Cardiff, and I spared you the Welsh regalia this morning. The other reason it was a good weekend is because I left Paddington Station here on one of these Great Western Rail-operated Hitachi trains, which is, of course, Rolls-Royce powered with our Series 1600 engines in a diesel-electric configuration.
We have had a lot of success with new rail programs that are being introduced at the moment with this product. That puts us in a great position as all these train operators need to get their trains cleaner in those regions of the world where there is not wired systems for electrifying the rails to introduce our hybrid platform. We've had considerable success with our hybrid platform in 2018. So far, only in terms of MOUs and evaluations, but I'm confident that we'll see some of those turn into orders shortly. It was a good year then, and that sort of thing's been driving things like order intake. The reason I put the train up there as well is because we've been introducing long-term service agreements, taking the Civil Aerospace model into Power Systems and being successful in signing up several of these long-term service agreements.
All of that has driven volume, and that volume has driven an increase in operating profit. China represents a great growth opportunity for our Power Systems. Our presence in China is relatively small today. Through our joint venture, we are hoping to grow that significantly. As a measure of just how fast things can move in China, we actually rolled off the production line our first engine in April last year, and we've now delivered over 100 from that joint venture. Around the rest of the Power Systems business, we also saw a number of product launches, which we hope will translate into business in due course. Moving to our defense business. Structure there in the bottom left-hand corner. We pool the various strands of our defense activity together into one business.
The picture this morning is a frigate powered by the MT30 marinized gas turbine rather than a picture of an airplane. Thought you might like a different picture this morning from defense. Largely driven by the aerospace portions, we've seen a significant increase in the backlog in defense, and that's probably the highlight for 2018. Halfway through the year at Farnborough, we were also pleased to be selected as one of the four key partners on the U.K. MOD's Tempest program. ITP Aero, very much part of Rolls-Royce, but run separately. We saw solid growth in ITP Aero. Obviously, that is significantly driven by not just Rolls-Royce activity in the Civil Aerospace sector, but by some of our competitors who have programs active with ITP. Moving on from the business overview. Restructuring halfway through the year in June. We talked about our restructuring program.
This is a recap of what we said. We're simplifying to three businesses. We're getting rid of lots of duplication, enabling our businesses to operate with a little bit more freedom, yet within a framework, so that we can get the center out of the way and operate in a more modern, faster way. How have we been getting on? That was in June. What we've done so far is established a Group Business Services section, and this is pulling basically the internal services together, removing lots of duplication, removing lots of multiple interfaces between people within the business, creating friction, slowing things down. Got rid of all that. That's been active since the beginning of 2019. Similarly, an innovation hub where we've pulled skillsets together that are relevant right across the group. That's things like our technology group, digital group, strategy group.
If you think about it, makes a lot of sense to have your future technology and your strategy tied together. We also announced in June that there would be an associated headcount reduction with all of this, 4,600 people. As of the end of the year, it's about 1,300. That, by the way, is concentrated on the indirect headcount rather than the manufacturing headcount, because actually in some parts of our business, we're needing to grow capacity. We believe we are on target too, at about 30% of the way through on run rate cost savings. We announced the sale of a couple of parts of our business during 2018, they are proceeding. We expect the sale of Commercial Marine to complete sometime in the first half of this year. It's probably in the second quarter of this year that that will complete rather than in March.
It's on track for completion with the necessary regulatory disposals having taken place. Little look to the future. Where are we investing? We're investing in three buckets, basically. Our sort of current technologies to make our current product portfolio healthy and future-proof. We're investing in enabling technologies to make that all more cost-effective. Then we're investing in some future technologies to get out beyond the current products and services. Those are the three key buckets. Right now, we're investing quite a lot in the current technologies, both from a sort of underlying material science point of view and a new design point of view, but also enabling tools to make our engineers more effective. Looking a little bit further forward, UltraFan. The UltraFan, we had a great year in terms of hitting the milestones on our UltraFan architecture development.
Just a reminder, this is basically a high-power gearbox driving a very low-speed fan to create efficiency. It's going to be a significant step forward in terms of efficiency, in terms of noise reduction, and in terms of emissions. During the year, we have run the core up to full power. We've been demonstrating to ourselves and experimenting with the new composite materials around the fan and the fan case, and also with the combustion system, the new lean burn combustion system. Actually, very pleased with how the UltraFan program is going. Looking a bit further forward, we said we're championing electrification. That's manifesting itself in a few electrification programs in aerospace. It's manifesting itself in things like entry into the microgrid business. The two pictures on the bottom right there, robotics in engine maintenance.
We think this is an area where we can take a lot of cost out of the engine maintenance and actually improve some of the reliability of that activity as well. The picture on the bottom left there is demonstrating some of our investments in advanced materials. With that, I will hand over to Stephen, and I'll be back for a summary shortly.
Thanks, Warren. Morning, everybody. I'll do my best to stick to the timetable, I've got about 15 minutes to go through the financials, I'll do my best. It's okay. The full-year results for Rolls-Royce, I'll just pause on this slide for a second. Warren showed this, but just to reinforce, I think, the revenue growth and remind ourselves that Rolls-Royce is a growth business and a strong revenue growth business as well. That's a core part of our progression and ambition over the medium term. A reminder of our reporting format. We will be talking mostly in this presentation around our core business. Our core business, Civil, Power Systems, Defense, ITP, that's where it stops. Below the line, Commercial Marine, L'Orange, they're non-core businesses, either being sold or going through a sales process to get you down to the group results.
It's core business is what we're highlighting here. The core for 2019 will become the group for 2019, just to reinforce that point. The group underlying results, just putting it all in perspective by each division. Particularly strong revenue growth in Civil and Power Systems, 12% and 15% respectively. Defense, solid, getting us to core business revenue growth of 10%. Really good progress. Earnings per share growing nicely from GBP 0.023 to GBP 0.16, still a long way to go on earnings per share. Looking at the income statement in entiretyRevenue growth, 10% revenue growth. Gross profit growing at 4%. Gross margin is now just 10 basis points up to 15.7%, impacted here by the contract catch-ups in the Civil Aerospace business that we'll see shortly. If you take that number out, you get closer to a 17% margin.
