Earnings Call: H1 2018

Aug 2, 2018

Great. So thank you for joining us here at the Linden Stock Exchange and for those of you who are joining us online. My name is Jennifer Ramsey, and I lead the Investor Relations team at Rolls Royce. Welcome to our twenty eighteen half year results presentation. In terms of the agenda today, Warren East will be our Chief Executive Officer, will be sharing his perspectives on the progress of the first half of the year. That will be followed by Stephen Daintive, our CFO. He's going to talk you through the financial results in more detail. And then Warren will then round up with his outlook. In terms of format, the presentation should take around forty five minutes, and we'll have time for Q and A at the end. And we'll be able to take questions online. Please access the webcast services to access the questions via our web page. We'll endeavor to take those questions along with the questions in that are in the room. We're not expecting any fire alarm test today. So if the alarm does go off, please leave in an orderly fashion by the doors. And can I kindly remind you to switch off your mobile phones? And with that, I'll hand over to Warren. Great. Thank you very much, Claire, and thank you, everybody, for coming along all right, I forgot the button to press for coming along with us this morning. So as Jennifer says, I'll start with a quick overview. And I'm well aware of my reputation for not being able to keep the time, so I'm going to do my best this morning so that we have plenty of time for questions and answers. So a quick summary. This is a good slide. It shows good half year progress for 2018, and that's really what is underpinning our confidence in the full year, which is why we've made the comments we've made this morning about full year free cash flow and profit at the upper half of our guidance range. Basically, all of these metrics are moving in roughly direction, and it's a strong performance across all parts of the business. And I'm particularly encouraged by good control of some of our costs, particularly our discretionary costs as well in the first half. So we're feeling pretty good about it from an overall point of view. I'll talk about that in a little bit more detail and run around the businesses and then some comments on the restructuring. So our Civil Aerospace business, good metrics here, obviously overshadowed by the issues we're seeing on Trent one thousand, and I'm going to talk about Trent one thousand in just a moment. But large engine production is up. It's up about 24%. Encouraging to see the run rate there. We're well positioned on run rate for the second half of the year. We do have a change in product mix going into the second half of the year that we can probably talk about a bit later. But and that's going to bring its own challenges, but it's a very good first half position to start with. And that's obviously led to growth in the installed fleet. So we're now up to about 4,600 large engines in the installed fleet, which is great. And you're seeing the size of the fleet driving growth in engine flying hours, and it's encouraging seeing that come through to the business. We also made good progress in the OE losses, and I think both Stephen and I can talk in a little more detail in a few moments about that. Very good to see new engines launched as well. We obviously couldn't talk with you in March about our new Pearl engine that's launched in Business Aviation, but it's also encouraging to see some of the other new engine activity as well. So all in all, a good half for Civil Aerospace, and I'll talk about Trent one thousand in a moment. Power Systems, again, a standout performance from Power Systems. Overall growth of about 13%, driven by volumes and strong growth in the target markets, particularly in marine and industrial sectors. Defense was a solid performance, very good on cash and a good development of the pipeline, the opportunity pipeline, which we believe can turn into orders in the second half of the year. At our Capital Markets Day a few weeks ago, six weeks ago now, we talked in more detail about the restructuring program that we announced, and I'm pleased to say that, that's going down very well inside the business, and we're making good progress on that. Taken all together, that gives us a good platform from a financial results point of view at this halfway stage in the year, growing in confidence for the full year. And now I'm going to go into a bit more detail, and I'll start with the Trent 1,000 issue since this is really a sort of contextual backdrop that has been a big issue for us in the first half of the year. It's been an even bigger issue for our customers. And I have to say that, of course, we apologize and do regret all the disruption caused to our customers. If you're a customer who has a large fleet of Rolls Royce powered 787s, there is there has been an unacceptable level of disruption. However, we are working very constructively with each and every one of those customers on a customer by customer, almost engine by engine basis, so that we have the situation with each customer's engines plotted out over the next twelve to eighteen months. And that is a dynamic situation, but we are working very closely with them on that. And I have to say that in spite of all the disruption caused, our customers generally are being incredibly supportive. And by working together, we are achieving minimal disruption for those customers. So from an operational point of view, at our Capital Markets Day, we had just passed what we believe to be the peak of aircraft on the ground, and I'm very pleased with the team performance that managed that situation. We've seen a lot of creativity. We've seen a lot of commitment and some very good results. The actions and the pace of response has been very good. We are now sitting well below that peak of just under 50 aircraft on the ground And our increased MRO capacity is absolutely keeping pace with just slightly ahead because we are on a slight downward trend of the inspections and the fallouts from the inspections. More importantly, we're also making great progress on the long term fixes here. And obviously, six weeks since our Capital Markets Day and the updates I gave then, I'm six weeks more confident in the final fixes to the situation around the Trent 1000s. So from an operational point of view, that's good. When we stood here in March, we talked about the cash impact on 2018 and 2019. And obviously, the additional inspections that have come to light since then and the full sort of extent of what it takes to deal with all those inspections, we were able to quantify the 2018 impact at our Capital Markets Day in June and say that that's actually increased from the expected £350,000,000 to £450,000,000 in 2018. And over the last several weeks, we've been busy quantifying the cash impact in 2019 and 2020, and that's what we're talking about today. The cash impact in 2019, we now expect to be the same as 2018 at £450,000,000 We do expect that to reduce in 2020 by £100,000,000 and fall very significantly after that. And Sveton will talk, I'm sure, in