Rolls-Royce Holdings plc (LON:RR)

Earnings Call: H1 2019

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Aug 6, 2019

Okay. So thank you for joining us here at the London Stock Exchange. And for those of you joining online, my name is Jennifer Ramsey, and I lead the Investor Relations team at Rolls Royce. It's my pleasure to welcome you to the twenty nineteen Half Year Results. The agenda for today's presentation is that Warren will start with a presentation to talk around his perspectives of the business and the focus we've made in the first half and Stephen Will, our Chief Financial Officer, will talk about our financial results. And then Warren will round up with his view for the year ahead. Our presentation today is expected to take around fifty minutes, and then we'll have time for Q and A, and that will be both from the audience and online, if you can feed those through online. And if you wish to ask a question, you can do that through the webcast services if you're online. We'll endeavor to answer those questions along with those in the room. Finally, can I ask you to switch off your mobile phones so that we make sure there's no interference? And we're not expecting any emergencies today. So if an alarm does go off, please make an orderly exit. And with that, I'll hand over to Warren. Thank you. Good. Thanks very much, Jennifer. Good morning, everybody. Thank you all for coming out and joining us. I was just sort of looking at the number of chairs in the room and thinking that either something must be going on or it's the middle of summer. So for those of you who made it, thank you very much. I'll do a little overview sort of from a group perspective and then a summary by business. So starting off with a slide with which you're familiar, sort of key numbers. And we summarized this whole sort of set of results really when we were talking about it as further progress. And I think you can see some progress in these numbers. And as we get into more detail, you'll see progress on both financial performance from an operational point of view and from a strategic point of view. And I hope we can cover all that in this presentation. But anyway, to start with, we were pleased to see a good uptick in underlying revenue and a growth in operating profit driven by our Civil Aerospace business approaching breakeven and good strong growth in Power Systems as well. And obviously, that drove an increase in underlying profit before tax. Core free cash flow was an outflow of approaching £400,000,000 That is normal seasonality, and Stephen will talk about the drivers of that. But there's quite a bit of inventory build in that, which in absolute terms was a similar level to the inventory build that we saw in the first half of last year. The dividend per share, constant for now. And obviously, that's a matter for our Board to discuss in due course. But for the time being, that's constant. Underlying EPS looks like a very disappointing number. There is an associated change in a tax charge that sits behind that, and I'm sure we can cover that in the detail. Looking at highlights from all around the business. Civil Aerospace, obviously 50% of our business, good engine flying hour growth, about 8% engine flying hour growth. And we were very pleased to see the OE loss reduced for our large engines. I'm pleased to see good progress on the Trent 1,000 issues, and I'll talk about that in a little more detail in a short while. And around the turn of the year, there were some serious questions around Trent 7,000, and that's the engine that powers the A330neo. And it's good to see a big turnaround in Trent 7,000 shipments. And so we saw a good number of those being delivered in the first half of the year. Power Systems, very healthy progress in the first half. Good bookings. Book to bill ratio 1.1. We're seeing continued steady progress on connectivity in the installed base, which is driving a shift towards more long term service agreements, that's sort of data connectivity of the engines that are out there driving that shift. But the order is really being driven by power gen type applications and a move to more systems away from pure, standalone engines. Defense, again, a good first half, very strong order intake, booked a bill of 1.5. And along with that order intake came came some healthy customer deposits. That is part of the business model that sits behind defense where we we get paid early. So it's that's the sort of financial dynamics of that business. So that was good to see some of those payments coming through. It was also good to see some of the efficiency improvements in our U. S. Operations coming through to offset some of the lower margin activities that we saw elsewhere in the business. And again, I'll talk about that a bit more later. In ITP, I think good revenue growth. Clearly, it's exposed to civil aerospace, exposed to our civil aerospace business and others, and we're seeing growth right across the piece there. Lower profit, this is phasing of different programs. And so actually, what's driven the lower profit is more of an engine mix issue, and we'll see that mix issue change with phasing in the second half of the year. More generally across the group, our restructuring program, in line with our plans set out at the Capital Markets Day in June 2018. And the summary on financial, I think we can see good revenue growth. We are comfortable with the free cash flow phasing, its typical seasonality, and if I look to the balance sheet, an improvement in net cash position. And so later on, we'll discuss why we remain comfortable with the £700,000,000 free cash flow expectation for the year as a whole. Now I'm going to step through three slides with slightly different perspectives. First, from a shareholder perspective, then I'll look to a sort of external perspective, and then I'll look at an employee perspective. So as far as an ownership sort of perspective is concerned, this is a reminder of the goals that we set out at our Capital Markets Day just over a year ago. And those goals have not changed one bit, and we remain absolutely on track to deliver on those goals. So free cash flow ambition, going out beyond 2019 to at least £1,000,000,000 in 2020 and a pound per share of free cash flow. As a midterm ambition, we are comfortable with those goals. We talked last year about disciplined capital allocation, and we're comfortable with how we're doing that at the moment. And in terms of strengthening the balance sheet, we completed, some disposals this year, and that was good to see. I think I'd remind people at this stage, it's not just about disposals. So you saw some bolt on acquisition activity that's happening as well, and that's helping us accelerate some of our strategic initiatives. Set out a type to that capital allocation. We set out some goals in terms of quality of cash return. And again, we're comfortable that we're still on track to return that measure through the cycle. And as far as payment to shareholders is concerned, then it's not really a 2019 issue for us. As I said, that's constant for the time being, but we're absolutely confident that we can start returning to some sensible levels sometime very soon. But the basic point is what we set out at the Capital Markets Day a year ago, we're comfortable with those goals. If I switch now to more of an external perspective, one thing we've noticed over the last six months is a a little bit of a aviation is being set up as the villain of the peace as far as environmental damage is concerned. Well, yes, aviation is built on setting fire to hydrocarbons, and we've been talking for some time about the fact that, we, along with a whole load of other sectors, need to wean ourselves off that and wean ourselves off it quite quickly. But from a business point of view, you know, we would contend, that it's up to us and, and our customers and others in the, in the ecosystem to lead rather than react to public opinion. And so, you know, we are about creating a more sustainable future. But I think it's important as a business that we remember we have to generate the returns now in order to fund the R and D that's required, to make those changes. So if I look at our products, well, our products do probably drive they drive the, the the carbon footprint. They they are about, converting stored energy into useful power, and today that stored energy is in the form of hydrocarbon fuels. But our engines continue to get more efficient. Most of our r and d is spent on making those engines more efficient. Some portion of our r and d is around new technologies, particularly around electrification, to address this issue. Internally, from an operational point of view, we've set ourselves goal to be zero, carbon except for, that that we use to test our gas turbines by 2030, and we're comfortable with that goal. And from a people point of view within the business, we think it's important to create an environment and a culture, for, the people of the next several decades, and so we're setting about doing that. So talking of people and internally, and the changes that we have to make to our business internally, the key objective is really not in the key objectives box. It's here on the left hand side of the slide. The key objective is basically to create a more sustainable, but importantly, competitive business. And in order to do that, you know, we are setting about reducing our central costs. We are setting about making sure that decisions are made closer to the customers within businesses. And, I'm pleased with the progress that we're making on those objectives. If I quantify some of that in terms of run rate cost savings from our restructure program, we are saying with our release this morning, 134,000,000, run rate, cost reduction from the restructure program so far. Obviously, we set out last year £400,000,000 annualized run rate by the 2020. And at £134,000,000 to date, we believe we are actually on track. You'll see more in the second half as we flipping down to the bottom