Earnings Call: H2 2011

Feb 9, 2012

Good morning. Thank you for joining us today. Let me start by introducing my colleagues from the board. On my right first here, Mark Morris, our finance director, taking over, of course, from Andrew Shilston. Mike Terrett, our Chief Operating Officer. Colin Smith, who is Director of Engineering and Technology. To my farthest right, Jim Guyette, who is President of Rolls-Royce North America. I have worked out that my colleagues on the platform have 109 years of experience with Rolls-Royce. The good news is that when I sit down, there will be 110 years of experience with Rolls-Royce. I am confident that we will be able to address any of your questions, if not answer them. I am going to give you an overview of the business, and then Mark will take you through the numbers, and then, of course, we will have Q&A. As I hope you will have read this morning, we ended 2011 with a record order book of GBP 62.2 billion, up 5% on 2010. Record underlying revenue of GBP 11.3 billion, up 4%, and record underlying profit of GBP 1.16 billion, up 21% on the previous year. This against a backdrop of a difficult economic environment, especially in Europe. This performance is a real tribute to the people of Rolls-Royce, who have worked so hard, to our suppliers who support us, and of course, to our customers who continue to trust us. These results are not down to luck, but are the consequence of a consistently applied strategy. A strategy that many are familiar with that is summarized on this slide. We address four global markets, civil, defense, marine, and energy. We have invested, we are investing, and we will continue to invest in technology, capability, and infrastructure. These are the sources of our competitive advantage. We benefit from our competitive portfolio, not only in original equipment, but in services as well. We continue to grow our installed base, a hugely valuable asset for the company, that based on the surprise at the value of our IAE holding is not fully appreciated by everyone. The provision of product-related services is essential for us and our customers. This strategy has produced significant growth in the last decade. Let me remind you of the scale of that change. In the last 10 years, the business has been transformed. If I had said in 2002 where we would be at the end of 2011, I doubt that many would have believed me. If I remind you of some of the headwinds, it is even more remarkable. The SARS epidemic, a soaring oil price, commodity inflation, global financial crisis, recession, and more recently, the Eurozone challenges have all buffeted the markets in which we operate. Our strategy has been very well shock tested and has still delivered substantial growth. As we have grown geographically, grown our product offering, grown OE and services, we have become an increasingly resilient business. As you can see, since 2002, revenue has doubled, the order book has trebled, and profit has more than quadrupled, while the share price has risen from just over a pound to GBP 7.85 at yesterday's close. In addition to being a growth stock, we have more than doubled our payments to shareholders. The transformation of our business and the expansion of our portfolio have given us an even more powerful platform for future growth. While the size of our order book underpins our confidence that we will double our revenues again in the decade ahead before taking acquisitions into account. in 2011, we took three major strategic decisions about the future shape and size of the business. Firstly, we acquired Tognum with our partners, Daimler. You will, I hope, have seen Tognum's preliminary numbers for 2011. Revenue of nearly 3 billion euros, up 16% on 2010, EBIT of 345 million euros, up 43%, and a margin of 11.6%, up from 9.4%. This is a strong, successful, and growing business, a world leader in high-speed diesels. Our product ranges are highly complementary, and with three world-class brands, Tognum, Rolls-Royce, and Daimler, working together, I am confident that this will be an outstanding acquisition and partnership. At the Paris Air Show, we announced with Airbus that Rolls-Royce will be the exclusive provider for the long-range A350-1000. As you know, we are the sole provider for the A350 family and have taken orders of more than 1,100 XWB engines, which makes it our fastest-selling Trent engine yet. The engine program is on time, and the A350 flying testbed will take off for the first time this month. The third major decision was the sale of our financial holding in IAE, surprising many with the embedded value. At the same time, we announced plans to form a new joint venture with Pratt & Whitney to build engines for the next generation of mid-sized aircraft. Three very important actions, but there were many others. In civil aerospace, we celebrated the first commercial flight of the Boeing 787 Dreamliner, powered by a Trent 1000 engine. The Trent XWB engine is performing well and already has more than 1,500 hours of testing. It is the most efficient jet engine in the world. We also delivered BR725 engines to Gulfstream for their new flagship G650 jet that will enter service in 2012. In defense aerospace, the TP400 engine for the Airbus A400M was certified and is on course to enter service in 2013. It has already flown over 8,000 hours. Our LiftFan system for the F-35B Joint Strike Fighter continued to make good progress during intensive flight tests, and last month we were delighted that probationary status was lifted and the first STOVL aircraft have been delivered to the U.S. Marines. Set against this, we were of course disappointed that the alternate engine for the F-35 was terminated. Elsewhere, the EJ200 engine for the Typhoon received praise for its outstanding operational performance over Libya. In Marine, we received an order to power a further 10 U.S. Navy littoral combat ships, our largest ever surface fleet order. In submarines, the U.K. government announced that its next generation of nuclear submarines will be powered by our latest pressurized water reactor technology. We also secured the first two orders for our award-winning Environship, a cargo vessel powered by liquid natural gas. We continued to invest in our network of service centers, opening or expanding another five during the year to bring us closer to our customers. In energy, we won our biggest ever single contract to supply Petrobras, Brazil's leading oil company, with 32 turbine power generators for its offshore operations. Investment continues in our civil nuclear business. We signed a number of MOUs with major prime nuclear contractors as we look to leverage our capability in this sector, and signed a EUR 250 million contract to supply instrument and control technology to the world's biggest reactor upgrade program in France. We delivered a lot in 2011. Where will our focus be in coming years? First, delivering on our promises. We have made substantial commitments to our customers, and quite rightly, they expect a lot of us. Our job is therefore to deliver our record order book on time and to specification. Second, we need to decide where we want to invest for future growth and just as importantly, where we don't. Thirdly, improving financial performance. While our financial performance has been good, we can do a lot better. We are growing and volume is a financial friend. We have invested and will continue to invest in new efficient plant and equipment, and we are constantly looking at how we can become more productive. We will improve margins over time, and as our supply chain gradually settles into shape, we will improve substantially cash generation, in particular from working capital. I've been working for Rolls-Royce for a year and have learned a lot. I have visited many countries and many of our facilities. I have met customers and suppliers and of course, investors. I have said it before, but it's worth repeating. This is an outstanding company with outstanding people. Professional, committed, enthusiastic, and hard-working. As I have described, the business has been transformed in the last decade, showing increasing resilience as its products, OE and services, and its markets have grown hugely. The foundations are strong, the prospects are exceptional, and this is a very exciting place to work. The work we do is essential. It is mission-critical. We are trusted to deliver excellence, and we strive to achieve that everywhere, every day. When we remember what we looked like at the turn of the century, and we think about what has been achieved since then, it gives us, and I hope it will give you, enormous confidence about what we can achieve in the future. Thank you. Well, good morning, everyone. I'm delighted to be presenting my first set of results as Finance Director. I represent 25 of the 110 years that John just spoke about. I've been Group Treasurer for the