a little bit more detail around the exact timing of that. And moving on to the expected P and L treatment of that, where we've taken an exceptional charge this morning. So we'll cover anything else about Trent one thousand in the Q and A session. Another key topic at our Capital Markets Day was Rewire program, the restructuring and addressing significant change to Rolls Royce across structure, across process, people and culture. And I'm pleased with the progress that we've made over the last six weeks since the Capital Markets Day. But of course, what I'm really pleased with is the progress that we've made internally since February when we kicked off this program in earnest. The restructuring that we announced to three business units has taken place. We are making good progress with tightening down on what is going to be our smaller, very lean head office. We have launched group business services organization and generally marching forward on that restructuring. Our executive team has been in action around the business, consulting with thousands of our employees. So here's a summary of what's happened. The Group Business Services Organization is bringing together about 2,000 people from functions like finance and HR and legal to support our empowered businesses. We have established another central grouping, bringing together things like strategy and our technology group really focused around beyond the investment horizon of our businesses, creation of genuine competitive advantage and intellectual property. And that's quite a small team of a few 100. As I said, the executive team has been around the business. We have face to face met with thousands of our employees around the business since the June, and that's been an effort from all of our execs who've been out hunting in pairs. It's been a very rewarding exercise, a lot of two way communication. And we've actually been able to use the input from our employees to help set priorities. It's actually initiated some short term immediate actions, which have been quite useful and helping us with our zero based budgeting approach to making significant changes with our processes. And in terms of the headcount reduction that we announced in the June, then we're on target for our goals there. We're conscious of the fact that this is about real people. It's 4,600 people leaving the business by the 2019. With approximately one third of that happening during 2018. We are on target for that. So that's restructuring. Now I'll just do a quick hunter around the three businesses. And looking at Civil, it's not all been about the Trent one thousand in civil in the first half of the year, and that's really what's quite encouraging. Trent one thousand is, I'm say, I've been very pleased with the excellent response from our business, but we've been able to do that. At the same time, there's a lot of other good things happening. So it's good to see growth in usage of the fleet. And you see a significant growth half year on half year in invoiced flying hours, partly, of course, driven by the increase in the size of the fleet. So it's encouraging to see the ramp up in volumes. We've been on this journey of 300, 400, 500 and hopefully this year about 600 engines being large engines being produced. We're on track for that and encouraging as well to see progress on the OE losses driven by XWB, but as Stephen will show a bit later, some of the other engines contributing there to a reduction in cash losses. In terms of fueling that in the future, encouraging to see the new engines coming through. So Trent seven thousand achieved certification. And those of you who visited Farnborough a week or two ago will have seen the Trent seven thousand on the new A330. And again, on new engines, very good to see the launch of Pearl. Obviously, it's been in development for some time. We haven't been able to talk about it. It was a very well kept secret, but good to see a resurgence there and at a time was when we see a little bit of an uptick in the business jet market as well. And it isn't all about the current activity. We are also seeing good progress on new technology looking further ahead. And our UltraFan core demonstrator, we've had some very good results in terms of testing there. On Power Systems, as I say, another standout performance really, very encouraging momentum at Power Systems. The pipeline for the second half and for 2019 also looking good, driven by strong markets, particularly marine, industrial. And that's been that extra volume has been helping our margins. Looking ahead to cleaner technologies, demand there for gas power. And in terms of what we've been doing inside the business, then a continuation of the simplification I've talked about several times standing in this very spot, continuing with the reduction in the number of product variants. We're now reduced about 30% of the product variants. Obviously, progress is a bit slower at that because you get the low hanging fruit first, but we're continuing on that journey. I also talked before about Power Systems and Service and the massive installed base we have out there and how we aim to do a much better job on service in our Power Systems business, pushing digital, pushing connectivity. Obviously, we are prioritizing the relevant applications there, but we've also we have actually seen the first really digitally driven applications in people's hands to help with the service there and a replication of the service center model that's in our Civil Aerospace business up and running in Power Systems. It's good. And looking ahead, Power Systems, also, again, driven by underlying fundamentals, cleaner, fewer emissions, more efficient engines and also system solutions that we're working on in Power Systems. So all in all, a good first half year there. Defense saw what we can describe as solid progress. I mean, actually, we haven't any huge announcements to make about what's been going on in defense in the first half of the year. Clearly, there was some work upfront on the structure, putting together different pieces of our business all related to defense under one umbrella. That's been encouraging. We're seeing actually some early signs of first customer contact where that's actually becoming quite useful to join up. Good to see the F-35s appear in The UK from a UK perspective. Good to see the MT30 getting outside of The UK and The U. S. Traditional navy, so in Korea and in Japan. I mentioned before the pipeline in defense looking good for the second half of the year. And again, those of you who are at Farnborough saw us on the platform alongside BAE and others with The UK's new combat program that was announced there. Just one tiny bit to finish on the overall shape of the portfolio. So we've talked about cleaning up the portfolio, and we talked about the elements of that before. So as of the half year, pleased to be able to talk about the bottom half of this slide there where the sale of Commercial Marine has been announced. We rearranged a few of the pieces in our formerly Marine business before we embarked on this process, which meant that we had essentially just a commercial marine