of the slide, as we make more progress on simplification. I've talked a little bit about the balance sheet and simplifying the portfolio. But internally, we are concentrating on introducing new systems, new processes. These are new systems dealing with people and talent management, finance and how we handle our finances, engineering, how we design our products, product change processes, how we ensure the integrity and safety of our products, when we make design changes to reduce costs, purchasing and so on and so on. And these are not incremental tweaks to our systems and processes. This is where we're taking out as much as 50% of the steps in processes affecting thousands of people around the group. So we've been putting the building blocks in place to make many of those changes over the last twelve months, and we're actually initiating using some of those some of those new processes, right now in q three. And that will translate into further headcount reduction in the second half of this year. And so we expect to be at about 2,700 headcount reduction by the end of this year. So now a little bit of a business update looking around, all the businesses. I'll start with Civil Aerospace, obviously our largest business. Pleased to see flying hour growth at 8%. That's ahead of market traffic growth. That's really because, of course, our fleet is growing and it was pleasing to see that being driven by Trent one thousand and XWB. XWB has also been a key driver in the reduction of the OE loss that we make, the loss that we make when we sell each engine. So on XWB, that came down by a third over the last six months, and that contributed to an average reduction year on year of, naught £200,000 or 13%, which we're quite pleased with. Trent seven thousand, there were a few questions at the turn of the year around Trent seven thousand and, the rate at which we were able to deliver these engines. That rate improved in the first quarter of the year and sustained in the second quarter of the year. And so by the halfway through the year, we've delivered over 50 of these engines, and we're comfortable that that is now in production. XWB, I mentioned, you know, grace is a driver for engine flying hour growth and, unit cost reduction. If you just look at the stats for that particular engine now, it accounts for 11% of our fleet. So the reason we're so keen on things like the the average cost of, of an XWB and the the loss that we won't be making or will actually be breakeven by the 2020 on on XWB is because it is the largest volume engine, coming out of Rolls Royce over the next several years. So far that engine is with, is operating very reliably with 27 airlines around the world, and and it's clocking up plenty of flying hours. Business aviation. We shouldn't forget business aviation. There's a lot of emphasis on large engines when we talk about our civil aerospace business. Twelve months ago, I stood here and surprised everybody with, with the launch of the Pearl family and the Pearl 15. We've now completed all the necessary certification around the Pearl 15 so that that will enter service between sometime between now and the end of the year. And it's it's up to the airframe and not us anymore because we've we've delivered everything we need to deliver, in terms of a production standard engine. And that's giving us a lot of confidence around the Pearl family and the opportunity that that gives us to, gain further market share in the business aviation sector. I can't not talk about, about Trent one thousand. So, you know, let me start by saying this is still causing a number of our customers significant disruption. And our main focus when we talk about Trent one thousand, obviously, report it to the investor community, but our main focus is our customers because these are the people who bet the farm on choosing Rolls Royce engines for their Dreamliners, and we are causing some disruption. The good news is we're causing an awful lot less disruption than we were causing twelve months ago. The number of aircraft on the ground, today is, is about half of what it was, a year ago, which is very encouraging. And that's happened because we have got on with redesigning blades. We're now in the PAC C version. You can see PAC C accounts for approximately 50% of the Trent one thousand fleet. Every time we're replacing complex compressor blades on PAC Cs, we're replacing with certified new blades, and so that engine flies off, and it's healthy. And that's why I say that, the the health of the Trent one thousand fleet is steadily improving. It's a steady improvement because a lot of those engines are flying around absolutely fine, and they won't need replacing for some time. So it is gonna take us a while to roll the new design into all of the fleet. There's no need to do that immediately. The other versions of the engine, the redesigns of the compressor blades are underway, and we expect the 10 version to be ready for installation before the end of this year with pack Bs following soon after that. However, earlier this year, switching to the far right hand side of the slide now, we did find that, the reduced life expectancy of, the high pressure turbines on the 10 version of the Trent 1,000, turned out to be even more reduced than we expected it to be. So the life limit of a thousand cycles, let's be clear, is completely unacceptable for, for a typical customer. And so we were redesigning the turbine blades. However, we found that some of these blades come off, you know, a couple 100 cycles before then, and and need replacing sooner. So even more unacceptable, for our customers. We've obviously spent quite a lot of time and effort investigating this. We anticipate that this will affect around a third of our 10 fleet. And you can see the portion of the overall fleet, which is 10. And so you can see what a third of that would look like. And in order to deal with that problem, at the moment, we're redesigning the blades. We're also managing, those affected, airplanes. That is putting an additional load on our repair and overhaul facilities. We've already grown our repair and overhaul facilities, but this additional load, is extending the turnaround times in those shops. And that means that for the Pac Bs and Pac Cs in the middle of the slide there, we are going to take a little bit longer, to return those fleets to a position of single digit aircraft on ground. It is possible we'll get there for the end of the year, but it's also very possible that the polluting effect of of the 10 will cause that to delay a bit longer. And that unfortunately is where we are. I'm still pleased with the progress we're making on managing and fixing all these issues, But the reality is that we've still got a lot of hard work to do before it's out of the way. So that's Trent one thousand. That's Civil Aerospace. Moving to Power Systems. Power systems, this is a picture of a data center because quite a lot of our power systems products, go into backup power supplies, for a data center. I was very keen to have a data center picture that looked unambiguously like a data center rather than a factory, so you get the inside view, not the outside view. The reason I was keen on that is because this is a this is a sector that if if we were actually playing in it, is growing at a compound annual growth rate of 25% or so per annum. So that fuels a huge demand for, backup power, and that's why we're seeing such a lot of backup power, demand, in this sector, for our power systems. That's helped drive a very healthy order intake. And, and additionally, the the regional penetration of of these products is is is small in some parts of the world, and we see a fantastic opportunity to grow our market share in some of those areas. Our business here is much more resilient than that of some of our competitors, which is whose businesses are are more narrowly focused on certain sectors. We have a very broad spread of applications in our Power Systems business, and that makes it much more resilient, than some of our competitors. That regional penetration did contribute to some of inventory build, by the way, and I think Stephen will talk about that in a few moments. I'm pleased to see the operating profit performance as well. And if I look forward towards the right hand side of the slide and look towards the future, we see a continuous evolution in the markets and applications for our power systems business. And we're very excited by microgrids, where our products are enabling the uptake of renewable power, and renewable power technologies. And microgrids generally, I had a picture of a train at the last presentation, that's microgrid that hybrid trains, microgrid that goes along a railway track. We're seeing quite a lot of stationary applications, now in renewable in renewable power, and we've established a joint venture activity or a partnership activity, with ABB to accelerate that. Defense. Defense really characterized by, strong order intake and associated customer deposits that's coming with that. I talked about, efficiency and, in the modernization box there. Our facility in Indianapolis, we embarked on a modernization program a few years ago. We're seeing that come through now. We're starting to actually produce, in the new facilities. We're busy demolishing some of the older facilities. And that extra efficiency is enhancing, the profitability of those products, which is helping to offset some of the profitability headlines headwinds rather we're seeing in other parts of the business. It's been a healthy period for sales on the F-thirty five, and it's been a healthy period for future products and future opportunities as well, both a couple there in The U. K, Tempest and the hypersonics program announced by the MOD a little while back, but also elsewhere around the world. And finally, on ITP Aero, good to see the revenue growth there. As I say, heavily exposed to the civil aerospace sector generally, about half the business being Rolls Royce. So we know jolly well the