last 10 years, and I hope you take from that that I'm well immersed in the business and have a good understanding of the business. As usual, I'm going to restrict my comments to the underlying performance. You all have the published data and the headline figures as well as the underlying, but it is the underlying figures that we look at as a business, in terms of how we look and manage the business. Okay, what I am going to do this morning, I am going to talk a little bit about the trading performance at the group level, and then I am going to drill down a little bit into each of the segments and pull out some highlights. I am then going to provide guidance for 2012, and just to be clear, the guidance that I am going to give will be excluding the impacts of IAE and Tognum. Then finally, I am going to give you an update on Tognum and IAE, two of the key strategic decisions we took in 2011. To the group highlights. As John stated, it has been a good year. Order book is up 5%, reflecting good order flow. Order intake of GBP 16 billion is up 33% year-on-year, with approximately half of the order book from emerging markets. This underpins our confidence in the future and provides great visibility of growth over the next decade. As we said before, we doubled revenues in the last decade, and we are confident in doubling the revenues again in the next decade organically. Revenue is up 4%, underpinned strong performance in aftermarket, which is up 9%, while OE revenues were down 1%, despite a good performance in civil, but countered by lower OE revenues in marine, which I will come on to later. We should not forget these are big businesses with a number of moving parts. Profit, up 21%, is well ahead of turnover, which represents a combination of a better mix, productivity, FX, and a number of one-offs, including the GBP 30 million net contribution from Tognum. I will cover these in the slide in a minute. Next slide. Cash. We are pleased with the cash performance. We started the year with GBP 1.5 billion of cash. We have invested GBP 1.5 billion of cash. The business has generated over GBP 200 million to end up with a net cash balance of GBP 223 million. On top of that, liquidity remains strong at GBP 2.5 billion. Finally, shareholder payments. The increase of 9%, sorry, to 17.5% for the full year reflects our confidence in the business and the size of the growing order book. Let us look at some key components to growth on the profit chart. We are going to start off with the GBP 955 million for 2010. Trading of GBP 52 million represents increases in volume, predominantly civil and defense, unit cost improvements, higher contributions from profits from JVs, lower restructuring charges, offset by higher manpower, slightly higher civil nuclear bid costs and IT costs, all reflecting where we are in the investment cycle. The GBP 52 million represents 3.8% growth on base trading, which is broadly comparable with group revenue rises of around 4%. Net one-offs. You know about these. There are three particular items. There is SDSR, which is the termination settlement, which was a GBP 60 million benefit in 2011. The Trent 900 incident, which you are all familiar with, which was a charge of GBP 56 million in 2010 and GBP 18 million in 2011. Finally, the Trent 60 DLE GBP 26 million charge, which we took in 2010, which makes up that GBP 124 million bar. Net foreign exchange comprises of GBP 64 million of transactional benefit, offset by GBP 10 million of translational negative. Net R&D is higher as we guided, and again, this reflects where we are in the investment cycle due to the phasing of new development programs where we are spending more. It is important to recognize there are really three components here. There's what we spend, what we capitalize or expense, and what we amortize. For those of you who came to the investor conference we held in November last year, you'll recall we did a bit of a deep dive on R&D. Just to remind you a little bit, we spend about GBP 1 billion on average on R&D a year gross. About half of that is what we fund privately. It's somewhere in the order of 4%-5% of turnover. The components of, in terms of where we are, also reflect where we are in various points in the program. We only capitalize between engine certification and entry into service. You will recall that T1000 went into service in September last year, so we've stopped capitalizing the Trent 1000. The next main program that will be capitalized will be the Trent XWB, which will not start until Q4 2011. The higher R&D charge reflects slightly higher spend, higher amortization, and lower capitalization. As I'm going to guide for next year, you can expect the R&D charge to rise significantly as we have lower levels of capitalization, higher amortization, and higher expensing. Entry fees are lower, and this again, purely reflects where we are in the program. Trent XWB and where it is, where the majority, so we're 17 lower there. Then finally to underlying profit pre-acquisitions of 1,127. I want you to remember this number because this is your base number for guidance, pre-acquisition. We add in the net effect of 30 million Tognum contribution, and that brings us to our reported underlying figure of 1,157. Moving on to the group cash flow. If we take our 1,157, this is how we're turning our profit into cash. We add back non-cash items, depreciation, and amortization of 410, up slightly over 367 for 2010, and again, reflecting where we are in the investment cycle. Net working capital reflects a number of moving parts. Inventory was up 140 million, really reflecting buffering as we build new factories and get ready for the increase in load. Deposits were down 126 million, reflecting where we were in the OE order cycle, but both more than offset by an improvement in net debtors and creditors. I expect this position to reverse for 2012. CapEx and intangibles of 775 reflects continued investment as we tool up to meet the rising load. It's worth remembering that we delivered 2,000 Trents over the last 18 years. We're due to deliver 2,000 Trents over the next five years, so a significant ramp up in orders and deliveries. Of course, investment is not just about building the factories. You're aware of Seletar and Crosspoint. In addition to that, of course, we do factory refreshes. We have to put the expensive kit that goes in them, and we do regular refreshes and updates of existing factories for productivity improvements, and of course, IT modernization as we globalize. This is a continuum. We're investing heavily because it's the right thing to do and reflects the confidence we have in our order book. The return on capital employed of 18% is also a good return on our investment. CapEx goes hand in hand with R&D, and expect this to rise in 2012. Other relates to financial RSP payments, provision utilization, and the difference between JV profits and cash dividends. We focus on trading cash flow, as items to the right tend to be largely fixed and escalating or specific in the case of acquisitions. 80% cash conversion in 2011 demonstrates good cash conversion in the underlying business. I expect this to be lower as we move into 2012 as we invest for the rising load. Pensions and tax representing GBP 410 million. Obviously, rising taxes as we are generating more profits and in jurisdictions where tax rates are slightly higher. Then finally, servicing our shareholders and investors, GBP 315 million increase. Brings us to our base cash flow of GBP 210. Obviously, the acquisitions we add into our reported figure of GBP 1,310. Let us have a look at the business segments and see how they fared in 2011. Firstly, civil. There is a lot going on here, but I am just going to pick out a few themes. In a tough environment, a strong portfolio is allowing us to continue to grow the order book, extending visibility. Up 7%, including an order intake of GBP 11 billion, which is up 47% year-on-year. It is worth noting that the order book contains GBP 250 million of thrust, compared to our installed base of GBP 400 million of thrust. So a significant stored value in the order book. Sorry. Just turning to OE revenues and service revenues. OE revenues growth is ahead of aftermarket, and it is primarily due to the leveraging effect of large engine deliveries. You can see that engine deliveries were up 14%, and again, the leverage effect of larger thrust and higher-value engines has contributed to that. Aftermarket revenues up at 10%, slightly higher than where we guided at the half year, and this is predominantly to a number of T&M contracts switching to TCA. Profit and revenues. Profit growth of 27%, let us remember, includes the effect of the Trent 900 incident. Adjusting for these one-offs, profit growth is around 15% and broadly in line with revenues. The remaining difference is due to a combination of mix, volume, unit cost, FX, partially dampened