If we put the gross margin in the context of our mid-term ambition of GBP 1 of cash flow per share by the mid-term, we're looking at a gross margin of around 20% for Rolls-Royce. That's the sort of number that's consistent with that GBP 1 of cash flow per share. I'm going through each of the line items over the next couple of slides. Underlying operating margin of 4.4%. Again, a lot of room for improvement there. Again, mid-term ambition, putting it in that perspective, around a 10% operating margin over the mid-term. Cash flow per share growing nicely, GBP 0.345, GBP 1 in the mid-term. Cash return on invested capital, I'll talk about that in a little while as well, 12% for the year, down 13% from the 13% last year, I'll share that detail with you. Looking at the breakdown of the revenue growth.
Rolls-Royce is not just a revenue growth story, but it's across all revenue streams as well. It's not just one that we're dependent on, it's across all revenue streams. OE revenue growing by 10%, driven by the growth in activity and deliveries, particularly in Power Systems. LTSA service revenue growing a nice 11%, the strong flying hour growth is a key driver there. Other service revenue as well, a nice high margin business for us, and that's in respect largely of spare parts sold to some of the older engines, such as the RB211, the Trent 500 and Trent 800 as well, getting us to that group gross margin of 15.7%. If we adjust for the contract catch-up accounting adjustments, we're closer to 17%. Core business R&D. As a group, our gross R&D cash spend was up to GBP 1.378 billion for the year.
Net cash spend was up 8%. You can see there the GBP 1.1 billion. Once we deduct the capitalized amount of GBP 498 million and then add back the amortization and impairment, we get to a net R&D P&L charge of GBP 650 million. Our capitalized R&D was GBP 100 million or so higher than we had anticipated, largely driven by, well, first of all, the increase in cash spend, but also just the timing and phasing of certain engine programs, particularly around the Pearl 15, that drove that increase in net capitalization. We're guiding today that we're expecting that capitalized amount to come down by around GBP 100 million in 2019. Just as a reminder, at the bottom here, bottom left-hand corner, 2018 is expected to be the peak year for R&D cash spend. Commercial and admin costs declining organically by 2%.
This is a line item where we expect to see good progress over the next few years, particularly as the benefits of our restructuring program start to kick in. Our mid-term ambition is to get to 5% of sales. We've made progress on that during 2018. At 6.9% of savings, but still clearly some way to go. The headcount reductions that Warren mentioned, the 2,000 to 2,500 or so during 2019, will be a key driver of that. Restructuring and exceptional costs. We have a GBP 1.4 billion in total exceptional cost that we're reporting today for 2018, made up of four key buckets. The Trent 1000, GBP 790 million, an increase from the GBP 554 million at the half year, largely driven by the numbers of aircraft on ground being at elevated levels for longer than we thought at the half year.
I'll go through the accounting on that, I'm sure during the Q&A, but I won't dwell on it now because I'm sure one or two questions might come up there. The restructuring in the bottom left-hand corner is largely around the group restructuring program that we announced in June of this year. Total cost for that program of around GBP 500 million. Run rate savings of GBP 400 million. The cash cost for the group restructuring in 2018 was just GBP 70 million, to put that in context. Trent 900, the closure of the A380 program, GBP 186 million exceptional cost for us, largely around owners' contracts, the impairment of some intangibles, and various tooling write-offs. Finally, a pension adjustment in respect of gender equalization provisions. Summary funds flow statement.
What we've tried to do here is summarize the key movements between underlying profit before tax and then group free cash flow. I think the two key numbers to highlight, working capital change of GBP 581 million benefit, and then the growth in the Civil Aerospace net Long-Term Service Agreement balance change. Let me just go through those items one by one. The underlying working capital reduction, we benefited GBP 581 million from this. What were the key moving parts? First of all, we had a materially higher payables at Civil and Power Systems driven by increased trading, particularly in Q4. At Civil, related to the ramp-up, particularly around the Trent 7000.
In Power Systems with a strong order book that I'm going to talk about in a second, that Warren alluded to as well for Power Systems that sees us into 2019. We also benefited from around GBP 400 million of supplier payment term standardization led by Civil Aerospace. This is effectively looking at our extending, where appropriate, our supplier payment terms so that we can essentially extend those payment terms. For example, let's say from 60 days to 90 days, and benefit from that. We did a lot of work on working capital. We continue to do a lot of work in working capital at Rolls-Royce, and we do see opportunities around the group, and I've alluded to this previously, whether it be collection of old receivables, inventory management, supplier payment terms of one just opportunity. We improved our overdue debt collection. It was another driver for us.
At the same time, a couple of negatives. We had GBP 150 million concession unwind in Civil. You recall the benefit we had last year. We had higher receivables in Civil and Power Systems driven by the increased trading activity. Finally, the most material of these items was increased inventory, reflecting the operational challenges in Civil and the volume growth in Power Systems. We had around GBP 400 million growth in inventory over the course of the year. Putting all of these together got us to the GBP 581 million benefit for 2018. Looking at the change in the Civil Aerospace net Long-Term Service Agreement balance, the movement here is largely driven by the customer receipts that we receive from our airline customers, driven by wide-body engine flying hour growth, growing at 14%, and also increased business aviation flying hours.
There's cash outflow from the major shop visits, which is up from GBP 240 to GBP 286, and also from the check and repair shop visits growing from GBP 356 to GBP 569. This credit balancing also includes the negative contract accounting catch-up adjustment of around GBP 300 million. That adjusts for the difference between revenue and cash flow. This balance effectively represents deferred revenue for Rolls-Royce, cash collected in advance of the shop visit. Cash receipts higher than revenue, it's a core part of our business model, this particular mechanism. It will continue reflecting flying hour growth. Looking at the group balance sheet, you'll recall that the group balance sheet is the number one of our four capital allocation priorities.