growth that ITP is exposed to there. There was a temporary product mix effect, which we will see unwound. And, we're actually investing in that business and continuing to grow it, investment in new facilities. As far as new technology is concerned, we're collaborating with the folks of ITP, around some of our new technologies in ultra fan. With that, I'm going to hand over to Stephen, and he's going to talk through, the results in a bit more numerical detail. Thank you. Okay. Good morning, everybody. Thank you, Warren. So our results for the first half. First of all, a reminder of our reporting format, our core business, Civil Aerospace, Power Systems and Defense and ITP Aero, that's our core business and firmly cementing ITP in there as a core business for us. Our half year results, pretty much as we expected six months in, good revenue growth across the group, 7% core business underlying growth and good profit growth as well, growing to $2.00 £3,000,000 of operating profit. We also see the typically seasonal first half cash outflow. If you look back over the last sort of five, ten years, you'll see this in Rolls Royce. We build in the first half of the year. We deliver in the second half of the year, so it's pretty typical seasonality. And I'll go into the drivers of the free cash flow in a little while. Looking at the income statement through a slightly different lens, broken down into its parts. There's the revenue growth again. Gross margin improving somewhat, the gross margin percentage. Actually I'm quite pleasing when you consider that we highlighted the Civil Aerospace drag on gross margin in the 2019 due to the mix of shop visits, I'll come to that point shortly. Commercial and admin costs, I'll talk about this probably the one more disappointing number in our results today. We want to make more progress there. We expect to in the second half and even more progress in 2020. R and D costs are up slightly, but at cash cost, they come down because we're capitalizing less R and D than we did previously, just to explain that number. There's the profit growth. The financing costs, that includes the first time inclusion of the costs attached to the IFRS 16 inclusion of the capitalized assets, which come into our accounts for the first time as from January. And there's the cash flow number down at the bottom there and cash flow per share. So looking at the on our revenue streams and the mix of revenue streams, all revenue streams growing nicely. I think probably what's most encouraging, LTSA service revenue, high margin business, growing very well, 14%, organic change of 13% revenue growth. Service revenue is still growing nicely as well. A lot of this is the time and material type of revenue in Civil Aerospace on some of our older legacy engines, but OE revenue is growing at 4% around deliveries in Power Systems and Civil Aerospace. And looking at the mix of our revenues, we now have 54% of our revenues as service revenues, and this is going be a growing proportion of our revenue base as well. So higher margin and growing proportion of our revenue mix over the next five years. So the progress on our key levers. Now these are the key levers that we called out at our Capital Markets Day, pretty much this time last year. And we highlighted three core drivers that between them would contribute £1,750,000,000 of incremental cash flow to Rolls Royce in the midterm. Those three core drivers are, first of all, reducing the loss on the engines on the unit loss on each engine that we sell in Civil Aerospace, wide body engine deficit reduction secondly, the improved aftermarket cash margin, the receipts that we collect from our airlines in advance of the shop visits and the margin that when you compare the costs the receipts against the costs, and I'll show that in a second. And then bending the fixed cost curve, bringing down the proportion of our revenues that we put towards R and D, CapEx and commercial and admin costs. Progress achieved against those targets on each of those. I'm going to go through the detail of them, but in short, we've seen a £50,000,000 benefit in the half on the OE deficit reduction. We've seen a further £100,000,000 benefit in the improved aftermarket cash margin, and we continue to bring down the proportion of costs that we're applying to R and D CapEx and commercial and admin costs. So a bit more detail on each of those. First of all, so £200,000 improvement per engine, that's half year on half year, that's 1,500,000,000.0 to £1,300,000,000 half year versus half year loss per engine. Over two fifty engines, that gives you your £50,000,000 benefit in the half year. And you can see the wide body deliveries, two fifty seven delivered. We've put 14 in there. That's made up of two thirty nine installed and 18 spare engines, one spare engine lower than the first half of last year. And I'll come back to that 18 number when we talk about the second half and what's anticipated there for spare engines. But we've also highlighted 14 engines here that have been shipped. They're sitting on the assembly line of the airframers. So that's part of our inventory build is inventory that's just waiting for ready to be invoiced. We've got a further 36 completed engines in inventory, so 50 in total. At the end of the year, we'll be closer to 15. So I'll come back to that number shortly when I explain the inventory build. Looking at the top right, a very nice and successful transition to the Trent 7,000. So just comparing first half last year with first half this year, we invoiced 41 Trent 700s, pretty much coming to the end of its OE life. But starting its OE life, the Trent 7000s, 61 sorry, 54 Trent 7000s, just Trent and just seven Trent 700s. So a very successful transition to that new engine. Bottom left there, engine sales volumes. You can see how the mix is changing. These big four engines are going to dominate our OE production in civil aerospace over the next ten years, and which should make for a, I would hope, better coordinated supply chain and assembly line in civil aerospace as well and the benefits that will come from that. And there on the bottom right is the improvement that we've made over the various halves on the wide body average loss per engine. The aftermarket cash margin, the biggest single driver of our cash flow growth in the midterm is going to be the aftermarket cash margin. Remember that £750,000,000 aggregate improvement compared with 2017. In the half, we saw a £100,000,000 improvement half year versus half year. And what this chart does is highlight the income that comes in at the top half of this chart and down the bottom here are the costs. So the income is driven by the size of the installed base, the flying hours of that installed base generates, 6,900,000.0 at engine flying hours this time last year, 7,500,000.0 in the first half of this year. That's an 8% growth. We're pleased with that growth, and that comes on the back of, if you recall, the 20% growth in the first half last year. So 20 and then 8%, that's two periods of good growth, driven by the installed base, the size of the installed base, but also the increased utilization of our engines as well-being newer engines. That's an important factor in this one. And then down below, what's the cost side of the equation? It's the cash costs, an important difference here. This is the cash costs of the shop visits that take place during the period. So in the first half last year, we had 137 major refurbs and 141, pretty much the same number. These are the scheduled shop visits that take place. The check and repair, though, a very different dynamic, about 20% growth in check and repair visits, shorter visits often at customer request and a big growth there in that. And that's driving the 18% growth that we're seeing in the long term service agreement revenues in Civil Aerospace. That's the driver of that growth, not the engine flying out itself. An important point on this one, we recognize the revenue and the profit in the aftermarket when the shop visit takes place. We're collecting cash all the time. We recognize the revenue and the profit only when the service takes place. That's why the volume of shop visits is an important dynamic. One thing one more thing to say as well about this, gross margin will be highly dependent period on period by the mix of shop visits that take place in the reporting period. In the 141 shop visits in the first half of this year, we had a lot more Trent 901,000 visits than we had say 700 visits in the mix this time last year. 700 higher margin business, 1,900 less good and that explains the gross margin impact that we called out, the potential negative gross margin in the aftermarket cash margin. So GBP 100,000,000 improvement in the underlying cash margin. Typically, we're expecting anywhere between sort of GBP 150,000,000 to GBP 200,000,000 per annum, so very much on track for the overall improvement in the aftermarket cash margin. The third driver, bending the fixed cost curve. Core cash R and D at 6% of sales. Important to note here that we are coming out of investment cycle. We've brought to the market seven new engines, Civil Aerospace, over the last ten years. There's been a 70% increase in our R and D, looking at the bottom right hand corner there in R and D, since 2010. So the six percent midterm ambition is very much in line with industry peers. If you look around, that's pretty much the industry standard, that 66% there. Core CapEx as a percentage of sales, we've built capacity across our, particularly OE line over the last few years to accommodate that ramp up in OE deliveries. We expect it and aspire to a midterm ambition of 4% of sales. We're already in this year bringing down our CapEx by about GBP 75,000,000. R and D, I should have mentioned, is coming down by GBP 100,000,000 this year. That's the guidance that we've given. What you will see though in capital expenditure, you'll see a change in mix in CapEx over the next few years as we invest more in our MRO supply chain to