by higher R&D, and lower entry fee receipts. Turning now to defense. The defense business performed well despite pressures on defense spending in Europe and the U.S. We continue to benefit from the diversity of our portfolio, having 24 engine programs across 103 countries with 160 customers, and with platforms that range from transport through to heavy combat. This provides a natural shock absorber as well as export opportunities to the emerging markets. Remember, transport represents around 50% of our defense business, and troop mobility, humanitarian aid, and movement of materials is always going on in and out of conflict times. The 7% decrease in the order book is partially down to the SDSR termination settlement, which represents about half of the decrease, and the rest is due to a decrease in the order intake during the year, which at GBP 1.7 billion, was 16% down on 2010. The strong profit growth has benefited from the SDSR termination settlement of GBP 60 million. When we adjust for this, profit growth is around 2%. This lower growth reflects the volume mix in unit cost movements and R&D on the basis of where we have had lower capitalization in some of the defense programs. To marine. Now, let us just put some context around marine. There are three segments in our marine business. Offshore, which normally represents around 50% of turnover, a little lower last year due to lower OE deliveries at around 40%. Merchant, which is normally around 20%, and naval, which includes our submarines business, which is around 30%. The order book declined 8%, primarily reflecting the phasing of investment decisions in offshore. You need to understand that marine is a much shorter cycle business with lead times typically around 9 to 12 months. However, we are encouraged by the order intake, which is a good lead indicator, which rose 15% in 2011 to GBP 2.1 billion. We are confident the order book will grow again in 2012, although we continue to expect to see price pressure going forward. Overall, OE revenues, overall revenues in marine were down 12% due to a 23% decline in OE revenues, which was partially offset by a 9% improvement in aftermarket revenues. We said at the half-year that OE revenues would come back strongly in the second half. That didn't happen, which is disappointing. Despite encouraging bid activity, some customers just chose to defer deliveries. However, what is encouraging about the marine business is that we were able to continue to leverage off our expanding network of service centers, adding four more and expanding one during the year to see strong growth in service revenues. As guided, profit was broadly similar to 2010. The 3% decline relative to a drop in revenues of 12% reflects improved revenue mix and increased focus on cost quality and operational performance. Finally, on to energy. Again, let's just provide some context as how I view this GBP 1.2 billion business. I would characterize it as having a mature, well-established, and profitable oil and gas business, which represents about 55% of turnover. Then a number of less mature businesses in power generation, civil nuclear, and low carbon technologies, which we continue to invest in, which suppresses financial performance in this segment. We need to be careful with the significance we attach to percentages as these are of smaller numbers too. To the order book, which increased 28%, driven by significant demand in the O&G sector and included our largest ever order in O&G to Petrobras in Brazil. Order intake was up 57% at GBP 1.5 billion. Revenue declined by 3%, largely due to phasing of OE deliveries in power gen, while demand for aftermarket products and services continued to grow with an increase of 10%. Profits fell 11% as a result of lower revenue and primarily from our investment in civil nuclear. Okay, now on to financial strength. Just got three items up here, really, but I think it's important that in a long-term business like ours, the importance of having a strong balance sheet is key to us. A good investment credit rating is key when we have long contracts with governments and customers that are extending 20 years. People want to know that we're going to be around over that sort of period. We have strong liquidity at GBP 2.5 billion at the end of the year. We have access to all the global debt markets. Debt maturities are well spread to 2019 with no material refinancing until 2030. This underpins our long-term commitments and gives us confidence, flexibility, and options. On to group underlying guidance. Just remember, this is excluding the impact of Tognum and IAE, and the base core underlying PBT number is 1127. What we have said, for the group, we expect to see good growth in revenues and profits. We expect cash flow to be around breakeven, and this really reflects the continued investment of where we are in the cycle, higher R&D, higher CapEx, and obviously growing working capital. In the segments, for civil, we are guiding good growth in revenues and strong growth in profits. In defense, modest growth in revenues and profits. In marine, a modest increase in revenues and profits broadly flat, reflecting increasing price pressures. Energy, we expect growth in revenues and some improvements in profits. So some housekeeping for your models. Some other relevant data for you. Foreign exchange for 2012 will be neutral. There will be a significant increase in R&D charge. Again, this reflects that there will be lower levels of capitalization and therefore higher levels of amortization and expensing. Cash, as I have already guided, we expect to be a modest increase in capital expenditure and similar for R&D too. Overall, I am pleased with where we are heading when we consider that we are guiding at the group level good growth in revenues and profits against the current economic backdrop when we take into account higher CapEx and R&D, no FX benefits, and no tailwind such as that from SDSR for 2011. When I overlay Tognum and IAE, it is only going to get better. So let us just remind ourselves where we are with Tognum and IAE. So the status on Tognum. It is a JV, a joint bid we did with Daimler. Between us, we now own over 99% of the shares. We have invested GBP 1.5 billion as our share. Our next steps, we are currently in the due legal process, which is referred to as a squeeze out, which is to extract the remaining shareholders. Tognum will announce its results on March 8th. If, obviously, we are successful with the legal process, eventually the group will delist. Our assumptions are for the first half is we will equity account for Tognum, and for the second half, full consolidation. We will continue to report Tognum for 2012 as a single segment. Finally, on to IAE. Again, you are aware we announced some restructuring with IAE, where we are looking to sell our equity stake and still remain as a subcontractor. But at the same time, we also announced a new JV with Pratt & Whitney for the middle of the market. Both are awaiting regulatory approval, and we are just in due process at the moment. Upon completion, and assuming we gain approval, the order book will reduce by about GBP 4 billion. We will receive GBP 1.5 billion as our share at closing. There will be a small reduction in 2012 revenues, and profits for the full year would rise by GBP 140 million. Obviously, you will need to do some pro-rating to the extent that happens later during the year. So I think with that, concludes my part, and I will hand over to John for Q&A. Thank you. Thanks. Thanks very much, Mark. I suspect after such a clear presentation, there will be relatively few questions. We will go to our normal format. If you could wait for the microphone before you ask your question. If you could raise your hand, wait for the microphone, state your name and the company that you are representing, that would be very helpful. Then we will attempt to answer those questions. So, over to you. Okay. Hold on. Good morning. It is Nick Cunningham from Agency Partners. Two questions coming out of those last two slides, if I may. First of all, looking at the GBP 140 million pro rata full-year uplift that comes from the IAE transaction, does that imply that you are assuming that the payment, I refer to it as the earn-out payment, that you are getting from Pratt is greater than GBP 140 million then? Because presumably, if reported sales are going down, reported profits must go down accordingly, particularly if you are booking a subcontractor margin, and then that is being more than made up for by the payment from Pratt. First of all, is that a reasonable assumption? Secondly, different question, but on Tognum. Do you have the intention of buying out the Daimler half of Tognum? If you do, how will you finance it? Would you have to issue paper in order to continue to finish the year with net cash, as you have said that you want to in the past? Thank you. Let