We've materially improved our free cash flow, and we've actually improved our net cash/debt position, moving from a net debt position of GBP 305 million at the end of 2017 to a net cash position at this year-end of GBP 611 million. We completed the disposal of L'Orange. We've announced the sale of Commercial Marine that Warren talked about. We issued preemptively EUR 1.1 billion of bonds at attractive rates. We prefunded all existing debt maturities at the end of 2019. We did that during the year as in anticipation of a Brexit event in 2019. We reiterate our ambition to return to a single A rating. Shareholder payments, we are holding the final payment at GBP 0.071 per share, and that gets us to a total payment of GBP 0.117. I put that in the context of the capital allocation priorities in the bottom right-hand corner here.
Strong balance sheet to improve our credit rating and returning to that single A rating to fund organic investment to drive growth and technology. The dividend payment to shareholders will increase dividend as free cash flow grows. We aspire over the midterm of 2.5 times free cash flow dividend cover through the cycle. We look at our shareholder payments in the context of our capital allocation priorities. Finally, disciplined and selective mergers and acquisitions activity. Moving one by one through the business units. Civil Aerospace, revenue growth, across the board. OE revenue growing 8%, services 12%. I mentioned earlier that strong services growth, that spare parts revenue growth, high margin growth out of the legacy engines, the older engines, the more mature engines, 21% growth there. The V2500 was a big contributor to this revenue growth. The gross margin impacted by the contract catch-ups.
We put a little line in here. If you were to adjust for both 2018 and 2017 for the contract catch-up adjustments, and this is in respect to the Long-Term Service Agreements, and I'm going to talk about this, I expect, during the Q&A and the volatility that's implicit within IFRS 15, it would have been a 10.4% gross margin at Civil Aerospace. Engine sales, just to go into a bit more detail for Civil Aerospace, as we're using Warren's words, half of our business. Wide body sales went to 469. We did ship 11 further. We're guiding to 520 for 2019. Bottom left-hand corner, a reminder of around 2,300 wide body engines that are on order, and a mix of those with the Trent XWB being a key driver of that. You'll recall the three key drivers of growth for us over the midterm.
The number one of these being the reductions in the OE deficits. We made good progress again in 2018 on this goal, a 13% reduction. The average OE loss is now down to GBP 1.4 million. Looking at the top right there, the XWB-84, particularly good progress with 32% improvement in unit loss. As a reminder, our goal is that for 2020, XWB-84 will be break even. Indeed, by 2022, we expect the margin across the wide body fleet OE to be break even. I won't dwell too much on this slide in the interest of time. Engine flying hour growth. Large engine invoiced engine flying hour growth grew by 14%, reflecting the growth in the installed base, but also the increased utilization of those engines. The large engine in service fleet, just going back to that earlier comment, 8% growth to 4,757 engines now in service. Shop visits.
Shop visits grew, 46 shop visits extra in 2018. This is the major shop visits, the ones that take place every five or six years or so. Check and repair visits growing significantly, largely driven there by the accelerated maintenance activity, as you might expect on the Trent 1000. Putting all that together gave us a GBP 200 million benefit to the wide body cash margin. The OE deficit improvement gave us a GBP 100 million benefit at the OE level. When you put all that together with the benefit from the increased growth in spare engines to support the growing fleet, we finish with a GBP 400 million improvement to the wide body underlying cash margin. This is a slide that we first introduced in 2017, in an attempt to give a more user-friendly perspective of how cash flow works in Civil Aerospace on a driver basis.
Just moving very quickly through the rows. First of all, we started with original equipment, number of engines invoiced times the loss per engine. Underlying services, the growth in flying hours, spare engines. You can see the Trent 1000 cost coming in there as well, taking us through to a wide body cash margin of GBP 900 million after the Trent 1000 costs. After we go through the other engines and through to R&D and CapEx and so on, working capital benefit, we end up with trading cash flow of GBP 200 million for Civil Aerospace. Going forward over the midterm and into 2019 as well, we are expecting working capital change to become more normalized. I'll talk about that later. Power Systems, strong revenue and profit growth.
15% organic growth in Power Systems, really strong growth, flowing through nicely to a growth in operating profit of 20%. The margin, the gross margin, is impacted by the product mix. There was an increased lower margin sales in construction and agricultural markets offsetting any benefit from the increased volumes and the improved factory utilization. Looking forward for Power Systems, just coming to that order book point, there's a more than a 20% increase in the order intake year-over-year, better order cover ratio than the prior year as well. Power Systems is well-placed for 2019. As a reminder, Warren mentioned this, 2018 did benefit from that pre-buy in effect, in respect to the emissions regulations that are being introduced in 2019 for diesel engines. One shouldn't expect the sort of revenue growth we saw in 2018 and 2019 for Power Systems.
I'll get to the outlook in a second. Defense, a solid year for Defense. Revenue pretty much flat year-on-year. Operating profit down slightly due to gross margin deterioration with lower combat and submarine volumes, partially offset by the increased demand for the Multi-Role Tanker Transport engines that Warren mentioned. Operating margin down slightly higher R&D spend. Our Defense business is moving into an investment phase over the next three years. We should see the sort of trend that we saw in 2018 be replicated in 2019 as well. I won't dwell on this. I think I've mentioned strong order book for Defense as well. Good orders received during 2018, a 1.3 times book-to-bill. The closing order backlog there now is GBP 6.8 billion. Good progress on the order book in Defense. ITP, solid growth in ITP, 6% revenue growth.
Operating profit growing nicely as well by 3%. I won't dwell on this one. The outlook for ITP for 2019, 10% revenue and profit growth. Couple of accounting policy updates. With effect from the 1st of January 2019, IFRS 16 will be bringing operating leases onto the balance sheet. The effect here will be an increase in our assets by GBP 1.8 billion and an increase in our liabilities by GBP 2.1 billion. The impact on PBT is negligible. No change to cash, of course. Just sort of update you on that accounting change. IFRS 15. IFRS 15 requires the disclosure of unrecognized revenue. This is the closest proxy to the value of the order book, but it is quite different from the way we used to disclose the order book. First of all, it includes only firm purchase OE orders.