accommodate that growing service business. That's only what you would expect. C and A cost as a percentage of sales, I think this is where we would like to see more progress in the second half and certainly into 2020. And then finally, the I just talk on the right hand side there about R and D and CapEx. An important point as well is that the R and D cash cost reduction is largely driven by headcount reduction. The 1,300 heads that left the company last year as part of our restructuring, two thirds of that were in engineering. So you would expect to see most of the benefits from restructuring that was carried out last year in our R and D line rather than the C and A line. So and I should call out as well that what you will see over the next few years is R and D and Defense rising somewhat for some exciting initiatives that we have in there, largely around sorry, and largely around electrification, there's a growing investment there as well, which Warren talked about as part of his presentation. So the progress on restructuring. The top part of this chart shows where we are year on for each reporting period on the gross headcount reduction, the net headcount reduction and then the cumulative at the end of the period. So at the 2018, we had a net headcount reduction of 1,300 heads, gross reduction of 2,000. The first half, five forty gross headcount reduction, net 300, therefore at this stage, we're 1,600 heads into our 4,600 headcount reduction. We have had some questions as to can't you move at a faster pace. What we are addressing at Rolls Royce is the underinvestment in technology, systems and process in Rolls Royce over many years. This investment has gone into, as one might imagine, gas turbine engines. We were addressing that. So therefore, it's not so easy to take headcount out in the absence of that investment, which we're now putting back in to allow for the headcount reductions to take place. During 2019, we will, notwithstanding that comment, see a further net headcount reduction of 1,400, taking us to a cumulative net headcount reduction of 2,700. And then in by 2020, delivering the full 4,600 headcount reduction. Table down at the bottom half of this table there shows the cash cost for each period and also the P and L charge as well and highlighting once again the run rate savings at the period end of GBP 134,000,000 that Warren called out. Summary funds flow, really important slide. What we do with this table is we reconcile our underlying operating profit, pounds $2.00 3,000,000 that you'll recognize from those earlier slides with the trading cash flow, and subsequently the group free cash flow that we're reporting today. This is not the reported profits, which of course is measured on different basis. We have adjustments in between. We have ForEx and so on. So this is the underlying operating profit that you saw in those previous slides. Okay. So let's go through this. There are five key drivers of the free cash flow outflow of £391,000,000 compared to the operating profit of $2.00 £3,000,000 First of all, we do have higher profit, pounds 62,000,000. Inventory build, you'll see here inventory is £433,000,000 higher than it was at the start of the year, not dissimilar though from the build that we saw to Warren's earlier comment in the first half of last year. The Civil Aerospace net LCSA balance change, this represents the deferred revenue, the cash that we've received from our customers that were not trading through the profit and loss account in the period. I've got a table that shows that in a second. The movement on provisions sorry, I should say the change in net receivable payable, $391,000,000, that's almost entirely driven by the customer deposits that we saw in Defence that Warren mentioned, around March attached to those customer deposits in defense, largely around two Ministry of Defense contracts and one Middle Eastern contract. So very good order wins there and the deposits that flowed with them. The movement on provisions of GBP $271,000,000, that's almost entirely made up of the Trent 1,000 cash costs that we incurred in the first half of the year. Net interest paid and received, not much to talk about there, getting us down to our trading cash flows. Let me just go through those key items, the five key drivers, the profit, the inventory build, customer deposits, the further growth in the receipts and the Trent 1,000 costs. So the key drivers of the cash flow performance, underlying profit. Underlying profit across the group, clearly, for the second half of the year, we're going to expect to see further improvement. If we're going to deliver our operating profit guidance of £700,000,000 £500,000,000 of underlying operating profit expected in the second half of the year. Inventory down £433,000,000 that reflects the typical seasonality and planned inventory build in Civil Aerospace and Power Systems. I've got a chart in a second that shows that detail. We expect to see in the second half of the year at least a £500,000,000 unwind in the second half. You'll recall that when we gave guidance for our 2019 cash flow, we did indicate that it would be an inventory upside or wind down from the opening position at the start of twenty nineteen. So clearly, given that sort of GBP $453,000,000 increase, there's a GBP 500,000,000 plus improvements expected in inventory in the second half of the year. Receivables and payables, the inflow largely due to those customer deposits and advances of around GBP 300,000,000 driven by those recent order wins in defense that I mentioned, broadly neutral on trade receivables otherwise, and growth is offset by better overdue debt collection. And I have talked about this before. There's there's a lot that we can do on good old fashioned working capital management of bringing in our aged debt better than we have done in the past. There's still lots of opportunity there. Underlying increase in the deferred engine flying hour revenue, 120,000,000. This is the contribution from the higher invoiced engine flying hours in excess of the revenue that we've recognized as our installed base grows. We recognize the revenue when the shop visit takes place. We collect the cash all the time, but only the revenue when the shop visit takes place. I've got a chart that shows this. It is lower year over year by £175,000,000 that's primarily due to the absence of a material aftermarket deposits that we saw in the first half last year. We had one big customer that converted onto a Total Care arrangement, there was a buying fee attached to that, that explains almost all of that GBP 175,000,000. Provision utilization, the GBP $271,000,000, that reflects the utilization of the Trent 1,000 exceptional provision. Total in service cash costs were GBP $219,000,000. You can see the vast majority of that GBP $271,000,000. In the first half, it's worth highlighting the costs were not covered by provision. We didn't have a provision then. So those costs in the first half of the year of just over £100,000,000 will have flowed through the income statement or the LTC balance, either of those two. The remainder due to increased utilization of other provisions that we have around the group. So inventory, where does the build come from and how does it unwind? That's what this chart does. And I'll try not to spend too long on here. There's a lot of detail in here, but in very simple terms, it's across the two businesses of power systems and defense. So in power systems, there's been a build of buffer stock, in India. We're moving the Series 1,600 engine production from Friedrichshafen to Pune in India. We've got a joint venture with Force Motors based down in the South, West Of India. And they have partnered they're a partner of Mercedes, for example, a key partner of Mercedes. That comes online in the second half of the year. We've built a buffer stock for that particular initiative to in anticipation of that move to India in the second half. We've also built inventory for China. We're anticipating strong China sales growth in the second half. This inventory is built and in the supply chain, on the oceans, on its way to China or into China, going through the supply chain, waiting to be invoiced in the second half, very good visibility around that inventory. Warren talks about, building PowerGen system solutions rather than move changing our mix from loose engines towards systems solutions. That has a longer lead time for the build of those systems, and that's part of the inventory build as well. And again, that will flow through in the second half. There have been one or two project delays, particularly a large project in Chile, mostly customer caused. And those projects, we're confident around those being completed in the second half and invoicing them. And then finally, there were some earlier parts purchased in Power Systems to smooth the second half production as well, which will wind down during Q3 and Q4. So good visibility of how the inventories got built, but also very good visibility of how it unwinds in the second half. Civil Aerospace, inventory build for what we're anticipating to be good delivery in the second half and good build in the second half, including 14 engines are currently already on the airframer assembly line. Those will unwind, of course, in the second half. And there's therefore going to be a reduction of finished goods held in inventory right now. Right now in inventory, we have 50 finished goods, 14 of which are on the assembly line. At the end of the year, we're looking our typical end of year run rate is about 15%, so 50% down to 15% over the course of the year. That's again a key driver of the reduction. So there's a very clear pathway to reducing the inventory in the second half of the year. The long term contract creditor. An important point to think about the long term creditor. This is all about revenue. It's not margin, it's not costs, it's revenue. It's the buildup of the revenue that we collect, the cash that we collect, I should say, as our engines fly