operation to sell. Very pleased that we found an excellent buyer in Konnsberg for that business and a good result financially. And with that, I'll hand over to Stephen. Thank you. Great. Thank you, Warren, and morning, everybody. So Warren has kept us on time, and I'll do my best to stick with that. So thanks for joining us for the half year results. And as Warren said, I think an encouraging start to the year, certainly ahead of our own internal expectations. We don't issue half year consensus sorry, guidance numbers for consensus, but certainly ahead of our own internal expectations. So just running through the numbers, there's the agenda, the half year results, a quick counter through the business units, accounting policy updates and then guidance for the balance of well, for the full year 2018. So the half year results. First of all, we'd like to introduce a new format that we're going to be using on a go forward basis to how we present the Rolls Royce numbers, highlighting what we consider now the core business. So we've announced the sale of Commercial Marine. We've completed the sale of LaRange. So those are coming out of our core numbers. Late December last year, we completed the transaction for ITP. So that comes into our core numbers, and that's how we've arrived at our core business. So this is when you see the expression core business throughout the presentation and in the R and S, that's what this is all about. And in fact, we've got we've shown our guidance updated our guidance to show this new format as well, which is consistent with the treatment that we adopted for the group in March earlier this year with the full year results. So the group underlying numbers. First of all, revenue growth, 26% growth in revenue across the group. And we'll see that's a very strong contribution from Civil, Power Systems and ITP as well. Sorry, that was 26% for civil aerospace. That was 14% across the group. Civil aerospace growing at 26%. That's growing in OE, long term service agreement revenue, but also in time and material revenue as well. So good growth across all three revenue streams. Power Systems growing at 13% ITP growing at a very nice 19%, and that's largely driven by its share on the Rolls Royce engine programs. Core business, therefore, growing at 16% and the group underlying results at 14%, so good revenue growth. And as we'll see in a couple of slides, across our three core revenue streams of OE, LTSA and time and material revenue. And then looking at the profit on a business by business section. The underlying operating profit or loss in Civil was £112,000,000 but that's £149,000,000 improvement on the equivalent period last year. Defense was pretty much flat. Power Systems nice profit growth in Power Systems of £56,000,000 on an organic basis to £80,000,000 and that's good flow through of profit from revenue growth into profit. ITP growing by £32,000,000 to underlying operating profit of 40,000,000 And you get to the group perspective there, core businesses growing by £183,000,000 And there's a strap line there, just as a reminder, is on free cash flow. As we'll see in a little while, pounds $211,000,000 growth in organic free cash flow to £72,000,000 negative, but a significant improvement on the first half last year. And group free cash flow at two sixty seven million pounds improvement there as well. So good progress across the group. Looking at the core business underlying results. When you add all that and take into account R and D and C and A and bring us some details in there. So there's a 16% revenue growth. Gross profit growing by 12%. R and D costs are down slightly by £100,000,000 or so, 28% organic change. But just to make the point, and I'll show a slide a little later that really demonstrates this clearly, our cash spend on R and D is actually up on last year. So we are spending more than last year, but the hit to the P and L account is lower, largely driven by the increase in capitalization in line with our new policy. And I'll show you that detail in a second. C and A costs are up by 4% to £479,000,000 This is the indirect expenditure across the group. Most of our businesses, in fact, are flat, if not down on C and A, and it is in Power Systems that was really driving this increase at a group level. And that's largely a phasing difference, which we expect to correct itself to an extent in the second half of the year. So core underlying profit growing by £183,000,000 and core free cash flow at the bottom there, which we'll explain in a second, growing by £214,000,000 Looking at the three revenue streams that I mentioned a little while ago. So whilst we're reporting core underlying revenue growth of 16%, it is not as though it's just one of our revenue streams that's sort of driving that 16% growth. It's pretty much it's good growth across our three core revenue streams. OE revenue, 19% organic growth, largely driven by the Civil Aerospace ramp up, which we'll talk about in detail, and the growth in Power Systems. LTSA service revenue, again, the flying hour growth is a big driver of that, but also the shop visits growth as well in LTSA service revenues and again, largely Civil Aerospace. And then other service revenue, time and material revenue, we see this growth in Power Systems but also in Civil Aerospace where, as you'll see in a little while, the growth there the on legacy engines, the old fashioned time and material parts and so on, high margin business growing very nicely. So it's encouraging to see a balance of growth across the group and not just in one particular area. Key point here, we actually have good visibility of revenues as well. We have a very clear order book around Civil Aerospace. And as we'll see in a little while, Power Systems as well has good visibility around its order book and indeed a strong order book as well, and we'll go into that. And you can see the mix there of the types of revenue streams: OE, 49%, growing at 19% LTSA, 25% and other service revenue, 26%. So a good balance of revenue streams as well. Here's the chart on R and D. So R and D actually increased by £43,000,000 on a cash basis to £663,000,000 Third party contributions represents government funding and so on to contribute towards our R and D programs. So our net cash spend is up by 14% at $518,000,000 We're capitalizing two thirty nine million pounds of that spend. And if you recall, when we highlighted our new accounting policy, we're capitalizing a little earlier and stopping capitalizing a little later than previously. And the comparison for the first half twenty seventeen did not have that new accounting policy in place. So that's why you've got a bit of a disconnect between those two numbers. So the core R and D P and L charge for the first half of £296,000,000 What else is there to say on this slide? I think where there is increased investments in civil aerospace largely, the advanced development programs, the ultra fan progress continues, as Warren talked about, and we've got the new business aviation family, the Pearl 15, which we announced earlier this year. There's an increased spend in defense as well, which you will see