That represents about nine months worth of OE orders, and it represents the entirety of any contracted aftermarket revenue. Whereas the previous order book value prepared included all OE orders at list price and then just seven years of aftermarket. Very different basis of calculation. Somewhat reassuringly, the numbers aren't dramatically different, although one might argue it's a coincidence, but that's where we've got to. Guidance for 2019. Just running through these. 2019 outlook, Civil Aerospace, around 10% revenue growth. Power Systems, going back to my earlier comments, mid-single-digit revenue growth. Defense, stable, again, reinforcing those earlier comments that I made. ITP, around 10% growth. Civil, the loss reported of GBP 162 million will be approaching a break-even position during 2019. Power Systems margins will be about 100 basis points higher, Defense 100 points lower, ITP stable.
You put all that together, we get to core profits of GBP 700 million ±GBP 100 million. Free cash flow of GBP 641 million again. Sorry, GBP 700 million ±GBP 100 million. Just those ranges, putting it in the context of a GBP 15 billion revenue business, those ranges seem large in respect of the absolute numbers of profit and cash that we're guiding to. In the context of the size of our business, they are actually quite small. Just to put it in that context. A further step towards our free cash flow of at least GBP 1 billion in 2020. Finally, reinforcing and reiterating our midterm ambition to move to at least GBP 1 of cash flow per share by the midterm, currently at 34.5 pence. Cash return on invested capital, at least 15% through the cycle. We're now at 12%.
A little higher than we reported at our Capital Markets Day. Just as a reminder, though, that cash return on invested capital we reported then of 9% was on old GAAP balance sheet basis. This is now IFRS 15 balance sheet basis, and they're markedly different balance sheets. Just to put that in perspective. That has caused us, therefore, to be more ambitious around the 15% cash return through the cycle. Just to make that point. We're using CROIC now increasingly so within the business to help us with our capital allocation decisions as well, which is encouraging. It's not just how we report progress, but it's how we measure and manage and work within Rolls-Royce as well. With that, just before I wrap up, I just wanted to say, I know that group finance in Derby are watching now, and PwC are watching.
Just want to say thank you very much to the team who've done, with a first-year auditor and the first full year of IFRS 15, an absolutely cracking job over the last two to three weeks. Thank you very much to everybody watching up in Derby and to Pricewaterhouse. Warren, over to you.
Thank you, Stephen. Bearing in mind the lousy job that I did of keeping to time in the first half, I won't keep you long on this, and we'll get on to Q&A. Rather than stepping through this, you can read this in the book. This is a very logical set of our sort of high-level objectives for 2019. You'll see not a huge change in terms of what we're doing year-on-year, because they all sit within this sort of wider term, high-level thing. We've put this in as a reminder, but it's about making sure we have a balanced portfolio. A lot of our expenditure goes into vitalizing our existing capabilities. That means the products and services that we operate today, how we make sure we continue to operate those and develop new versions of products and services ever more cost-effectively.
The tools that we're using to do that are largely reinventing the business through digital, through adopting digital technologies to link our designs to our manufacture, to our supply chain, and so on. Transforming the way we actually operate the business, both from a manufacturing point of view and, as you heard Stephen say a moment or two ago, by how we measure and manage our performance. Looking forward to the future with new technologies, very much embracing the inevitable electrification that's sweeping through the industrial landscape at the moment. With that, we'll move straight to your questions. Sorry, I didn't spot who went first. Those who are driving the microphones, please, we've got a couple here, and then in the middle. Why don't you fire away, Christian. Do you want to go first?
Yeah. Thanks. Hi, good morning, and thank you. Christian Sherlock from Bernstein. Two questions from me. The first on the Trent 1000. The second on the NMA. On the Trent 1000, are you at, or do you see on the horizon the point at which you will be comfortable or confident in that you will have fully provisioned for the cash outlays required in the future to get this program back on the right footing? Secondly, around NMA, can you elaborate a little bit on your concerns about not reaching sufficient maturity on Boeing's timeline? It seems a bit from the outside, and granted, obviously we're observing from the outside with a lot less information, but that UltraFan has been actually progressing quite nicely against a number of development milestones.
If you can just clarify or elaborate a little bit on what's gone and changed your mind or drove the decision, that'd be great.
Okay. I'll do the NMA one, and you can talk about-
You want to go on that first?
-the Trent 1000 surely.
Sure.
It's hard to put much more color on it, really. The reality is that Boeing have a specific engine program that they are working towards. The exact specifications of that engine are not completely tied down yet in terms of requirements. Based on the extensive work that we've done with Boeing, in tracking those specifications and looking for how that overlaps with our UltraFan program, we simply couldn't find sufficient overlap. There would have to be additional work that needed to be done specifically for the engine variant that would be required for NMA. Of course, technically we could make that work. We do know from bitter experience that you need to do a huge amount of very rigorous testing work to ensure a certain level of maturity when the engine enters into service.
We simply couldn't find enough hours in the day, even if you threw many more bodies at it, and much more money at it, there's simply not enough hours in the day to do all that work in time to get to a sufficient level of maturity in time for Boeing's timescales. It comes down to what makes commercial sense and how much risk do you want to put into that program. We chose to be completely open with Boeing and our customers and our investors, that rather than get into a program and get towards the delivery dates and say, "Oh, sorry, we can't do this, we need to do an extra year's worth more testing." Once we'd ascertained that we just couldn't make it fit in the timescale to get to that level of maturity, we had to withdraw.
That means that we can concentrate on our UltraFan architecture development, which as you rightly observe, is going pretty well at the moment. I'm very pleased with the progress in 2018 on that. That is targeting an architecture development and the milestones that we have to hit in that. It just takes you to a different place than what was required for NMA.
The Trent 1000. The Trent 1000, first of all, just as a reminder, is a multi-year cash cost over six years from 2017 to 2022. In total, around GBP 1.5 billion of cash cost, being broadly GBP 100 million in 2017, 450 in 2018 and 2019, 350 in 2020, and then the balance of 150 or so over 2021 and 2022. That's the profile.