and the flying hours generate the cash from our customers. We debit the cash and we credit the balance. We started with £4,500,000,000 on the balance sheet. We collect more cash as the half progresses, 1,700,000,000.0 of cash collected. That's a function of the number of flying hours and the yield per flying hour. And then off, we deduct from the creditor the revenue that we attach to, a shop visit when it takes place. So what we do under IFRS 15, we look at the stage of completion of the contract based on the cost that we've incurred and the cost to go. We know therefore what cost of progress that we've made on the contract, and we recognize the revenue that we then need to record in respect of that particular shop visit that's taken place. And we deduct therefore the revenue that moves then into the profit and loss account. We debit this one and the credit goes into the P and L account. There's an FX adjustment of £150,000,000 and what this does is accommodate for the fact that you have a balance sheet here at a certain spot rate, you have a balance sheet over there at a certain spot rate and in between, you have cash flows at our achieved rate. So we're accommodating and triangulating normalizing all of that and there's an equal and opposite GBP 150,000,000 that would otherwise be in the other line in the summary funds flow that we've taken. We've netted those two off for the ease of presentation. So an important point, this is deferred revenue, reflects the difference between invoice flying hour receipts and the P and L revenues traded. This is a piece of work that we did in April, May, earlier this year following all the various calls that we had on this particular item and how it worked. But hopefully, this simplifies it. So looking at our balance sheet. We are well funded. We've got liquidity of GBP 6,700,000,000.0. You can see we've got net cash on the balance sheet at the half year of GBP 4,200,000,000.0, debt of GBP 6.2 that net position of GBP 1,900,000,000.0. We've had a group free cash outflow of $429,000,000, but we have got the proceeds from Commercial Marine, net proceeds of GBP $451,000,000. We also completed the disposal of power developments, and that gave us £29,000,000 We've got no material maturities coming up now until October 2020, and we remain focused on our ambition to return to a single A rating. The drivers of the £42,000,000 higher financing cost, I highlighted that earlier on, it's the inclusion of IFRS 16 and those capitalized assets. Our capital allocation priorities remain unchanged. A strong balance sheet and improving our credit rating, somebody just talked about earlier. Funding organic investments, Warren talked much about this to drive growth and technology leadership, particularly in the current environment of the airline industry and coming under close scrutiny with environmental concerns. Payment to shareholders, increasing our dividend as free cash flow grows, an important ambition for us, and Warren alluded to that earlier on. M and A will be disciplined and selective. I think it's fair to say that the focus right now in Rolls Royce is driving operational improvement of our existing business rather than looking at M and A priorities. We're committed to restoring our shareholder payments to an appropriate level over time. Free cash flow will be the key driver of growth and best indicators when the time to do that. And we view it in the context of overall capital allocation priorities. Business Unit Review, just running through our businesses one by one reasonably quickly. Civil Aerospace, organic revenue growth of 11%, good growth. And you can see that strong services growth there of 18% that I mentioned earlier, but also strong services growth in Time and Materials growing at 17%, still growing very, very nicely. Gross margin, gross margin improvements, notwithstanding that mix of shop visits that I alluded to earlier, and you can see that the progress we've made on the operating loss. Civil, very much moving towards profitability. We gave guidance at closer to breakeven. You never know, with a fair wind, we might even see profitability in the second half and perhaps even on a full year basis, but we shall see. Lots to do still. The drivers highlighted down the bottom there, anything else that I haven't called off. Gross profit, the margin, of course, is improved by the OE losses. And what else? I've talked around those. The operating loss improvement, perhaps not as great as one might have thought. The R and D charge is higher, and the C and A cost increase is impacted by the absence of prior year credits that was in the 2018 number. A little bit more detail, OE revenue growth, good OE growth of 6%, strong growth in business jets as well. These are offset by a material decline in the V2500, which is now pretty much a service revenue business for us. Services revenue growing by 18%, that 20% growth in large engine shop visits that we called out earlier. Business jets, again, 29% growth led by, again, the volume of shop visits, but also some positive catch up adjustments in that business. Large engine fleet, I've talked about these numbers, up by 7% year over year, 8% flying hour growth, very good growth against that challenging comparison of 20% growth in the previous period. The outlook, around 10% revenue growth. Civil Aerospace profit closer to breakeven. This is unchanged guidance from that which we gave in April when we gave our full year results for 2018. Power Systems, notwithstanding some market nervousness about these markets, very good growth in Power Systems, 6% revenue growth, gross margin improvements, decent profit growth as well. A strong second half expected for Power Systems. Revenues will be about GBP 500,000,000 to 600,000,000 higher than the first half as well and a strong profit contribution from Power Systems in the second half of the year, very much a reflection of that delivery on that inventory build in the first half of the year. OE revenue growth of 6%. Warren alluded to this and showed the photographs, strong demand for power generation products in data center markets. And this growth that we're reporting despite the nonrecurrence of the 2018 pre buying effects on the emissions regulations around construction and agricultural markets. So very pleasing revenue growth with that potential, headwind. Services revenue growing at 7% and the an increase in the installed base, well over 150,000 engines in Power Systems. And good progress in the LTSA strategy. It's growing nicely, still only seven percent of service revenues, but growing nicely. And again, good order to intake in Power Systems, so good confidence around 2020. Looking a bit more. Then moving on to Defence. Underlying revenue growth in Defence tubes. I think the story for Defence, the first half of the year, are some big order wins and some big customer deposits and a good book to bill ratio and a good order book ahead for Defence. So a very solid performance for our Defence business. Gross profit is higher as well. Operating margin is stable despite the higher R and D spend on future technology with some good C and A improvement there. The gross profit is hit to an extent by the lower UK combat profits, offset by benefits from the operational efficiency in our facilities. Recall the Condor investment, the benefits very clearly throwing through there to protect us against what would otherwise be dampened margins due to the cessation of the tornado support contract. Breaking that in a little bit more detail, revenue growth 4%, combat and naval growth in particular, although lower transport volumes, particularly on the medium range tanker transport engine. Service revenue growth of 1%, strong order book, 2,300,000,000 of orders coming in and a 1.5x book to bill. So really strong order performance in Defence in the first half of the year. And then finally, ITP Aero. Good revenue growth driven by higher Civil Aerospace OE volumes across Trenton and Pratt and Whitney programs, but the aftermarket decline is due to phasing there. And we call that out there that we got lower high margin aftermarket sales in this mix. So it's a mix impact in ITP in the first half of the year. We very much expect it and have good visibility around the unwind we expect to take place in the phasing in the second half of the year and maintaining our guidance at that 10% revenue growth and margin stable against 2018. So just highlighting there that the margin are at lower levels of high margin spare sales that will improve in the second half. And they've got temporary OE mix headwinds, again, dampening the profitability in the first half of the year that will unwind in the second half. So the guidance for 2019. Here's how we get from our 400,000,000 outflow in the first half of the year to a £700,000,000 inflow on a full year basis. Three big drivers of contribution. One is the higher underlying profit led by Power Systems, improvement in ITP Aero and Civil Aerospace moving closer to breakeven, in aggregate contributing around £500,000,000, in the second half. We're going to see at least a £500,000,000 unwind of those inventory levels in Civil Aerospace and Power Systems. And one point I think that's worth making on inventory is that we should expect to see inventory improvements and we should aspire to inventory improvements over the next five years. We carry 4,000,000,000 of inventory on our balance sheet, which is around six months worth of inventory. So there's a lot to go for in this space even after having done this unwind that we're seeing in that we are expecting and looking for in second half of the year, very good visibility around that. And then the final piece is the £100,000,000 contribution from the growth of the engine flying hours ahead of sales. That's the deferred revenue, the long term contract credits have grown by that much. And those are the three core drivers that get us to that £700,000,000 inflow on a full year basis. Guidance, this slide is unchanged from the one that you saw earlier