me take the second question first. Daimler are long-term partners, and that's the position. As simple as that. We are not going to get into speculation about buying it, not buying it, how we'd finance it. That's not up for discussion. Daimler have been and are, and I'm sure will be, terrific long-term partners, and that's how we regard that joint venture. In terms of IAE, I'm going to suggest, Mark, if you want to add any comments to it, but what I would say is just stand back a little bit, which is there are some technicalities going on, and then there's the bigger picture. The bigger picture is clearly we're getting a significant payment reflecting the installed value of the base and a pull ahead of the earnings of some of that, which is the GBP 140 million and the GBP 1.5 billion. I think the GBP 1.5 billion was significantly more than most people would have estimated the value of that installed base. The point that I've made, and I'll continue to make, is people should reflect on what that means for the total installed base of Rolls-Royce. Then there are the technicalities about what we're actually doing. This is a financial transaction. We continue, obviously, to still make parts and products for the V2500 engine, and we continue to assemble it as well. So there's a technicality in terms of who has the orders, which goes down. A little bit of jiggling around with the revenue and then the income streams. I think where you're going is you're getting down and getting into some really detailed, granular information. We've just stood back and given you painted a broad picture. But Mark, I don't know if you want to add anything to that. Yeah, I think all I would say is, look, there's a number of moving parts in IAE like we have within Rolls. We have OE sales, we have spare sales, and we have total contract accounting. Of course, when you unpick these numbers they will change how we take profit. I think that's one of the things you need to recognize. But recognize we used to have a third of all the revenue that came from IAE. We've monetized some of that by selling our equity stake. We continue to be a supplier and will make a return on the work we do in terms of both what we manufacture and what we assemble. Of course, we continue to get a share of the aftermarket, which is effectively a royalty stream, but is obviously based on engine flying hours. I think that gives you a good picture of where we're going. The number, I think, just reflects our assessment in the first year of how that will look. Thanks. Could I just follow up very? Is that possible? Just on the earn-out stream or the royalty stream or whatever, you've said it in the past would be about $2 billion in total. It declines each year. It's front-end weighted. It's mostly in the first five years. Whether we want to back it out or leave it in, we still need a point of departure and an idea of the gradient in order to be able to come up with some sort of realistic forecast looking forward because it's clearly going to drain material to your outcome over that period of time. You as well. Well, I think the only answer I can give to that is we don't give guidance beyond the year we're in, so we're not going to do that for you. We will get the regulatory approval. We hope to get that this year, and then we will provide updates to you. But this is, again, I back up. Think about the value of the installed base and the impact that means for the rest of the business. The first thing. The second thing is the new joint venture that we have established or will establish, we hope, with Pratt & Whitney, which gives us access back into this very large and important market in the future. There are those two elements that I would focus on and encourage you to focus on. Unless there was one more. No, we will go to the next question. Thank you. Thank you. David Perry from Goldman Sachs. Apologies, three questions, please. Easiest one, could you tell us on the civil aftermarket in 2011, just for the full year, just what it was pre and post FX? I am just not sure there. The second one is, can you just clarify your defense EBITA guidance for 2012? You talk about modest growth in profit. Do we strip out the SDSR for the starting point or do we leave that in, and is modest growth off what you reported? Then perhaps the more detailed question that I am most interested in is the supply chain. You alluded to improvements you are going to make there. Could you just give us more color in terms of the how, the timing, and the potential upside, please? Okay. Thank you. Well, if I take the last question first and give you an overview of that, then I am going to ask Mike Terrett to make a few comments and ask Mark to address your other two questions. As the company is growing, as we have invested in significant new plant and equipment, the obvious examples would be the investments that we have made in Singapore, the investments that we have made in Crosspoint, as well as the investments we have made in the U.K. refreshing much of our plant and equipment. The expansion that we are seeing takes time to, one, fill up the system and then get production up to a certain level. If I take Seletar as an example, we will officially open Seletar next week. There will be a very gradual ramp-up in production in Seletar during the course of the year. In that ramp-up, what we will see in the supply chain is a buildup of inventory, and then once we reach production, we will see that inventory level coming down as we reach a level of efficiency and productivity that you do not get to in the initial buildup. Then you multiply that around the system. Clearly, we are sitting on quite a lot of inventory. So over time, and I would emphasize this is a gradual process, there are significant opportunities for us to improve that net working capital position as we grow and as we become more efficient and as we get through the launch phases of many of these new facilities. But Mike, you are I think far better placed to comment on inventory than me. Yes. Thanks, John. Nice lead in. Yes, I mean, the volume is our friend. New programs are our friend. The investments that we make in technology, not just in the R&D, the technical side, the manufacturing technology, all of those are benefits to us over a long period of time, and that's really the core of what we're driving in the supply chain. As John said, getting to volume actually has some costs and some investment requirements, and you can go and physically see these in Singapore, in Virginia, in the U.K., not just the externals, which are relatively cheap, but the internals where the advanced manufacturing machines are. They give us both a near-term challenge in terms of investment, which is very exciting, but also give us the longer-term opportunity to put in later machine tools standards, later processes, newer processes, for us to drive productivity in the long term. Because these are long-term programs. The XWB, we're building the first engines flight test this year. Development engines are clearly running. That gives us an opportunity to build a platform for 25 years of production and a further 25 years of aftermarket. That's a much better place to be than sitting on legacy products which are nearing the end of their life. So it's a whole series of phased opportunities that we're taking in the supply chain. That's both our internal supply chain and the 75% or so of the engines that are produced in the external supply chain. I would like to stress how pleased we are with our partners and our suppliers who are actually also investing in new facilities, factories, and processes alongside us. Again, largely off the back of the new products that we develop in pretty much in every segment, albeit the ones that you hear most about are the ones in the big Trents in the civil segment. Hope that helps, Dave. Thanks, Mike. Mark, would you like to? David, I think you asked two questions. The first one was on FX and the impact on aftermarket for 2011 on civil. The short answer to that is it is around 4%. Organic aftermarket. You are looking for understanding pre and post FX impact. Yeah. Yeah. The organic aftermarket was four. Is that right? It was 10% for the year, was aftermarket growth for civil. Yeah. The impact of FX was about 4%. Okay, so six organic. Yeah. Then in the defense. Your second question, which was what is my guidance based off, and the answer is it's our reported figure of 376. Why such an improvement in defense EBITA in 2012? Because the underlying would be much, much better. Yes, I understand what you're doing. You're stripping out SDSR and getting your number back down to 3- Yeah Whatever it is, 316. Well, look, the combination, again, it's where we are in the cycle, a number of moving parts. You've got, first of all, higher top-line growth. You've got some unit cost improvements, benefits of some R&D. I mean, there's