shortly, explains the defense profit before tax coming operating profit coming down slightly, and that's on future program investment to support those new orders that Warren talked about that we're expecting in the second half of the year. So restructuring. Warren's talked quite a bit about this already, but let me just put the sort of the financials on this. The exceptional P and L charge that we're reporting today for the first half of the year is £132,000,000 And the test for this this is largely headcount cost related. The test for this is that our employees have a reasonable expectation of being impacted by this program, and that's the test for when you it's the trigger for the providing the provision in place for that headcount reduction. And as Warren mentioned, we've carried out, I think, every ER team member executive team member has probably done 40 to 50 town hall sessions around the Rolls Royce group over the last four weeks, not just U. K, but across The U. K, but also Singapore, Germany, The U. S, around all parts of the global Rolls Royce, and explained in detail the restructuring program, the implications of it, but also what we're looking to try and achieve out of it from a cultural and a process change across the business. So it's been a good start on delivering plan. The next five months are a critical time when we then start implementing on those headcount reductions. Just as a reminder, we have highlighted that we're expecting around onethree of the headcount reduction to be in 2018 and the balance in 2019. The benefits of this, reaffirming the benefits, pounds 400,000,000 of net saving run rate by the 2020 around fixed costs and headcount. Going back to my point about process, a much simpler, more responsive business structure, improved efficiency and effectiveness. And what's been encouraging, just to reinforce Warren's words, is the degree of enthusiasm across the workforce to get involved in this restructuring. So we've been delighted with that reaction. Total costs of £500,000,000 so the £132,000,000 is a proportion of that £500,000,000 I think we guided to around 25% in 2018. So we're kind of broadly on track with that, maybe a little bit ahead it. But in its own way, that's good news because it demonstrates the progress that we're making on the restructuring. Just as a reminder as well, the underlying profit and free cash flow excludes the one off restructuring items. So this £500,000,000 cash cost is excluded from our underlying cash flow and profit numbers. The Trent 1900, and I've combined the two engines on this chart, but the numbers, particularly as we get into sort of 2018 through to 2020 and beyond, are a very large majority of those are in respect of the Trent 1,000. So the March 7 guidance that we gave was £350,000,000 cash cost for the Trent one thousand nine hundred. Since the PAC C and PAC B worthiness directives, that cost has increased to around £450,000,000 As Warren mentioned in his presentation, we're now expecting 2019 to be broadly flat with 2018 at around £450,000,000 2020 falls by £100,000,000 to about $350,000,000 And then we have a material reduction into 'twenty one and 'twenty two beyond that. The updated impact, what does this extra cost reflect? It reflects the cost of the compressor rotor blades and the significant ongoing customer disruption over a period of time as these airworthiness directives remain in place. We'll talk about that in a second. I should say as well that all the cash costs for the Trent 1,900 are included in our underlying free cash flow guidance and targets that we've given for the years ahead, just to make that point. So whilst the accounting treatment, which we'll get to in a second, is around the accounting of it in cash, This 1,000 and the GBP 900,000,000 in service cash costs are included. So the triggers for the exceptional treatment. And over the last few weeks, we've exercised a lot of brain cells on this treatment with our auditors, with our audit committee, with our brokers. And we have all landed on the this accounting treatment that we're highlighting today for the Trent 1,000, a £554,000,000 provision that we're setting up for the exceptional costs of the Trent one thousand total costs over the next five years. That's twenty eighteen, twenty nineteen, 2020, 2021 and 2022. So what are those triggers? Well, first of all, and we've put these words down very prepared these words very carefully because these are the sort of triggers that we will use going forward should we ever be in the position again. We're certainly not expecting that. And what we have is a pretty unique event with the Trent 1,000, and but this is just to clarify exactly what has triggered this treatment. So first of all, a series of abnormal events giving rise to a significant level of cost of a nature not normally expected. And most importantly, it's not reflected in the contract price, not included in the original long term contracts. The abnormal events, I think the material technical issues arising from the regulatory airworthiness directives. And the airworthiness directives fleet wide is an important trigger as well. It's a wide ranging impact across the fleet of an entire product type, Trent 1,000, and it's causing significant disruption to our customers. In these cases then, the cost of disruption, waste of material, labor, etcetera, in respect of the abnormal event will be treated as exceptional in the P and L. And when we do all our sums, that item comes out at £554,000,000 and that represents around 40% of the total cash costs of resolving the Trent 1,000 issues for the period over January through to 2022. So it's a multiyear provision, 40%. The balance of around 60%, therefore, will be recognized over time in the P and L through our normal contract accounting margins over the next fifteen, twenty years, that balance of around £800,000,000 or so. Final bullet point is just reinforcing my earlier comment. The cash costs will continue to be fully reflected in underlying free cash flow as they are being for 2018. The drivers of the growth in free cash flow. We're reporting a £267,000,000 improvement on the prior year and a number of drivers that get us to that number. First of all, increased cash inflows from civil aftermarket engine flying hours. Flying hours growing at 20% on an underlying basis, so good strong growth there and there's good cash generation from that. Higher spare engine volumes. We have a much better mix of spare engine volumes first half, second half compared to last year, which is very much second half weighted. So there is a growth, therefore, in the first half this year compared to what was a relatively low number in the first half of last year as the spare engine volumes were very much second half weighted. So there is a benefit in what is, at the moment, a very buoyant spare engine market, not just because of the Trent 1,000 issues because there are so many new engines going to a number of operators who like to build up an inventory of spare engines for their new fleet. Defence and other business working capital improvements. You might recall from the Capital Markets Day, we're