That is GBP 100 million more than we expected at the half year, but we do believe now that with the regulatory approvals that Warren mentioned in his presentation that we've received over the last couple of months, and the one or two that are still expected, and with the improvement in the aircraft on ground situation falling into single figures towards the final quarter of the year, those will be the key drivers of us getting certain around the cash and the cost profile on the Trent 1000. 80% of the cash costs are being incurred over 2018, 2019, and 2020. Just as a reminder as well, that just over half of the total cash costs are broadly in respect to the customer disruption costs, and claims in respect to our customers, caused by the aircraft on ground.
The aircraft on ground, we have made improvements over the last couple of months, reducing from the average of 41 during the second half of last year to 35 now. We expect to see that continued decline during 2019. It's that that gives us the confidence, along with the approvals from the regulatory authorities, to feel confident that with the GBP 1.5 billion cash cost is a solid estimate.
Okay. Thank you.
Pass it along and then we'll go to the middle.
Thanks very much. Rob Stallard from Vertical Research. Couple quick questions on the 2019 guidance, probably for Stephen. First of all, you said working capital normalization. Does that mean roughly breakeven for 2019? Secondly, what are your expectations for group CapEx this year? Finally, looking at the Civil division, how do you expect the aftermarket to progress, both for long-term service and for older engines, in 2019? Thank you.
Okay. 2019 guidance. Working capital normalized levels. I think the only material item of working capital that we're expecting at this stage is a reduction in inventory. One might expect that given the growth in inventory that we saw during 2018, which was largely driven by the Trent 7000 production ramp-up, but also the growth in Power Systems. That's the only single material item of working capital that we're expecting. Aside from that, we're not anticipating or planning for any significant items in either the payables or the receivables line. Having said that, and I've mentioned this before, Rolls-Royce and our industry, is an industry of lumpy cash flows, and timing can have an impact. At this stage, there's nothing in our guidance that assumes anything other than the inventory improvement. Second question, sorry.
CapEx.
Yeah, CapEx. I don't know whether we've given explicit guidance, CapEx, if anything, we should be declining slightly from current levels, let's say anywhere between GBP 50 million-GBP 100 million, then steadying down at that level over the next five years. That's the plan for CapEx. It has grown over the last few years, just as a reminder of that, to accommodate the production ramp-up that we've seen over the last couple of years and continue to see.
Finally on the aftermarket.
The aftermarket progression?
Yeah, how do you expect old engines-
Sorry.
Old engines versus long-term service.
We've had a very good year on old engines. We can't expect that sort of growth to continue. We still think we're going to see good growth, particularly on the V2500 for the next three years or so. I don't think we can expect to see that sort of revenue growth continue. We ought to be a bit more circumspect in our sort of longer term horizon and moving into single digit territory for revenue growth there. Can we-
Thanks. Nick Cunningham from Agency Partners. I wanted to ask about the thinking behind holding the dividend, because it sends an opposite signal to the commentary and the guidance, the medium-term guidance. It's not actually very much money, at least the percentage increase in it is not very much money. I wanted to understand that. Second, different question. On the NMA decision, what's the route to market for UltraFan in that case? I mean, the obvious one would be a sort of A350neo stretch. Will you be ready for that? Does it also mean that effectively the pairing has now become Rolls-Royce and Airbus, GE and Boeing, and Rolls won't do another Boeing program? Thank you.
Shall I do that one?
Yeah.
I'll do the dividend.
You do the dividend one.
It's certainly not our intention that the sort of Airbus-Rolls, GE-Boeing thing is accentuated. To that end, it would have been very good to have been able to participate in the NMA program. We've gone into why we couldn't participate in that, so I won't repeat that bit now. As far as UltraFan is concerned, then it's a scalable architecture. It's scoped to scale from about 25,000 pounds of thrust through to about 100 and teens, thousand pounds of thrust. That means we can go after wide body, we can go after single aisle. We expect the first opportunities will be in wide body, things like you suggested just then in the question. Obviously, introduction of new airframes is a matter for both Boeing and Airbus.
I can assure you that our relationship with Boeing is very rich and very healthy and over the last 12 to 18 months, while we've been working together very closely on the Trent 1000 program, it's been a great opportunity for some of the Boeing engineers to wander around in Derby and get a much better idea of how our UltraFan program is developing. I'm actually quite optimistic with both airframers for the future and UltraFan.
On the dividend, yes. The dividend will be under review in 2019. We are clearly approaching that territory where it is appropriate to reconsider our dividend and restore it to previous levels. Just to put it in the context of a couple of things. Number one, we're also extremely keen to return to a single A rating, and improve our balance sheet. That's a key priority for us. Number two, we have the ongoing issue of the Trent 1000 and the GBP 450 million or so of cash costs there as well. We're just balancing it against those other priorities and managing through there. It will be under review in 2019, we're certainly approaching that territory where it is appropriate to start restoring the dividend again.
Thank you.
CapEx, sorry, we are explicit about that guidance. It's a GBP 75 million reduction in 2019. Between that GBP 50 and GBP 100 I mentioned.
Okay. The microphone's just moving that way. Then it's going to go back a row.
Andrew Humphrey, Morgan Stanley. Just a couple of quick ones, one on IFRS 16 and one on Power Systems. Stephen, you mentioned IFRS 16 will be neutral at PBT level. Can you tell us what the impact will be on EBIT? The second question on Power Systems. I think over the course of 2018, you've highlighted a level of pre-buying there ahead of some regulatory changes. You're still guiding for growth in 2019. Clearly, if that's the case, there must be a stronger level of underlying growth in that business. Maybe talk about the offsetting factors there would be great. Thank you.
If I could quickly do IFRS 16. At the operating profit level will be about GBP 30 million-GBP 40 million benefit. Just an estimate at this stage, but that's what it will be. On the sort of situation in Power Systems, we highlighted a couple of things, as Stephen said, 15% growth last year. The pre-buying was one of the factors behind that, unlikely that can be sustained. However, we're not looking at a complete reversal because some of the other growth in Power Systems is in things like power gen. It's in things like adoption of some of our new variants in gas engines. We're coming from a very small base.