various moving parts in which we're not going to break out, but having done our guidance, that's where we come out. Let me try you on a cheeky one because we- Okay we're getting to know you. We obviously shouldn't allow you to keep the microphones. That's the trick here, Jack. We shouldn't take the microphones back. As Mark Morris, new CFO, what's your definition of good? That is a secret. We've got 1,127 as a base. I think it's the same as Andrew Shilston's. Yeah. The Rolls-Royce lexicon, I think, is well established. I was trying to get hold of Andrew to answer that question, but unfortunately he's on a beach somewhere, laughing himself, enjoying himself. Okay, thank you. I think if I just go back to defense and your question there, I think clearly, the guidance that we've given for 2012 will be a little surprising maybe against the backdrop of the defense budget positions that many of you have in your heads. But if you reflect on our position, if you reflect on the markets that we operate in, as Mark has said, we have 160 customers, 103 countries, although the U.S. and the U.K. are clearly the biggest. Where our markets are, we're actually in a slightly different position to many of other defense companies, so we get a slightly different result. Which is why when I've been speaking to people, whilst my optimism and enthusiasm about the defense would've been higher a year ago than it was today, based on the budget cuts and the budget positions that we have. Actually, we're okay in terms of our defense business, which I think is probably a slight surprise to some of you. Go to the next question. Take the microphones back, Gemma. Sorry. Maybe don't give them out. Maybe that's the Good morning. Zafar Khan from Soc Gen. Just wanted to go back to Nick's question on the GBP 140 million that you're talking about for this year from the IAE transaction, the benefit to your EBIT line. Is that an ongoing benefit, or is there an element of one-off in that 140? Okay. Let me get Mark to answer the question, but the 140 is not this year, the 140 is in the 12 months- Sorry, I know once we've got regulatory approval. All right. Just to make sure that's crystal clear. Mark, do you want to? Well, again, you're asking me to give you guidance beyond two years as well. I'm not asking for guidance. All I'm asking you is the GBP 140 that you get in the first full year. Yes. I think- Is there an element of one-off in that, or is that an ongoing thing? No, I think as Nick alluded to, there's some pull forward as part of the deal of what we've done in terms of how we structured over the 15-year period, effectively. But we're not going to get into the details of exactly what the rate of change is year on year. We have been crystal clear. It is just one part on a much bigger business. Yeah. We have been crystal clear, 140 in the first 12 months and then declining over a period of time. But we are not going to go far anymore. Thank you. Yes. Carter Copeland, Barclays Capital. Just wondered if you might elaborate a little bit more on the civil aftermarket. You said that the like for like organic growth was 6%, but you also called out the TCA conversions providing some uplift to that number. I wondered if you might comment on what extent that would further reduce that organic number. If there's any phasing that number would imply, I think, a little bit of a weakening second half versus first half in that growth profile. I wondered if you might comment about TCA conversions and how that weighed first half, second half, or what we should think about the underlying growth. One of the great dangers of providing information is that all you want is more information. Which is understandable. What I would say is, let me go back to the guidance that we've given for civil for 2012. To cut to that, which is good revenue growth and strong profit growth. I'm not going to give any further breakdowns of that. I'm not going to get sucked into the detail of exactly where this is, because I'm not personally convinced it's entirely helpful. We saw good performance in civil, good growth in civil in 2011. And we expect that to continue. But unless, Mark, you have anything more you wish to add, I don't want to get sucked into- No more granularity about who did what, why, and when. I think the danger is you just get sucked into looking piece by piece by piece, and there's lots of moving parts. And remember, we're a long-term business. I think just trying to measure something from one half to another half is not really representative of a natural underlying trend. So no, I don't really want to get staked out in the sun of saying everything else is here, and here. Because I think the premise of our philosophy and strategy is having a broad portfolio and the split between OE and aftermarket recognizes that when we produce our group results, there are pluses and minuses in each of the little sub-sectors. And trying to be held accountable for every various sub-sector gets quite difficult. It's guidance at the end of the day. Andrew Shilston lent him some advice when he. Next, I'll go right at the front, Gemma. Just here as we kind of edge our way backwards. Thank you. Andrew Gollan from Investec. A couple of questions. Firstly, on some of the divisional guidance you've given Marine and Energy. Firstly, in Marine, you talked and mentioned quite a lot of pricing pressure. We've got a few dynamics going on there in terms of growing aftermarket and the OE story that's happened over the last year or so. How do we think about that going forward? Because the margin has improved significantly. We've got clearly some new dynamics coming in. What should we think in terms of forecasting forward? Secondly, on Energy, similarly actually, you said investment in civil nuclear is one of the factors holding back the margin, but still the margins are very suboptimal there. What is the longer term trend? It should be up, but on what it's a long way down. So how far should we be thinking? Yeah, I think we spoke a little bit about Energy at the half year, and if I look at the various elements of that, as Mark has said, there's the five elements in the energy sector. The oil and gas, which is a good profitable business. Power generation, which needs to improve and is important in terms of proving equipment that is subsequently provided to the oil and gas. So there's a linkage there. Civil nuclear is a fledgling business. I think I've described an opportunity for us to grow. It's an area that we spend a lot of time on, and we're investing money in a variety of ways. And I'm confident that will be a successful business in the future. But as I've said to a number of you, it's one of the few businesses around that makes our civil aviation business look short cycle. So that will take some time to develop and mature. But I think we're in a very good position based on the capabilities and skills that we have, the relationships that we've built up over time with the prime contractors in that industry, and I'm sure that will be a profitable and successful business out into the future. I think the other two businesses, tidal and fuel cells, are the ones where we're giving some serious thought to. Again, I referred a little bit to this at the half year in terms of what is the business case, what are we doing, and what are we really good at. What I would say is, if I take the tidal business, we are really good at parts of that. It is a propeller with a turbine. Okay, we do that in marine, so we are good at that. What are we not so good at? Well, putting things on the seabed is not one of our core skills. Getting power off the seabed onto the land and then getting it to the grid is not something that Rolls does. How do we go about this for the future? We are wrestling that to the ground. As we are speaking here, there are people giving thought to that. To come back to your question, energy is going to improve over time, but we have got to wrestle some of those things to the ground in terms of what do we want to be in and where are we going with some elements of it. Then there is the civil business that is growing and developing, and what period of time does that take? Energy's performance is going to improve, but it will not be, as I said at the half year, something that we wave a magic wand at and it transforms over time. Whilst we may be frustrated by that financial performance, I have got to say, in the last three years it has been a profitable contributor, whereas in the previous four years it was a loss-making area. So it has already notched up a step. It needs, obviously, to improve in the future because it is a drag on the overall business. In terms of marine guidance, I am not going to get drawn into any more than we have said. Clearly, you are all aware of the marine environment, the various pressures there are on that, particularly on the very large merchant