encouraging all of our businesses to work harder at working capital in inventory, in debtors and creditors. We still have a large balance of old debtors to be collected. We still have some supplies that we tend to pay a little earlier than the terms than we ought to. So there are old fashioned opportunities for working capital improvements. Inventory remains at too high a level as well, which I talked about. There's good opportunities there. And then mitigation actions are contributing as well to the Trent 1,000. As Warren alluded in his presentation, managing discretionary spend very tightly, particularly on travel costs, which have come down quite significantly over the last few months, and in capital expenditure as well. On the other side of the coin, the outflows Trent 901,000 engine in service costs, we've guided to that number around £450,000,000 in 2018 in the for the full year. Power Systems is modestly lower due to the order book composition. But also, if you recall, Systems last year had a particularly good cash flow performance and particularly in the first half of the year, which, of course, you can't tend to repeat that year after year. And then we've talked about the High Future Programme R and D investment across civil and defense. That gets us to the numbers in the middle of the page there. Slightly higher tax, slightly lower pension costs, reflecting the surplus that we have on our pension scheme, and there's the outturn below of group free cash flow but also highlighting the core free cash flow. And all of these items give us confidence, therefore, around the full year 2018 cash flow, and hence, the updating to guidance today to be in the upper half of our guidance range for cash and indeed profit as well. Looking at working capital, a bit of detail. We tend to get quite a bit of questions on working capital, so we put this slide in just help that analysis. Inventories have grown by £427,000,000 one shouldn't be surprised at inventory growth with Civil Aerospace and Power Systems and the volume growth that we're seeing in those businesses. Of course, I think there's an argument to be had around the efficiency of our inventory balances, but that's another story. The increase in trades and other receivables, again, largely volume driven. And an increase in trades and other payables, there's been a material increase in the civil long term service agreement creditor balances, which has been driven by that engine flying eye growth in advance of revenues recognized. And within that number is also the £154,000,000 prior year contract catch up adjustment, which is a debit, a cost to our P and L account in the first half of the year, which I'll talk about in a second. We've got phasing ahead of the H2 volume ramp up for Power Systems, again, as you would expect that given the order book and growth expected in the second half of the year. And you've got underlying volume growth in the Civil Aerospace as well. So an equal and opposite match for that inventory growth that we're seeing up above at the top of that chart. The group balance sheet, just reinforcing our ambition to return to a single A rating category single A rating, I should say. Just a couple of things. During the first half, we completed the disposal of L'Orange. We announced the sale of Commercial Marine. And at the same time, we successfully issued a £1,100,000,000 bond at attractive rates to pre fund the existing debt maturities until the 2018. So our view that 2018 is probably going to be a better year than 2019 for debt maturities, and so we pre funded that. Just on this point on the balance sheet, on these disposals as well. I mean what I like about these two transactions is that we end up with a broadly £1,000,000,000 of extra cash on the balance sheet, but zero loss to profit or cash in our numbers, which is a nice piece of portfolio management from a financial perspective. Shareholder payments. We're holding those flat for the interim payment of 4.6p per share. The cost of that is about £86,000,000 We are committed, and we mentioned this at the Capital Markets Day, to restoring shareholder payments at an appropriate level over time. And 2.5x free cash flow dividend cover through the cycle is a sort of rough guide that you should be using to think about how we're approaching dividends. We view dividends in the context of our overall capital allocation, going back to the Capital Markets Day, and the sorts of cash return on invested capital that we're looking for across Rolls Royce. So the business unit review. Much of this, I've touched on already, so I will try and run through these slides. Underlying revenue growth in Civil, 26%, right in the middle of the chart there. And you can see the growth in OE revenue. There's a benefit there in that number related to those spare engine volumes in the first half of the year, which sell at list price, of course, rather than at the post concession price that we see in the deliveries to the airframers and then subsequently on to the airlines. Long term service agreement driven by the growth in flying hours and shop visit growth and then services, time and material around often legacy engines and sales of spare parts. So revenue growth of 26%, good profit flow through, improving profit by 149,000,000 Within these numbers, the operating loss is a net capitalization increase of £174,000,000 But at the same time, in that middle bullet point, there's a £154,000,000 negative contract catch up in our numbers, which are broadly awash those two things. And you'll recall that in the roughly May and November of every year, when we have our material contract pack reviews, to look at things like what are the operational assumptions for our fleet, what's our assumptions around retirements, what are we seeing about what visibility we're getting on the cost of shop visits and how much they're aligned with the plans that we have for those long term contracts, and we adjust our contract margins for any changes in all of those things. This year, we have had times when this has been a positive number. For the first half of this year, it's a negative number to the tune of 154,000,000 pounds Engine deliveries grew by 24% to two fifty nine wide body engines in the first half of the year. And again, with reinforcing Warren's comments there, looking at a number that in the high 500s, if not getting towards 600 on a full year basis, therefore. Looking at the mix of the revenues there, 45% Trent XWB. You can see a few more Trent 700s and 900s and around onefour or so, 28% Trent 1000s. The order book profile is on the left hand side. And again, just reiterating the increased spare engine deliveries. Seven business a growth of seven business aviation engines. So there's an improving market for business aviation. PUL 15, we believe, is arriving at the right time. The OE loss on our engines, there's a 15% improvement. A bit of this is mix improvement. XWB-eighty four continues to make good progress towards its breakeven target by 2020, which we're again, which we're reaffirming today. There's both cost and price reductions improvements, I should say. The Trent 900 has a temporary