As I alluded to in the presentation a little bit in terms of geography as well, where again, in some parts of the world, and in particular in China, we're coming from a very small base. From a cost point of view, we've had a significant barrier historically in China, and that's why we set up the joint venture. I think when we set up that joint venture and we talked about it, first of all, we said it's partly about cost to make ourselves more competitive in China, but also to make ourselves more competitive generally, because then we can export some of that to the rest of the world. In terms of initial production from there, it's about targeting growth opportunities in China. Compared with some of our competitors, we do target a much broader field of applications.
That's really what's underpinning our growth expectations for this year. Not as racy as last year. There was that particular factor. We still expect mid-single-digit growth.
Thank you. Good morning. Zafar Khan from Société Générale. Stephen, just on Slide 40, the change in Civil Aerospace net, LTSA balance, which is quite a big benefit to the cash flow. Slide 40. Obviously, you've got, on the positive side, the growth in the flying hours, but I suppose as the fleet matures, you're going to get more shop visits. What should the decay look like in that number going forward?
Yeah. I've been asked this before, I think we were expecting this margin to grow nicely over the next five, six years. Growth will continue. It will carry on growing, albeit at a much smaller rate as the six-year anniversary comes up for those first shop visits of those delivered six years previously, and when the ramp up first started in OE production. We should be thinking around 2024, 2025 is when we start to see the growth plateauing and then growing more steadily at more moderate levels. Over the next five or six years, we are going to see good growth in this margin.
That particular number in the cash flow statement, should we be looking at that number being stable over the next four to five years?
It will depend. It will depend on the nature and mix of the shop visits year-to-year. Essentially, it'll also depend on flying hour patterns as well. We've had some very good years of flying hour growth, and it will depend on that. Your logic is not wrong. It ought to be a relatively linear type of relationship, but it will depend very much on the mix and type of shop visits.
Thank you.
Let's move that way, then we'll come over to you, Celine.
If I could just, Charles Armitage at Citi, just continue that a little bit more. The 944, is that about where you would have expected it? Was it particularly good or was it particularly bad? Are we looking at 700 to a billion or are we looking at 700 to 900?
We should also, on this point, remind ourselves that this includes the credit to the balance sheet from the expense, the debit of the contract catch up in Civil. Approaching GBP 300 million of this is non-cash. The number is closer to GBP 600 million rather than GBP 944, and we do point that out on the slide once you adjust for that. Notwithstanding that point, yeah, that's how we should be thinking around the cash receipts from the aftermarket activity.
Sort of GBP 600-ish for the next few years.
Again, very much depending on how flying hours, aircraft, the particular engine growth, but also on the type and a mix of shop visits. We are going to see a ramp-up in shop visits to mirror the growth in the install base over the last few years as well.
If we pass the microphone on to that end of the row, Celine, and then we'll come up to the back on that side.
Hi. Good morning. Celine Fornaro from UBS. My first question would be regarding the growth in the old engines and the flying hours. Some of these engines, you're probably paying those yourself as a compensation to some of the airlines that have got 787 issues. I just want to understand if that's capturing that revenue number, and how would you account for that? My second question is regarding the single A credit rating, which is clearly one of your top priorities for the year. Thank you.
I'll do the second question first.
I'll do the first.
You come back to the first one, yeah. The single A rating. I think, in my conversations with the rating agencies, underlying free cash flow is their core metric, and growth in the free cash flow. I think they'll be pleased to see net cash on the balance sheet. They also look very hard at the quality of the cash flows as well, and there are those that will look, and clearly, we benefit from working capital in our current year cash flow. Whilst we have a benefit from those normalizing, standardization of supplier payments, you can only do that in the year, and it's a permanent benefit in the year, but it's not repeatable year after year. The rating agencies will look at that. I'm expecting they'll be pleased with the progress.
They are extremely keen that we deliver our at least GBP 1 billion of free cash flow by 2020, and they'll be looking at the quality of that cash flow as well. As it stands, I think they'll be encouraged, but I'm not expecting any material change at this stage from the rating agencies. Warren?
I think to the point, if I've got it right, it was about older engines and the service revenue that's flowing from those older engines and the possible contribution of that caused by us leasing older aircraft to help our customers with the disruption. It's true that that's one of the tools that we've used to help our customers through this time. That's one of the things that we're paying for in these extra costs. Actually, compared with, I draw your attention to one of the slides in Stephen's presentation where we're talking about key cash drivers in Civil Aerospace and the service piece. I'm afraid I haven't got the number of the slide here because I'm on another version than yours. There is just a lot of activity
Amongst the older engines. If you think about the quantities of aircraft that we've had on ground, there just simply haven't been that many Trent 1000-based aircraft on ground. The volumes of other aircraft we've had to lease to help customers out is very small compared with the numbers that are contributing to this older engine service revenue. It probably is a very small factor in that. We're talking typically, and not on all the airlines affected, but for some of the airlines affected, it would be small single-digit number of aircraft that we've been leasing for periods of months.
Thank you.
I think we've got a few over here. Anne, it's important to go to Jennifer because she has some of the online ones. Shall we just do some of the online ones first, then we'll come back to the group on that side.
Okay. This is my chance. I'll ask in typical sell-side fashion, I have three parts. The first part, first question was, is it ethical to delay paying suppliers? Is it effectively borrowing money at the expense of suppliers? Stephen, if you wanted to answer that question. Secondly, are we prepared for a no-deal Brexit? We haven't had any Brexit questions, I thought I'd raise that because there were a number of Brexit questions. Finally, can we comment on where we are in terms of winning orders for the Trent 1000? Are we seeing our market share being lost there given the number of campaigns that we won in 2018? How do we view the future?
Okay.
I can do the supplier, I'll do the other two.
Yeah. Is it ethical to delay paying suppliers? Well, first of all, we're not delaying paying suppliers. We've renegotiated payment terms with suppliers, which is an important distinction. Let me just put this in perspective as well. On average, for our large suppliers, we pay on 75 days, on average. The industry average is anywhere between 90 to 120 days. If anything, we're well below industry practice. We're also signatories to the Prompt Payment Code. When we look at that and compare ourselves again with others in the industry, we're a top-quartile performer in terms of paying on time. I can see the point that's being raised in the question there, but it's not applicable to Rolls-Royce.