elements of that business, which we are not in, and the pricing pressure that has been exerted there. We see some of that in a variety of parts of the business. If you went back two or three years ago, people were concerned about getting equipment, not what price they paid. Now they are concerned about what price they pay as well as getting equipment. So the dynamics have changed a little bit in that industry, and that is the pressure that we and everybody else is seeing. That is why we are, like most other people, focusing very hard on our costs and how productive we are and how efficient we can be, which is one of the contributory factors as to how we managed to compensate for the OE demand in the second half of 2011. But the guidance is clear and laid out in the press release. Anything else? Okay. Just one more quick question, please. Can I take that microphone back, Mark Jevon? Well, on dividends, once you get the profit uplift from IAE, you have had a progressive policy for many years now. Do we expect that to be progressive still in line with earnings? Do we see a step-up as a result of that because of the new level of profitability of the group? It will undoubtedly be a topic of important conversation at the board when we get to that stage. Gordon Hunting of Fisk. A particular question for Colin Smith because he hasn't had any yet, poor chap. Now, much more to the point of various airlines not wanting to use three-shaft engines. They much prefer two as being safer. Does that mean you're expecting competition on the A350 XWB from either of the two two-shaft manufacturers? Well, as you rightly say, that is a question that's going to head towards Colin in terms of three-shaft and two-shaft. What I would say before I pass to Colin is, having got an exclusive position on the A350-1000 and having sold 1,100 engines on the other derivatives, we're in a particularly good position on that aircraft. And whilst the other engine manufacturers have the opportunity to come and compete with us, we're confident that we have a strong competitive position. But Colin, maybe you'd like to talk a little about threes and twos. Well, perhaps a misunderstanding. I don't see there's any fundamental difference in safety between three-shaft and two-shaft. They're both incredibly reliable machines from a fundamental concept point of view. And the safety across all the civil aerospace, all the manufacturers, is improving year on year. It's phenomenal how good, for instance, the in-flight shutdown rate is now on any of the big engines. It's something between 20 and 40 times better than any certification requirement at all. So from a safety point of view, Gordon, there's absolutely nothing to call wrong. Thank you. Who's the next one? Just look on this side, and we'll go over to the other side of the room. Hello. It's Ed Stacey from Espirito Santo. Just one question on the civil division and the margin uplift in 2012. In 2011, if we strip out the effect of the one-offs getting better and the FX improvement, your operational leverage sort of boost to margins was very little, which is as per your guidance for the year. But in 2012, you do have a sort of like-for-like margin improvement, it seems. Is there a sort of more favorable mix coming through or something? Mark, you want to? Yeah. I think it's first of all, higher volumes and a particular mix of units that we're selling in terms of the margins that we expect on them. And obviously continuing growth in aftermarket revenues. So again, even with those additional R&D headwinds, that's factored into our guidance. Thanks, Mark. I know Colin's delighted, and thanks to you, Gordon, for asking the question, but I know that Jim is getting concerned about not having a question. Maybe have it out here, because I know this is going to go towards Jim. Yeah. Two questions, actually. One is for Jim. Excellent. Thank you. Perhaps the question for Jim first, so he doesn't feel left out as well. Just around IAE, we've heard from John quite a lot about the logic behind selling the stake. From your perspective, given your role there, what's your view on Rolls-Royce's logic there, and what do you see as the future of IAE? A question perhaps more for Mark on the R&D side. Is the increase in R&D and CapEx, a lot of it is obviously manpower, but is it primarily coming through in civil or will it be across the business? What can I add? Jim, would you like to have a run at that? Well, thank you for including me. With respect to IAE, I have been on the IAE board for probably 10 or 11 years, so I have lived with this collaboration, which is probably one of the most successful collaborations that the industry has seen in the engine arena. I think one in which shareholders on both sides have benefited greatly. A great product, a great reputation in the marketplace. I think we start from a very good base. The difficulty came about when the Airbus company decided that it wanted to launch its new airplane, the Neo. We could not make a business case to launch a new engine for the Neo. Pratt & Whitney was in a different phase of development with respect to their new engine, and they felt they could. It put the partnership out of alignment, and it became increasingly difficult because your customer base had the previous style of engine, the V2500. On a go-forward basis with new airplanes coming aboard, they wanted to take advantage of the new Pratt & Whitney engine. It became very difficult, very hard to go in and renegotiate contracts with airlines that you had contracts going out into the future. It simply didn't work the way it had in the past. We all felt that the best way forward was for us to move out of the partnership at this time, take in the $1.5 billion, have the revenue stream going forward on Power-by-the-Hour, and also maintain our industrial position. Even more importantly, to make sure that the partnership could reform for the next narrow-body airplane. I think that there's great logic to it, and I will tell you that the partners, I think, feel very comfortable with this position. Mark, would you like to have a go? Yes. Your question in relation to R&D for 2012. Again, let's just recap what I said earlier on. We expect to see a modest increase in R&D spend, but quite a significant increase in the R&D P&L charge. Again, this just reflects the various components. I'll come onto a broad split of where we're spending the activity. Let's just look at where we are in the cycle. John just reminded me that I inadvertently referred to 2011 as opposed to 2012 with respect to Trent XWB, but the next large engine, which will be capitalized, will be the Trent XWB when we look to engine certification in quarter 4 2012. There's a lot lower levels of capitalization going on during 2012, which is one of the reasons the R&D P&L charge is rising as we expense more and we amortize what we've already capitalized. In relation to where are we spending it, the short answer is we spend it in all our businesses, but civil takes the lion's share. But there are growing activity in areas like civil and marine. Of course, again, when we talk about R&D at the broad level, you've got to remember there are three sub-components to that. There's research and technology, which I normally refer to as the science projects. There's R&D, which is the productionization of our engines and development of them. Then there's sustaining engineering, which is continual improvement throughout the life of them. All of those are being worked on, and at any point in time, the spend reflects where we are in the cycle and the P&L really reflects what we're capitalizing and what we're not capitalizing. Ben. Yep. Ben Fidler from Deutsche. A couple of questions. The first one just on FX. You talk about no transaction benefit in 2012. You have reasonable visibility, presumably, on the hedge rates based on the scale of the hedge book. As we look beyond 2012, should we expect to see at the current spot rate, would we expect to see any further transaction benefits, or should we think of those as having now pretty much played out for the business? Well, as you know from the press release, you've got a pretty good idea of the size of our hedge book. At the year-end, it was around about GBP 22 billion with an average rate of about 160. We have guided for 2012 a neutral impact from FX, and that's transactional FX we're really talking about. Obviously, we don't give guidance beyond that, but I don't think it takes a brain surgeon to realize when the average rate in our book is around 160, where you think there is a lot of potential uplift at the moment. Right. Thank you. The second question is, sorry to come back to this point on R&D, but whether you're able to give us any steer in any way as to the 4%-5% range you give, that's effectively up GBP 120 million delta between the top and the bottom of the range, which is about a 20% impact