pricing impact. So please don't read too much into the 15% I think that's going to be completely replicated in the second half. The mix will change significantly in the second half. We have a large ramp up in the Trent 7,000 production in the second half. And traditionally, our newer engines have a higher OE deficit than our older engines. Engine flying hour growth grew at 20% over the period, one of the standout numbers in today's results, I We have a growing fleet, but we also have a growing flying hour growth as well, representing invoice flying hour, representing good passenger traffic, but also the use our fleet is getting younger. And as our fleet gets younger, the utilization of our fleet gets better, and that's also driving flying hour growth as well. And there's the fleet now just short of 4,600 widebody engines. Shop visits. On the left hand side are the regular overhauls that take place, the major shop visits. They've grown by 46 from 91 to 137. And then on the right hand side are the check and repair type visits, the unanticipated shop visits for various items. And as you might imagine, the key driver of that significant growth in the first half was around the accelerated maintenance activity on the Trent 1,000 that Warren has talked about. Looking at the XWB, we talk a lot around the Trent 1,000 and quite rightly, given its financial impact and customer disruption. But as a reminder, just on the XWB-eighty four, now entering its fourth year, over 2,000,000 flying hours now, 99.9% dispatch reliability. And the one or two engines that we have brought in for routine inspection or to carry something out are performing very well at this stage. So it's a case of touch wood four years in, but at this stage, the XWB-eighty four is performing extremely well. And this is important given its significance to the order book and what the fleet will look like in five years' time. So it's an important health indicator for us. Power Systems, moving on to that business. Again, using Warren's words, a standout performance for Power Systems, very much showing the conviction that Andreas demonstrated during the Capital Markets Day and these numbers reinforcing those statements around the strength of that business. 13% growth and good profit flow through, pounds 26,000,000 operating profit growing to £80,000,000 And this growth is across pretty much all end markets. The one market which is down slightly is power generation market, which is largely due to a very good first half with the sale of engines into China to support the growing data center market in China. A good operating margin improvement as well of three thirty basis points. On Power Systems, again, growth across both of its core revenue streams of OE and services. I pretty much said talk to those words. Just on the order book as well. There's good visibility of the order book but also very good order coverage as well. It's over 80% coverage of the order book right now, and that's well ahead of where it was this time last year. So it gives us confidence, therefore, around the Power Systems revenue performance in 2018. And then finally sorry, not quite finally, penultimately, Defence. A solid performance in Defence. Underlying revenue, flat on an organic basis, operating profit down slightly but largely due to higher R and D spend that's partly offset by reduced C and A costs. And looking at Defence, and again, reinforcing Warren's comments, we do have a good pipeline of orders that we're expecting to flow through in the second half of the year. The orders are very much weighted in that direction, and we remain confident on the outlook that we've given for 2018 for our Defence business. Quick word on ITP. We completed the transaction at the December. ITP is a very important partner to Rolls Royce. It has shares on all our key engine programs, particularly the newer engine programs. And it has where it has, for example, shares of around 10% or so on the XWB. The underlying revenue growth is driven by the growth in Rolls Royce Civil Aerospace program. The margin shows good improvement, higher aftermarket volumes and improved OE mix and some good growth in operating profit as well, growing from £8,000,000 to £40,000,000 organic change of £32,000,000 and there's the 19% revenue growth. Quick accounting policy update. IFRS nine is effective 01/2018. Small adjustments to reserves on that date. No restatement of comparatives and has no material effects on our first half numbers. And this is just accounting for financial instruments. IFRS 16 will come into play on the January 1. We'll update you on this later on the year and the impacts on Rolls Royce, but all of our leases, including operating leases, will come on to the balance sheet. So for example, leases for our car fleet, for example, will come on to the balance sheet. We'll update you more on that. We're making good progress on the policies, the impact assessment, working with a very good software tool to capture all the data. So we'll be in a position later this year to report to you what that looks like for Rolls Royce. The property and aircraft engines are the most material item. Interestingly enough, the car fleet causes us the most complication with all the detail attached to that, but that's a different story. So the guidance for 2018 that we are updating today. This is just a reminder of where we were. Free cash flow, we guided £450,000,000 That excluded ITP at that stage on the March 7. Updated free cash flow guidance on a like for like basis. So the red bar there shows you where we think we're going to be on a like for like basis comparison to where we were on the March 7. So we now think we're going to be somewhere in that top half, the upper half of the range. The core business, if we then add ITP in and take out Commercial Marine and L'Orange, free cash flow there is at £400,000,000 because as we highlighted at our full year results on the March 7, we expected ITP to have a £50,000,000 cash outflow in the in 2018. Profit outlook. The guidance we gave was £400,000,000 plus or minus £100,000,000 for profit. Again, that excludes ITP. On a like for like basis, again, similar to the free cash flow guidance, we're highlighting now we expect to be in the top half of the range. And then if we look at our core business, so we throw in ITP, take out Commercial Marine and L'Orange, we're now expecting to be £450,000,000 because we guided that ITP would deliver around £50,000,000 of profit in 2018. So just hopefully, you can get your heads around that math. It's a little complicated, but I hope you can see now how we're looking at Rolls Royce. And that's it for me. I'll hand over to Warren for some concluding comments. Great. Thanks, Stephen. Right. I've got three slides here, and I'm going to cheat a bit so we can get on to Q and A. And I'm going to flick through and go slightly in reverse order. So first half results, obviously, the emphasis is very much around 2018. And we put this slide in because we wanted to say that, yes, we are concentrating a lot on what we're doing this year. We've got a lot of things on our plates in terms of restructuring, in