Brexit. Brexit has wasted a huge amount of a lot of people's time over the last several months. It's not going to waste any more of our time. We are ready for whatever outcome happens with Brexit. Clearly, we've had to plan for the contingency of a no-deal Brexit for a long time because obviously we have to operate our business on the 30th of March, whatever happens. To that extent, we have been building necessary buffer inventories. We have made the necessary movements of job functions. No actual transfer of jobs, but job functions from out of the U.K. into mainland Europe, based at our Dahlewitz site for regulatory approvals. We're as ready as we can be. We can't guarantee that every single one of our suppliers is as prepared as they could be.
We've spent a lot of time making sure that we've asked our suppliers and we've challenged their answers. At the end of the day, one of those engines takes an awful lot of parts, and it only takes one of those parts not to be there for the engine not to go. That is a risk, but we have taken all the steps that we can see that is necessary. I should also point out that in terms of flight disruption around Europe, flight disruption between the U.K. and EU countries, typically, this is a narrow-body activity rather than a wide-body activity. Of course, with the exception of the number of V2500s, and that's a relatively small part of our service revenue, then we're not exposed to that Brexit risk. On the Trent 1000 and the market share. A couple of facts.
Our market share has declined in terms of new orders. It does sit at, our market share today is about 35%. We had obviously hoped ahead of this issue that that share would be growing from mid-30s towards 50%. I would interpret what's happened as a delay in that trajectory. The Trent 1000 is actually a very reliable engine. It has a 99.9% dispatch reliability. Our customers who are flying the Trent 1000-powered Dreamliners, whilst not initially, clearly they were very disrupted, are able to partition in their minds the operation of the aircraft when the engine is behaving normally, and take that away from when the engine isn't there at all. We do think we have a product. It would be wrong of me to say that the issues we faced haven't affected things.
Certainly, our competitor has utilized the situation to their advantage with some very aggressive sales campaigns. Wouldn't you? I actually don't think this is a long-term thing, but it's undoubtedly an interruption. It's one we're obviously very sensitized to. It just so happens that the campaigns that happened in, particularly the first half of last year, did not go our way. That doesn't mean to say that we're wringing our hands with horror and we're putting our best foot forward on what we believe is a competitive engine and a good solution for those customers who are engaged in campaigns now and in future. Now we need to move into a few questions here in the second row.
Harry Breach from MainFirst. Can I just ask, firstly, the large engine OE losses, I think GBP 1.4 million for the full year. I think you said GBP 1.4 million for the first half as well. Is the fact, therefore, that we don't seem to have seen second half improvement, just a function of new product introductions in second half? Great. Thank you, guys. Can you give us any color on the sort of, the pace of improvement in 2019 on that? Next question, completely different. Sort of slightly re-looking at Rob Stallard's question on T&M aftermarket. I appreciate what you say about unsustainability of 21% organic. At the same time, the dynamics on V2500 are quite favorable. Can you give us a bit of your sense about current T&M spares and shop visit demand in your fleet here in February 2019?
Is it still running at last year's pace? The very final one, and sorry to labor this, Warren, in particular. We talked earlier on about cost estimate stability on Trent 1000. Can we maybe look at the technical side? Can you give us a little bit of a feeling about what gives us a confidence that we're not going to make further durability discoveries on Trent 1000? We've kind of got to the bottom of the barrel on discoveries.
All right. The first one was cost trajectories on how it's unfolding with the balance of this year on OE. Is that right?
Yeah. The OE improvements that we're expecting.
The OE improvements that we expect to see this year. Well, Stephen outlined that there are two data points. Breakeven on XWB by 2020 and breakeven on the portfolio by 2022-ish. The latter is obviously dependent on the product mix because what's going to happen is XWB will actually go into a state where we make a positive contribution every time we ship an engine. For some of the other engines, low volume, I'm sure the Trent 900s that we ship over the next couple of years, we'll never make an OE profit on. For the others, Trent 1000, Trent 7000, there's a lot of commonality between those engines. There's actually a lot of commonality between the 97K version of XWB and the 84 version of XWB.
We're moving from a situation of multiple engines in relatively small volume to essentially two engines and one variant each thereof, and therefore a higher volume of all of those engines, which is why we expect to see that second trajectory. The rate at which we get there will depend on the product mix. As we look through 2019, we can see we're going into 2019 with XWB accounting for approximately 50% of the shipments. The remainder made up by these new engines, largely the 97K variant on which we make a loss and Trent 1000/7000. I think we'll see a continuation of the trajectory that we're on. There's nothing that we can see today to suggest otherwise.
Do you want to do the T&M one?
T&M one?
Yeah. T&M.
I don't think we're going to see the 21% growth that we saw in 2018, 2019. Today, you asked the question about today, it's a healthy and growing part of our business. I think if you were to held me to it if I were to hedge my bets, I'd say you should be thinking around sort of 10% growth in 2019.
Okay. Are we going to find some further durabilities on the Trent 1000, durability issues?
Look, I cannot sit here and rule out that we won't find some issue on any one of our engines in future. That's just how things are. What I can assure you of is that the Trent 1000 situation was, if you look at the whole history of the thing, very unusual in having multiple issues with one engine. If you think about it, there were a number of iterations of that engine to get the thing right. Where we are now with Trent 1000 TEN, we are confident that we have solved the fundamental turbomachinery issues that have caused all the hiatus in 2018.
We know we've got that design right to the extent that we have been thoroughly testing, Boeing have been thoroughly cross-examining, and the airworthiness authorities have been convinced, not only in terms of certification of the redesigned parts, but very thorough analysis of the failure mechanism, and what sits behind that. The best brains in the world on this have spent the last six months on it. That's as confident as we can be. As I say, you can't possibly rule out there might be some other issues in future, but that's the same as any other engine. I think we've got one here and then we-
Rami Myerson from Investec. On spare engines, you've talked about an increase of GBP 112 million of revenues from sales of engines to your engine leasing JVs. Can you maybe talk about the profit and cash contributions from those JVs to underlying profit and cash? The second question would be on long-term deliveries. In the past, I seem to remember a chart where you talked about 550 to 600 deliveries a year. Next year's only 520. Do you still plan on getting to that 600 in the timeframe of 2022, 2023? Lastly, on NMA. Would you consider participating as a partner in one of the engine programs of one of your competitors if they are selected for that program?