on civil profits based on the number you reported Yeah last year. Should we think top end, bottom end of the range looks more, it sounds like you're steering more towards, in the short term, the top end of the range. Would that be correct? Yeah, look, I think I've given you guidance, which is a modest increase in spend. I think as David referred to, I think the Rolls-Royce lexicon is relatively well-established out there, and a significant increase in the R&D charge. I'm not, I think, getting into any more detail than that at the moment. The real answer to your question is that Mark and Colin wrestle each other to the ground on this, and the outcome will be exactly who's wrestled who to the ground. Colin looks like he's got a bit of a weight advantage. No offense. I'll just sit quiet. One final question, just coming back to an answer to one you had earlier on defense. I mean, what you seem to be implying is we should think of defense as a broadly 17% margin division as being sustainable. My question is just scratching my head slightly. In the current defense environment, why we are now looking at a business that is structurally 300-400 basis points higher margin than it has ever been, and how sustainable that is? Again, if I refer back to what we said. We have given guidance for 2012. We have not said anything about the future. You shouldn't read into that the world comes to an end after 2012. You think back about the dynamics of what it is that we sell and how that works in practice. Again, I made a couple of comments in terms of the budget position. I am going to ask Jim just to comment a little bit in terms of the U.S., where we are in the U.S. budget, just to make sure that you are clear. When people talk about defense budget cuts, people shouldn't think that the defense budget is going from 100 to nothing overnight. In many cases, it is a reduction in the rate of increase rather than even a reduction in the rate of absolute amount. But Jim, maybe I could ask you to make a few comments about it as the U.S. is such an important area, and I think that that's- For 2012, we have great visibility with respect to defense budget. I think also it is important to recognize the area in which we play a significant role, which is transport. These are very, very important solid programs where there are some long-term commitments, multi-year contracts. The C-130J, the V-22 Osprey, in particular, are major components to this. The LiftFan system for the Joint Strike Fighter, again, a very important technology that only Rolls-Royce has. No other company has that technology. So I would ask you to just think about that. Moving back now to the defense budget process, we have to recognize that this is a very complicated year politically in the U.S. I think I have said that politely. Being impolite, we have a dysfunctional Congress, and we have an election year. This means that the clarity that we would like to have on a go-forward basis is not quite as good because nothing is going to happen until after the election. What I would say is that there has been, I think, a great deal of work done by the new Secretary of Defense, and I will tell you we are very impressed with the strategic thinking that has gone on because this is not simply a haircut. It is looking at what are the capabilities that the U.S. requires, and the budget is being tailored accordingly. Recognizing, again, the political issues, I think a quite good process of a slow reveal of what the budget is going to look like for 2013 is underway. The President will be sending his budget officially to the Congress next week. In advance of that, there have been some press conferences that have outlined the current thinking. If we take that in and look at it for Rolls-Royce, I would describe it as a couple of bruises, nothing major, some bruises. I don't think that anyone in this environment is immune from reductions. Again, we don't see a major hit. Now, I say we don't see that based on what we know today. You have to recognize that the process in the U.S. takes the President's requests, moves them to the Congress. The Congress will deal with them. A couple of the bruises that I mentioned may not come about because the Congress may reverse them. I think the important point is our bread-and-butter programs, the big programs, are intact. That's also true, I think you're probably thinking more on the aviation side, but you'll have to remember, we also have a naval business that is important in the U.S. The big programs there, the DDG 1000, the newest destroyer, those three ships are still in the budget as we know it today. The littoral combat ship, which is an important part of the go-forward U.S. Navy, those ships, in our judgment are going to be built. The Navy needs that capability. The other business that we have in the U.S. that's part of the Naval, it's something you don't see a lot of, but it's an important part, and that is in the U.S., we build all of the propellers for the surface combatants in the U.S. Navy, and we also have other products on ships as well. Again, our defense business is well-balanced, and I think it is well-placed, and I would also say to you that other companies would like to be positioned as we're positioned. This is not dropping off a cliff. Thank you. Thanks a lot, Jim, and thanks for clarifying, I suppose, the top-line environment. My question was, as much as anything, trying to get to the margin aspect. Got to get those microphones. We've been a sort of 12%-13% division for the last three, four years. We're suddenly now becoming a 16.5%, 17% division if my maths is broadly correct. We've given you the. My answer, I go back to my answer, which is we've given you the guidance for 2012, and that's where we're going to go. But the question really is what's driving that in 2012? And we've given you the answer in terms of- Yeah Jim's talked a little bit about it, Mark's talked about it, and I've talked about it, and we're going to stop there because we'll- Thank you very much disappear. We're going to start circling around again, but we have one new question just in the middle of the back, and then we'll come back to the front. Yes. Hi, good morning. Céline Fornaro, Bank of America, Merrill Lynch. One question, if I may, on the working capital for next year, I mean for 2012, sorry, on the guidance. Basically, as far as I understand, you've got an inventory buildup somewhat related to the new plants. How much of this inventory is under your control, or how much risk should we add on to that if Boeing fails to deliver more 787s this year than what they're currently planning? How much of this inventory is really under your control? Yeah, I think Mark, I think Mike, he would like to have a run at that. Well, strictly speaking, all of our inventory is under our control in the sense that we schedule it in a controlled manner. Just to talk about the process we follow, that may help. In all of our sectors, we run what we call a sales and operation review board, where we take in our contractual position, our long-term views, which we talk deeply with the airframers about in civil, and other primes about their production schedules, their progress, which customers we're going to win. And we put that into our sales schedule, which we then flow down into our supply chain at a piece part level using an ERP system. We actually know really every time we look at forward planning, we know in real detail down to part number and to contract over a period of more than 12 months, significantly more than 12 months, what inventory we have and where it is in our system. We have that inventory, whether it be for schedule variation, for smoothing or for buffering against risks, and we understand that in really great detail. Clearly, when we have a macro problem of the nature of past slippages on the 787 and the A380, that clearly can have a macro effect that is quite significant. But we have proven quite agile in recent years at being able to respond to those signals by staying close to the airframer and also making timely and appropriate decisions. You are quite right in what you said earlier that, a significant amount of that inventory is to do with new programs and new capability. If I just bring out two, we are actually bringing on board the Seletar facility in Singapore this year, which will double our output of final assembly and double our output of wide-chord fan blades. The other half being what we currently have in the U.K. Clearly, we have to go through a product proving process to make sure those facilities are the same in terms of capability as the U.K., and that has some inventory. Similarly, as I mentioned earlier, we will be building flight test engines for the A350 XWB flight test this year. Again, that is an inventory requirement. Both of which are fantastically good for the business, but are near-term absorbers of cash to