in the year and very much a further good step towards at least GBP 1,000,000,000 of free cash flow in 2020. Thank you very much. Thanks, Dean. I'm just going to make a few comments before we hand over to Q and A. And I thought we'd start with a little bit of an external perspective on the markets in which we're playing. Top half of this slide, Civil Aerospace, there's been quite a lot of discussion about the wide body market and its condition. So as we look forward, we look at the in terms of shipments of airplanes and therefore engines for us. We can see the airframes that we're designed into at the moment. And we can see what the airframers are predicting in terms of build rates, and that translates into an engine delivery rate as far as we're concerned. And if I've been standing here a few years ago, you might have seen about 600 in that box. And you're looking at 500 today. That is where we are in terms of build rates. When we analyze that, however, now it is just putting into numbers, what we have been saying in in various investor meetings over the last year or so after a period of ordering above trend, then we're seeing actual shipments of airframes align more closely with the underlying rate of growth of demand in the market. And that looks like about 500 engines over the next several years. Don't forget our installed base is comprised of the engines that are there minus the retirements plus the engines that get shipped in a period. And so the installed base that we expect to see in a few years' time, we can see going through the 6,500 mark in a few years' time. The two fifty seven or so engines invoiced in the first half of the year offset by about 36 retirements in the first half of this year. So there's this kind of picture there. Actually, the installed base is probably the more important number for us, but we mustn't ignore, the rate at which we're modernizing our fleet. That's the market environment. In power systems, market environment there, I'd characterize that as, you know, what what are the drivers there? And we're seeing, a couple of drivers. We're seeing, really environmental concern causing people to want cleaner power solutions. That's creating opportunity for us, particularly around microgrids and the like. We talked about data centers. It looks like that's set to continue for some time, data centers. And also, expansion into parts of the world where we frankly don't have that much of a market share, which we think we can go after. So those are the drivers there. In defense, then, in addition to the standards that you see on the slide there, which is really our key markets, I mean, US customer for us is approximately 50% of our defense business. The UK is approximately 25% and the rest of the world is the remaining 25%. And you can see the reasons for growth there. I think in addition, we're seeing new technologies. And particularly in The U. S, we're seeing investment now going into new technologies for defense. And electrification plays across all three of these sectors. In defense, it's much more about capability than environmental concern. So that's really the and I've already covered ITP Aero effectively in in civil aerospace. That's external view. As far as we're concerned, we have a strategy which is unchanged. So this is a slide with which you are familiar. We think this is a framework which equips us well for the future. Activity in the first half was good, in in supporting these various initiatives. And I think, the commentary that came out of the Paris Air Show demonstrates a healthy momentum there. So I'm not going to, talk about that in more in more detail. The power that matters is increasingly, low carbon. We don't propose that Rolls Royce is the panacea that's, you know, the company that's going to solve all the world's climate problems. We can play our part, however. And and similarly, electrification is not the the one answer to everything, but it will play a significant part in that. And electrification really flows through all those boxes on the slide. So just to summarize what we're up to this year and looking forward, we broke down this slide I showed you a couple of months a few months ago. We look at customers. We look at technology. We look at what we're doing inside and how all of those translate into financial progress. I think we made, as I said at the start, good progress in terms of financial metrics, good progress both operationally and strategically as well in the first half. And I'd better stop at this point, and we'll go on to some questions and answers. First one. We need to move the microphone along. Thank you very much. I'd like to ask two questions if possible, are quite different from each other. Firstly, on working capital. We can have a really good go, I think, at modeling LTSA cash profits and so on. But the if you like, the conventional working capital, the other working capital, is extremely hard to model. It's very volatile period to period, and it was a big positive in '17 and '18. So what I wanted to ask was, what are you assuming within the £1,000,000,000 free cash flow in 2020 and the pound of free per share of free cash flow subsequently? And are there any clues as to how we we model that, know, if if you like, as to what set of assumptions should we apply going forward? And then and then should I ask the other question at at the same at the same time? Well, the totally different question really for Warren is, you've called out the electrification issue very early and, agree with your enthusiasm about it. The the motor industry is a little bit further down the line. It's going through a big process of consolidation, JV ing, and so on to sort of cope with the cost of that. Rolls Royce is, if you like, medium size within, the aerospace industry. And UTC and Raytheon, at least part of their rationale for their merger is that they need to be bigger to cope with practical electrification. So where does Rolls Royce sit in that? How are you going to afford it going forward? And how does that sit with the 4% to 6%, R and D as a percentage of sales, sort of aspiration that you outlined? Thank you very much. Okay. Working capital. What have we modeled for 2020? Well, I think you'll relieved to know or pleased to know that we haven't modeled any benefit from either receivables or payables in 2020 in our working capital models. We have, however, modeled further improvement in inventory reductions, which, going back to my earlier comments, I think is very attainable. In our very simple model, we have between GBP 200,000,000 to 300,000,000 of further improvement in inventory. That's beyond that which we expect to deliver in the 2019, but nothing more beyond that. Okay. And on the electrification question, well, I think it's early days at the moment. But I would point out that one of the reasons why we are so keen on the activities that go on in our power systems business is because our power systems business is exposed to applications where electrification is playing a key role today. And, so, you know, I've always said that it's much better, I think, to develop our technologies, system solutions and the like with real customers and real applications rather than develop them in a lab and then hope you can fly them one day. And that's what we're doing with our power systems business. So as far as the 4% to 6% is concerned, two things. One, we're developing a lot of that technology on the back of existing revenue today. And secondly, I think you have to remember the context. As Stephen mentioned, you know, we've been through a period, a whole decade actually, of, you know, huge investment in, in r and d to deliver, our gas turbines that that we have as as, you know, in the portfolio today. The Pearl 15 was the seventh new production engine, in a decade. And, I said on the wires call this morning, you know, that is the richest period of new engine, development for Rolls Royce in its entire history. We don't have to develop those engines anymore. They're developed. Obviously, we're spending f time and effort taking cost out of them, improving the efficiency, improving the durability and so on. But we're already, seeing the ability to to basically shift resource away from those programs and deploy some of that resource. Had I had more time to talk about the last slide, I would have talked about the changing skill mix that we're looking for, different shaped engineers and so on. But basically, we believe that we can we can approach this, this problem, with the resources that we have within the r and d, envelope that, that we currently have. I mean, when I say within, it it will fluctuate by perhaps 100,000,000 or so in either direction, but it is quite a substantial level at the moment. Can I just follow-up slightly on the on the working cap question? I mean, normally, a growing manufacturer, you do expect to use working capital a bit, given although, obviously, you feel you can squeeze, inventory somewhat. So for our sort of longer term modeling assumption, should we just sort of grow working capital with sales, or do we assume that you can beat that? I think you you can assume that we can beat that. And the reason why is that I do think when there are opportunities, there are opportunities in receivables. I think there are, you know, old debts there to collect that run into small hundreds of millions of pounds to go for. And inventory durations, we can do a lot better on our supply chain to synchronize our supply chain than we do our S and OP process. Sales and operations planning for it is not what it should be despite all the effort that goes into it. So I think there's a point to the inventory opportunity as a way of dampening those, what would otherwise be headwinds, as you rightly point out, to other working capital outflows and challenges from a growing business. But the one thing I would point out, it is, whilst it's easy to model working capital, it's very difficult to know for certainty because of course you can have some big order wins