Shall I kick off with the early one?
Yeah.
The spare engines.
Do the spare engines. Okay.
Yeah, you should think of about half of that number as contribution to profit and cash, as a rough guide. Second question was?
Okay. Volumes of large engines. Look, when we put up our projections of volumes, it is our best estimate at the time. What I would say is we've probably got a tighter grip on demand signals from our airframers than we possibly had a couple of years ago. That isn't to say that they take some orders and they try and shove a few other things in. Things could change. I think, we're in the zone of 500-600. We know we have the capacity and the run rate to deliver at over 600 per annum if we need to. We've done that. We've done 160+ in a quarter, over the last couple of years. Clearly, when we're going through introducing new engines, that gets interrupted a little bit. As I say, that's largely behind us.
What you see today is basically the result of our sales and operations planning process for 2019 based on the demand signals from our airframers. As we look forward, the demand signals that we're getting at the moment are in that zone of 500 to 600, but it could change. On NMA, would we partner with somebody else? We'll have to see what happens and who gets selected. We've made our decision in terms of our proposed offering. If we can do something useful and it makes commercial good sense to partner in future, then of course we're open. We'll have to see how the future unfolds. One behind, and then one over there, and then back to the middle. Okay? We're at 10:29 A.M. at the moment, so we're going to have to be fairly swift.
Hi. Andrew Gollan from Berenberg. Question is on contract catch-ups.
Yes.
Quite a big negative in the year, almost GBP 300 million. Firstly, specifically on that, what's driven that this year or in 2018? Perhaps a broader question. The negatives generally have trended to be bigger over the last few years, if we look back at the data you've offered us. Is that indicative of a bigger issue in terms of contract assessments over the long term? Because we're making increasingly large negative adjustments. A bit of a devil's advocate, but help us understand that, please.
First of all, the contract catch-ups. First of all, this is an IFRS 15 treatment. This is a very different treatment for contract margin reviews that take place during the year on our 187 contracts that we have with various airlines. The way IFRS 15 works is that it looks at the cost to go on the contract. Any variation in that cost to go, either positive or negative, has an adjusting effect on the revenue previously reported. This is a catch-up of revenue. What this can mean is that the volatility of IFRS 15 is demonstrated here, that the very small changes in estimates of the cost to go on high margin engines that are significantly through their program but with still a large amount to go, relatively small changes can lead to a disproportionately high adjustment to revenue previously recognized.
In respect of the GBP 276 million, that's most true of the Trent 700, of course. High margin, about halfway through its program of its revenue collection. That's largely what this is in respect of. It's largely just around utilization of the aircraft by its customers, causing us to have a slightly different view on the cost to go. It's implicit within the volatility of IFRS 15 and how that works. What we will be doing is building, I would say, more contingency into our estimates around contract margins going forward to protect us from those volatile swings. A slightly technical answer, but it's an important one, and it also plays into sort of how we think about outer years as well. The second one. I don't think it is indicative of any sort of malaise, generally.
I just think it happens to be first-year IFRS 15 and that impact. You're not wrong that, if we look over sort of 2014, 2015 or so, we were seeing benefits, and then sort of 2017 and 2018 unwinds. I don't think one should read too much into that. It's a very specific event in 2018 that's led to this Trent 700, in particular, contract catch-up.
Okay, thanks. Final two questions. I think we've got one there, and then we're coming back to Did we ever get to you? All right. Sorry, sir, but you've already had a go. Okay. We'll do one there and one up there.
Yes. Good morning. Olivier Brochet with Credit Suisse. Two questions quickly. The first one on spare engines for 2019 and beyond. Can you help us understand what you have in your plans, compared to the 50 that you did in 2018? Second, on UltraFan. I understand that you don't have an engine for an aircraft, so it's very difficult to answer that question, but what sort of RRSPs do you have in mind for that program?
Okay. Spare engines. 50 spare engines delivered in 2018. Spare engines are an important part of the whole ecosystem for the airlines and ourselves. Particularly important in 2018, of course, with the Trent 1000 issues, to have spare engines available to help service that particular issue. We're not expecting significant growth from the 50 in 2018. You might be thinking around sort of 60 or so, but not massively dissimilar from the number that we saw in 2018. Risk and Revenue Sharing Partners for UltraFan engines. Probably the usual suspects. I couldn't be any more specific than that at the moment. It's a new architecture, but it's still a gas turbine. We still need to work in the domain, so it will be the usual suspects.
Thanks.
Thank you. Jeremy Bragg from Redburn. One question on working capital. Sorry to keep hammering away at this. There's a GBP 400 million benefit from payables, which I guess reverses next year, so that's GBP 400 in my free cash flow bridge as a negative. What I don't really understand is exactly what happened with the engine concessions, because that was a big benefit last year, and you've given this number of GBP 150, and I don't know whether that's an absolute number or a bridged number. Did you in fact see a GBP 600 headwind this year in respect of engine concessions, which was offset by the GBP 400 positive of-
Yes.
Great. Thank you.
Yeah.
The next question, again, clarification, please. You said break even on the portfolio for OE engines by 2022. Unless my mind's playing tricks, I thought the last deck said GBP 0.4 million loss per engine, please?
Hmm. Yeah. Well, maybe I'm thinking sort of midterm 2023, that's certainly the direction that we're in.
Yeah
we're on. It's maths. We'll look at the difference between those two things. As we sit here today, we're on that trajectory in the medium term. As I said in answer to a question, I wouldn't want to step in too accurately, it has to be zero at this particular month, because it is going to depend on the product mix that we're actually shipping at the time.
Understood. Thank you.
Thank you. I'm sorry we're out of time. Thank you all very much for your attention.