later become tremendous generators of cash. We have great visibility. Strictly speaking, we are in control. Any macro issue that happens, we will be as agile as anybody in responding to it. But as we see the programs today, we see good progress, good control in our major airframers, and we work very closely with them. I am sorry, what about the U.S. plants? You did not really talk about these. Well, our U.S. plants, as you know, we have built a new plant in Crosspoint. It is ahead of our Singaporean plant, in the sense that we started producing first parts about a year ago, and that is now ramping up into volume. It is ahead of. We recently got into production in the LiftFan factory in Indianapolis, which is small but spectacular modern facility that really excites everybody who goes to see it. We have also put a lot of investment into our older plants in the U.S. to, whilst the outside shell looks older, what we have actually put into it, for example, in Mount Vernon, our energy plant, we have improved flow lines and we have actually improved the machinery inside the older plants. It is less visible. It is a CapEx investment, and it is, therefore, longer-term development. Then we have got plants elsewhere in the world. Including the U.K. Maybe if I could just add. Yeah, please, Jim. onto that. We are investing for the future. We are investing for growth, we are investing in technology, we are investing in people. That is true throughout our company, but also true in the U.S. We have just announced an investment in the U.S., in Mississippi, for another outdoor test facility. We are ready to make an announcement in Indianapolis about a new bit of work that is coming in that will require a small new facility. We are also looking at another project for our new Crosspoint facility in Virginia. Those investments are being made, and they are being made not just for product that is being made in America, but for product that is being made globally. I think that this is really an important point when you look at our 2012 year. It is an important year for investment. Again, it is not just plant, it is about technology, people. Thanks. Follow on from that. It is about the unit costs. I know in the past, Rolls used to guide about unit cost and how we should think about that from one year to another. Is there any comment, any color that we could have on 2012? Yes, let me deal with that for me, John. Again, stepping back, to use John's phrase, my life and my team's life is surrounded by one purpose, really, which is to make sure that not only do we deal with growth, but actually do it with improving productivity. Our aim is always to meet or beat escalation pressures with our productivity improvements and do that on a continuous basis. Everything we have talked about in terms of investments, our attitudes, people, plan, processes, all about making sure we drive productivity in everything we do faster than pressures that come on us from an escalation perspective. We have been successful in doing that. It comes out in the financial numbers, which have been mentioned today. We are basically not in a position to give one simple number because our range of our products are very diverse, from marine products to civil, to defense, to energy. They are quite diverse products. We have a lot of new products being introduced, going through learner processes, the ones I have just talked about. To actually give a number would actually be meaningless. The numbers best come out in the overall numbers, which we have given you in some detail, and the general improvements that we are making, which are on the productivity things we share with you at different times during the year and whenever we give an update. Ladies and gentlemen, we're almost out of time, so we'll have to go for two more questions, please. So two for me, please. Just coming back to civil aftermarket. Two sub-questions then. Time and materials at the half year, I think you talked about some of the trends in terms of slightly improving forward bookings and arisings. How is that panning out now? We've had six months down the line and looking ahead. Then secondly, back to the TCA conversion issue. For us, that's a new phenomenon. It's the first time we've heard that. How did that come about? Is it a strategic- Covered it in the Finance Director's. Is it a strategic change in what you're trying to do with your time and material business in terms of locking into long-term contracts? Just a bit of an explanation around what this means, notwithstanding the fact that you don't want to give any financial guidance or impact on- Mark, maybe you can talk to those and maybe I'll come back at the end. Your two- Can you scale it? Your two sub-questions. So first one, which really related to T&M activity during the year. I think it's fair to say that we're always pursuing time and material opportunities like many of the other players are out there. It's driven largely by the airlines themselves wanting to bring their aircraft and their engines in for overhaul. And of course, as we've seen growth in ASMs and more aircraft coming out of those that were parked, people looking to bring aircraft back into service will naturally start to drive up time and material activity. So the answer is yes, some of that 10% growth in aftermarket revenues also reflects more activity in time and materials from where we thought we were at the beginning of the year. In relation to your next question, I don't think it's a change in strategy at all. We have always been keen to sell the virtues of TotalCare and long-term service agreements. We think there is sound logic not just for ourselves, but also for our airlines. At the end of the day, it removes the lumpiness in terms of scheduling. It removes the issues around having to schedule because we take care of all that. Arguably, we sit at the top of the knowledge curve because at the end of the day, we have more data than anybody else. We know which shops are available, and we can utilize that to our advantage and scales of economy to help drive down the costs, and therefore share those benefits with our airline customers. That is part and parcel. What you see when we talk about 70% of our aftermarket now captured on some form of long-term service agreement, you will see that on the newer programs, it is probably closer to around 90%, but on the older programs, it may be around 50% or even lower on some of them. Of course, what airlines are doing, along with us trying to convince them of the sound economic logic for it, is trying to move them from T&M onto TotalCare. Of course, what you saw in part of last year is a number of airlines recognizing that outsourcing had those benefits, and that is what you are seeing. It will happen. It is difficult to forecast at what point. It is like all things, we will continue to market the virtues and benefits of TotalCare, and success will depend on where the airline is in its thinking, effectively. David Perry again. Two real quick ones, I hope. The tax rate was very low in 2011. Can you just give some color on 2012? Also, can you just your cash flow guidance, just to double-check, presumably that is before any dividend payment when you say flat cash flow over the year or broadly flat cash? Yeah. Let me take your first question first then. So tax. So underlying, I think it came out at about 22.7 versus 24.7 for 2010, I think. The two main components there really are some prior year adjustments, so release of provisions. And then the effect of joint venture profits, which is an accounting effect on the underlying effectively. I think if you strip out the joint venture effects, it gets to about 23.6 or .7. Simon can give you the exact numbers, but it's around there. In terms of our guidance, obviously, we always guide around our base cash flow, so that will have included our views on where we see post-tax pension payments and so on. No, sorry, just your tax rate for underlying earnings in 2012. Oh, for Does it go from- Well, I think in the press release, we are guiding around 24%. Oh, sorry, I did not see that. Okay. Cash flow, you said broadly flat cash in 2012. Is that after paying the dividend? Yes. Yeah. Okay. Thank you. Thank you very much for joining us this morning. If I might just make a couple of comments. I think the good numbers, the solid numbers that you have seen from the company in 2011 really reflect the application of this consistent strategy that John Rose and Ralph Robins before him have applied over many, many years and will continue to apply in the future. I would say that as the management and the people that work for Rolls, we are confident about the future. But, and this is very important, not complacent. As Jim has said and I have said, and a number of others have said, we are and we will continue to invest in future growth. Thanks very much for coming today. Thank you.