in defense as we've seen in the first half that help, which is good news. And that's part of the characteristics of that business. So we have got a very clear model. It's largely around inventory improvement to offset any working capital drag. Hi. It's Andrew from Berenberg. Two questions, one on OE losses and one on defense. So on the OE losses point, I think you said the XWB was down by about onethree on in scale terms. So firstly, how much of that was operational and how much of that was pricing? And then a kind of follow on from that overall, can you say anything about the other engine programs? Did they actually contribute? Or was it all driven by XWB? And then on the defense, the question, I think, Warren, you said several times about the profit headwinds in the defense business being offset by operational performance in The U. S. Exactly was that? Is that just the mix? I think you said about the tornado contract. What what are we talking about? Some kind of structural shift here that's just being offset by new new facilities? Okay. Should I just answer that defense one? And you you can look up the numbers on the engines. So, on on the defense one, I said a half of the business is roughly U. S. And a half a quarter is The UK and a quarter is the rest of the world. We are seeing particular pricing pressure in The UK with single source regulations and the like. And if it were not for operational efficiency gains elsewhere, then that would be showing through in the numbers. So that's the offset that's happening. There's more efficiency to come. We've only just started. Our Condor program doesn't really finish until, end of this year, beginning of next year when we've got all the overhead cost out that is coming from, withdrawing from the older facilities. But when that is in place, we will have executed a program to improve basically the fixed costs of running our operation in Indianapolis. And that will continue to be a benefit. I think on Stephen's slide, was something about profitability in defense over the next few years. You will see a bit of investment in R and D. I talked about new opportunities, in Tempest in The UK, hypersonics in The UK. I talked about the success that we've had with Bell on vertical lift, in The U. S. There are also opportunities around B-fifty two that we are, very optimistic. We've got an excellent solution for reengineering the B-fifty two. It's great we've got an excellent solution, but we don't get it designed in without investing a little around that excellent solution to make sure that it gets designed in and then to make sure that we can produce it at sensible economic cost. So there is over the next several years, a little bit of a profit headwind in defense caused by some increased R and D. But I think our key point is that Defence will remain a nicely profitable margin business for us. It's on the margin that we're talking about. Now about those OE loss reduction on XWB, yes, it is a mixture of continued removal of launch discounts from the mix and ongoing cost reduction. And XWB is the biggest driver of our average cost reduction, but those cost reduction programs are running across or the cost reduction activities rather are running across all the engine programs. And it depends whether it's a particular component change or a change in a methodology. If it's a change in the methodology, which we are introducing, creating a lot more, automation in our component production facilities, then clearly that applies, across all the engine programs. Thank you. Hi. It's, Andrew Humphrey at Morgan Stanley. Three questions on three different engine programs, if if I may. First on on Trent 1,000. As we look over the next couple of years, there still seem to be quite a few open slots where aircraft have been orders but ordered but don't yet have engine orders attached to them. So, how should we be thinking about that? Are you seeing any change in terms of customer body language around preparedness to order, how tight they can get to their delivery slot before ordering? Second, on the Trent 7,000, you know, the a three thirty was a particular area, I think, where Airbus has seen some, pressure from from Boeing on the seven eighty seven. I think you've indicated you've made some concessions on aftermarket pricing for that engine to make that aircraft as a package more affordable for customers. How material an impact on that on medium term cash flow targets is that in the mix? And thirdly, on XWB, think we're coming up to the five year anniversary of some of the earliest engines in service. We should start to see material volumes coming in for first shop visits over the next year or two. Can we draw any conclusions, I guess, from the from the earlier engines that are anniversarying their five year period at the moment? Gosh, three questions, all civil aerospace. So on Trent 1,000, our assumptions are that we maintain the market share that we have today, that we, which is approximately 35%. On a customer by customer basis, if the customer is a Rolls Royce house, we would say, we're more likely to win that, but we're not taking anything for granted. And we celebrate if there's a bit of a turnover. And I'm sure that the other guys do exactly the same. It is quite aggressive at the moment. However, if you look in the first quarter of the year, we were very successful. We took 100% of the orders in the first half of the year sorry, first quarter of the year on 787s. We have subsequently lost a couple to GE. We were not surprised to lose Qatar. They're an existing GE customer on the July. We were disappointed to lose Air New Zealand. However, it was a small volume. It was only eight aircraft and the customer told us there was an extraordinary offer that was non refusable from our competitors. And whilst moving on to the second bit of your question really around A330, whilst obviously in a competitive environment, one needs to respond to aggression, with aggression. You know, there are limits, of commercial common sense and, and so we won't always go there. We will endeavor to be you know, aggressive and secure business where we can. I don't think there's a material sort of center of gravity shift going on. There's always a spectrum and, you know, we have a sort of expected business case and we are taking some business way above that and some business way below that and we look at it on a portfolio basis. And that applies to how we do Trent 1,000 and how we sell 7,000 on the A330neos at the moment as well. And yes, of course, we've seen Boeing be very competitive towards Airbus and the Dreamliner pricing coming down and and giving the a $3.30 neo a run for its money. But actually, in the first half of the year, I think if you look at the, at the mood music now compared with, compared with twelve months ago, then the story on a three thirty neo is really very different, from where it was, from where it was twelve months ago. On XWB shop visits, it's still a little bit early to draw any conclusions. You know, the fleet leaders are, well, the fleet leaders are getting to the the time when it's due, but actually the engines are performing very well and so, so they're not actually we haven't had as many shop visits as as we would have expected so far. We do expect those shop visits to start happening as we get towards the fourth quarter and into the first half of next year. And so probably, next March is a better time for that question. And just on that pricing point that you mentioned and how it might impact medium term cash flows, very little is the answer because, of course, it will only represent a very, very small proportion of our installed base, which will by then be 6,000 plus engines, so a tiny impact. Margin compression on that particular engine program to an extent, but still the volume impact will offset that of the size of the installed base, the growing installed base and the flying hours and the cash that that generates. Okay. Thank you. Frank? We have some coming from online, and I'm conscious of the time and the online demand. So should we just do you mind just switch to online for a moment and then we'll come back? All right. We've got well, there are quite a few online. So I'll do a four part question. Apologies for that. Firstly, on free cash flow seasonality, a question about industry seasonality and why it's stronger in H2 and Airbus it's obviously an issue for Airbus and Airbus have spoken about their ambition to fix it and whether or not we have any ambition around that. The second question is on sustainability of the time and materials aftermarket growth because that has been very strong and continues to be strong, was strong in last year as well. A question about our capacity, we've now spoken about delivering 500 large civil engines per annum. And previously, we spoke about 600 and having a capacity of 600. So what would we be doing with any extra overhead recovery if we were actually delivering 500 per annum? And then finally, on the LTSA, we have a question that talks about how quickly we would burn through the creditor and given the fact that we've come down, it's GBP 120,000,000 this year, Would we reduce to zero in terms of on a twelve month run rate? The question is whether our order backlog would reduce to zero and the LTC creditor reduce. I don't know if you can discuss a little bit more about the LTC creditor. All right. We're going to start off. Stephen's going to, answer the first one about seasonality. Yes. So seasonality, you you it's a good question because you could say, well, why is there seasonality in the industry? Because there isn't. You see, you know, the engines are flying all the time and passengers are flying and so on. So why seasonality? I think it's just the nature of the industry. Just sort of, you know, there's a it's build first half, deliver second half. And and you'll see it's across the industry. The Airbus have the same issues. We know that other engine manufacturers have exactly the same issue as well. So that's just the, the