terms of Trent one thousand and so on. But the future doesn't just happen. We have to make it happen. And you saw this slide at our full year results, but you saw it with different pictures. And so we're putting it up here, same slide, to show that our approach to the future is very consistent, hasn't changed, and we're executing according to plan. But in spite of everything that is happening and that we're doing in 2018, we have an eye on the future. So yes, it's about the balanced portfolio, and we just talked about restructuring the portfolio. But starting on the left hand side of the slide, clearly, the inescapable theme towards more electrification, okay? We're actually doing things about it. Those of you who visited us at Farnborough would have seen us investing in pure electrical, seen us investing in small scale hybrid and seen an update on the larger scale hybrid activity that we're doing in conjunction with Airbus. And so the picture changes a little bit there. Reinventing with digital. Yes, we've been dealing with this Trent one thousand issue this year. Actually, we've been deploying R2 Datalabs team to work on that program. And the Trent one thousand team have been benefiting from the data analytics that we've been deploying through R squared data labs. So the reinventing with digital is starting to be real. And transforming our business in terms of production, A couple of weeks ago, those of you who look at these things very closely will have spotted us announcing a little robot developed in conjunction with Nottingham University. We've been doing that for a little while, but now we're actually bringing that into use so that we can automate some of these inspections that are costing us a lot of time and effort and people. And if we can automate that a little more, it can be both cheaper, faster and more reliable. And down at the bottom, the picture here is a picture of composite fan, which will be used on ultra fan in the future. As these fans get larger and larger, you just can't make them out of the titanium anymore because they get too heavy. And clearly, we need to be working this is one of the ingredient technologies for the future. So just wanted to put that in. Coming back to 2018 at our Capital Markets Day, we talked about restructuring. This is a fundamental big thing that we really need to get done over 2018 and 2019. And the must dos that we put on the slide in June. This is a reminder, we're working on all of these must dos now, and you heard from both Stephen and I how pleased we are with the start of that progress. And continuing in reverse order on the slides, our priorities for 2018, completely unchanged in terms of categories of priorities. Good start to the year, the first half. In the second half of the year, we absolutely need to continue to think about our customers. We need to make sure that production ramp up continues to happen. We're well positioned at the half year for it to happen going forward. There is a change in engine mix. We do have some challenges producing significant quantities of new engines, 7000s and 97Ks in the second half of the year. We think we're well positioned to do that. With that growth in the fleet, now 4,600 large engines out there, as Stephen mentioned, We have been expanding the service network. Again, the eagle eye would have spotted a few press releases about joint ventures and licensing out there so that we can build the MRO capacity in line with the demand. And we continue to deal with the Trent 1,000 issue, both the operational management of the inspections and the customer issues and the long term fix that we're work or fixes that we're working on for the Trent 1,000 engine. So very much priority there. Not forgetting the future, the technology pieces I spoke about. Not forgetting resilience, the future of the business built very much around the transformation program, the restructuring that we're doing, pleased with the progress there. Put all that together, that's why we're confident in tone this morning with the financial outlook for 2018, but this is only half time, and we've got a lot of work to do in the second half. So with that, I'll let you ask us some questions. So I'm not sure who went first. Who wants to go first? Jamie. In the middle, Jamie. Hi. It's All right. We've the mic. Well then. Three, if I may. One is on the 20% flying hour growth, which I think was a standout number this period. Can you tell us how much visibility you had on that in June, particularly in relation to guiding around midterm targets? The second one is on working capital. Clearly, there's been a substantial benefit in the half year. A lot of that came from organic flying hours growth, but there are clearly other moving parts around that. There's been limited discussion around the concessions, which we thought would unwind after a pretty favorable position in December. So perhaps give us a little bit more color around that and how that evolves in the second half. And then finally on the Trent 1,000, you've taken a charge representing around 40% of the overall costs. Can you tell us to what extent that sort of derisks program margin on the rest of the Trent 1,000 as we look ahead and as we try and kind of model it on a P and L basis over the midterm? Okay. Should I do the first one and do, can you Yes. Was scribbling down the question for number two. You'll have to remind me number three when we get there, but I'll come back to it. Okay. I mean, yes, of course, we have some visibility of flying hours. We're in daily communication with our customers, and we haven't got thousands of customers. There are several 100. In terms of being precise about this, then we can't always model accurately. And when we talk about invoiced flying flying hours, then we can see significant growth over the next several years. I think Stephen's comments about the age of our fleet are particularly pertinent. And so if you consider airline customers who have a mixed fleet but want to retire some airplanes, they're going to retire the older airplanes first. So the Rolls Royce share of the underlying growth in the market will tend to increase because of our younger fleet. And of course, we are growing our fleet compared with a competitor who are actually shipping more large engines. And so you've got the underlying growth in our fleet as well. So those three things. Okay. And on the working capital guidance, I think, first of all, on the concessions item. Well, in the first half of the year, we actually again had some Trent 700s and 900s that we delivered that, again, have the concession that gets paid in subsequent periods. So we were equal to we were able to offset that potential headwind. And we still expect it to flow through ultimately as the Trent 700s, in particular, wind down, and that may very well be in the second half of the year. As it stands, working capital as a contribution to free cash flow for a variety of reasons, I still expect it to be a modest generation of cash flow for us going forward each year. Inventory levels, we have around £4,000,000,000 of growth inventory on our books. There's opportunities there, less than