natural cycle. There's no clever answer to this, I'm afraid. That just seems to be the way the industry operates. We'd love to smooth it out. If they want to, and they can make a difference, then then, you know, we're we're a supplier. So we will we will naturally benefit from from from their initiative. Time and materials longevity. I mean, time and materials contracts generally apply to older engines. And our our older engine fleets in a couple of portions, there's a there's a regional fleet and a a large fleet. The large fleet is about a thousand engines at the moment. So out of our 5,000, we've got roughly 4,000 Trents and roughly a thousand older engines. They are time and materials, and gradually, those engines are retiring. But what we're seeing is that as, older engines transition to subsequent owners, there is a greater propensity to move to, time and materials or some of the long term service agreements with Flex with a greater proportion of a greater time and materials content even though it's a long term service agreement. And so I think its longevity is going to be there to stay. The only thing that would destroy it is if we made our insurance contracts, the long term service agreements, so attractive, that it would wean people off time and materials. But, you don't get something for nothing in this world. And if we made them so attractive, then they'd probably become less profitable for us. And so I think the mix is here to stay. Overhead recovery, well, know the engine volume is reducing from 600 to 500, but don't forget there's an installed fleet out there of nearly 5,000 engines today, large engines. Most of Rolls Royce production facilities are used to create components. And a lot of those components are going into servicing the 5,000 engines rather than assembling the 500 or 600 engines. And so, I think there's obviously, we will, in terms of variable costs that would be dedicated to assembly, then we can respond to that change quite quickly and take the cost down. But as far as the fixed costs of installing capacity are concerned, it is mostly around the components. And so I don't see a serious issue with that. And then Do think about LTSA? No. I mean, it's a good question. As you might imagine that we model this as well. I mean, it's a function of, the size of our installed base, the flying hours that generates, the utilization of our engines. And then we also model the shop visits that go with that installed base. And our plans assume a growing installed base. And if we look over the next sort of five to ten years, a rule of thumb, a good rule of thumb is that the long term contract creditor should grow by around anywhere between GBP 300,000,000 to GBP 400,000,000 per annum. That's a good rule of thumb. It can vary in that space according to shop visit experience during the particular period. And therefore, the £4,000,000,000 will carry on growing. That deferred revenue on the balance sheet will carry on growing. That will ultimately trade through the profit and loss account in time when the shop visits take place, but it should carry on growing. So I won't put a number on it, that sort of what the number might be in ten years' time. But if you use that sort of simple math that I've given, you can get there. But certainly, it's not going to be winding down. It's still going to carry on growing. Okay. I think we better come back into the room. Have we got any more online, by the way? Okay. Harry Breach from from MainFirst. Can I just pick up firstly just the T and M question that got asked online? Just the 17% year on year growth in the first half. Just in terms of trends you're seeing at the moment in the shop network, are you seeing that sustaining July, August at the moment? And then second question, I can, and forgive me if I missed an explanation to this earlier on, but just the point of view about no longer accruing deferred tax in The UK, a sort of simpleton like me might assume that that might indicate you're not assuming much taxable profit generation in future in The UK. Can you correct my mistake and just help us to understand a little more about why we didn't accrue that? And then finally, again, I'm I'm a bit of a simpleton. The hedge book, I think in the release you said, still at what dollar 54 with three years after sterling started to crater following the Brexit vote in June 16. And can you just help me understand why the hedge book rate is still so much, so far above spot? Thank you. Yeah. Sure. The short term, short term time materials? You're gonna do the time materials one, and I'll do the next two. Yeah. Okay. Right. So unfortunately, Harry, that's just too short term. I'm not going to comment on that. I mean most of our day to day MRO discussion right now is about juggling things around to make sure we have sufficient capacity to deal with our customers that are getting disrupted by the Trent one thousand situation. And so that's our number one sort of MRO issue that we deal with. I think the growth year on year in Time and Materials is clearly not a sustainable level of growth. Mean all of these things will trend to the underlying growth of market demand for air travel. But you saw a little blip and it's a healthy blip that we have at the moment. And such things will happen from time to time. Okay. So the deferred tax asset. Well, first of all, what is it? So well, it's £1,100,000,000 That represents the tax, in very simple terms, the tax, The UK tax on the cumulative UK tax losses that we have that we will use in the future. So there's no time limit to using those losses. We will use them. Deferred tax asset stands at £1,100,000,000 at the 2018. When we look at the recovery period, in other words, when we're going to recover those tax losses, it's actually a twenty five year or so recovery period for those tax losses in The UK. In The UK, we make losses using a round number of around £500,000,000. We make very good profits in The U. S. And in Germany, we get taxed from those profits in those jurisdictions. But in The UK, we have very little cash tax in The UK, of course, we're making losses in The UK. So in order to use that deferred tax asset, and we have to be making profits in The UK and the recoverability period for the full £1,100,000,000 to get full use of that is twenty five years. We took the view that it was prudent to draw the line at twenty five years. This assumption makes no change whatsoever to cash flows. It's just the effective rate of tax because, of course, when you've got a very small profit number and you're not getting any benefit for that £500,000,000 or so of UK losses, you're being charged on your, US and Germany profits, giving you a very high tax charge on a very small profit number, resulting in that very high, if not loss number, that very high effective, negative tax rate, if that makes sense. I hope it does. So would that effective tax rate be one we should model at continually? No, not at all. I mean, just to put this in perspective, if we didn't have that, effect, we'd probably be down at a 40% or so tax rate this year. Long term, what you should model as we move into UK profitability is something in the low 20s, which is really the what you might expect because that's a mix of the, U. S. And Germany tax both in the low 20s and The UK tax rate at 17%. So that's what you should be modeling, from sort of well, I won't put a date on it, but in the medium term, you should be modeling low 20 tax rate. But the key of course is turning to profitability in The UK. And then the hedge book, yes, you're dead right. We did have a full hedge book of in excess of $40,000,000,000 We have been winding that down to an extent through natural usage, but also we haven't entered into any new hedges in the last, what is it now, the last eight months now. So we were already locked in at that 154% rate that we're seeing for 2019 several years ago. And indeed that has been the rate, in 2018 and 2017 as well there or thereabouts. You will start to see decline over 2020, 2021. And then in 2022 and 2023, you start to see, if you look at the shape of the hedge book, a sharp decline, assuming we don't take out any hedge rates. But even if we were at the forward rate, we would still see a material decline in our achieved rate. So it's going to be, some time before we start to see the benefit, the real benefit of the achieved rate being significantly lower and therefore taking benefit of that strong dollar because reminding ourselves we have around $6,000,000,000 of cash inflows coming into this business to pay for UK costs every year. Okay. Thanks. I think that has to be the penultimate question, I'm afraid. So we've got time for one more, because some people have to go. No. We've got one more on should we do the last one from online then? Yes, Jennifer. Sure. Can you just quickly comment on restructuring plans? Because in the results, talk about exceptionals related to the June 18 restructuring plan, but there are other restructuring charges as well. Can you talk about the other restructuring? There were handful ongoing before June. Do you know the numbers? There's no material change to what we highlighted at the full year other than an increase of around £60,000,000 in our provision for the, cessation of the Airbus three eighty program. It was related to restructuring. As restructuring? Sorry. Well, we've given the numbers that we've highlighted today. Nothing to add beyond that actually. I mean, there were some ongoing restructuring programs, in place, when we announced the program that we talked about a year ago in June. And I would imagine the exceptionals that being referred to are from those legacy restructuring programs that are still happening at the same time as we're doing this major They primarily relate to Power Systems and our defense business with the closure of the Oakland site. Okay. With that, I'm afraid we're out of time, but thank you all very much for, coming along and for your support.

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