three turns of inventory. So I think there's a really good opportunity to improve that one. Debt, as I've talked about, and indeed, payables as well. So I think there are working capital opportunities. So we shouldn't expect that to not be a contribution going forward. But certainly, that headwind on the concession item, I'm expecting it to be second half of this year, but it may move into 2019, very much dependent now on the profile of the 700 and the 900 deliveries. I'm sorry, your third question was? It was just on the Trent 1,000 charge and the extent to which taking that charge upfront now basically derisks program margin for the rent shop Yes. To an extent, it does. I mean, clearly, we're taking £554,000,000 of cost now through the income statement, that would otherwise flow through the contract margin. And if I try and put this sort of financial terms, what it means, in 2018, for example, it would have been about £32,000,000 hit to profit through in the contract packer margin in 2018 had we not accounted for that £554,000,000 So I'll try and put it in financial terms for you. Jamie Robotham from Deutsche Bank. Three questions, very similar topics, I'm afraid. So Stephen, on the working cap, in the first half, if we ex out the benefit from the increase in the contract creditor, there was an underlying working capital outflow, I think, not perhaps as big as we might have seen in previous years despite the seasonality of the business. Did that benefit from some of the work you've been doing around bad debtors or debt factoring or sale and leaseback type stuff? Or is that all still to come? Secondly, I was grateful for Slide 24 on the Trent 1,000. The comments you made, so you'll spend an extra GBP 200,000,000 roughly than what you previously thought over the course of 2019 and 2020. And that does not affect your confidence in the ability of the group to deliver around GBP 1,200,000,000.0 of free cash by 2020 from what I understood, but perhaps you could clarify. And then lastly, cash costs of restructuring, were there any in the first half that were excluded from the GBP 72,000,000 free cash outflow? Apologies if I've missed it, but what was the cash cost on Trent 1,000 in the first half? And presumably, having now identified some of Trent 1,000 as exceptional, you're not about to start ex ing that out of the underlying free cash flow. Okay. So the short answer to the first question is yes, they're pretty much flowed through. There might be some impact, but it's not material on those first few items that you mentioned, the washout in terms of working capital. On the Trent 1000, yes, we are reaffirming our confidence in 2020 free cash flow, getting to our £1,000,000,000 number. I mean, clearly, as we're indicating today, 2019 and 2020 are each £200,000,000 more than we had anticipated on the March 7. But our visibility and confidence around the rest of the group across civil, defense and power systems means that we still feel confidence around that £1,000,000,000 around £1,000,000,000 by around 2020 that we've highlighted earlier. Clearly, it means, of course, that number might be a little lower than it might have been a few a couple of months ago, but it's still nice we're still nicely confident around the overall conviction around that number. And indeed, the £1 of cash flow per share by in the midterm. The cash cost of restructuring in the first half of the year, no, there were no at all, in fact, cash costs in the first half of the year on restructuring. One cash costs, first half? Trent 1,000 cash costs. We don't actually disclose that number, and we're choosing not to. We'll give you an update on the full year cash costs at the 2018. Thanks. Christian Laughlin from Bernstein. Good morning, gentlemen. Just two questions for me. Firstly, starting with the XWB 84. Just broadly speaking, how do you think about the drivers of the unit cost improvement year over year with respect to pricing getting better and getting through launch customer pricing, if that's applicable or how much that is applicable and versus say reduction of unit cost from learning curve improvements and benefits from many other initiatives? And the second question is around the, say, for lack of better descriptor, the legacy portion of your aftermarket portfolio, Trent 800s, older 700s that are maybe on their second contract or on time and materials and then RB211s. How has performance of that group over the last half changed your outlook going forward for the rest of this year and beyond just at least in general trends, positive, same, negative? Do want to do the first? I'll do the second one. Yes, sure. So the ex WBAT4, I think as we've mentioned previously, the improvement in the deficit, still the majority is price driven rather than cost driven, but cost increasingly paying a contribution. So I would kind of think about sort of seventy-thirty in that mix in terms of percentage contribution to the deficit improvement, but moving much more in the cost direction as the volumes pick up in particular. So that's where we are today. And then Warren, second question? Yes. So on the second question, the basically, older engines and the service revenue that we derive from the older engines, There's not been a material change that I'd want to highlight in the first half of the year. I think the confidence that we are portraying about the full year is not really driven off. I was asked a question earlier this morning, what's the one thing? And there isn't a one thing. It's across the piece. And the fact that there is effectively no material change in those legacy engines doesn't affect our confidence in the second half. I think Celine is next. Thank you. Thank you for not showing the videos about the snake robots and the bugs robots. I appreciate that. So two questions, if I may. The first one would be on the seven eighty seven-ten. If you could talk about that one a little bit. And I guess you may have done some on that engine too. How is it flying? How is it behaving? And if there is any charges there or any risks there on from a technology perspective on what you've had on the other 787s? And the second question is related to the business jets. If you could just give us a little bit of a view on how we should think about the deliveries of the biz jets and also commercial interest on the Pearl engine and maybe getting another OE backing? What's the time frame on that? Okay. Right, Tayo. So on the 10, it is a different engine, but it is clearly it's a Trent 1,000, and there are common components. And so a couple of things. When the 10 was originally certified, there were some life limitations on some of the components built into the certification. Those life limitations have not all been alleviated yet. And so there will be some overhauls as a result of those life limitations as we get into the fourth quarter of this year and the first half of next year. As a precautionary measure, then we are changing the design. We're taking the lessons out of the PACVs and the PACCs around the compressor that we're dealing with at the moment. And rather than wait for potentially those issues to arise on the 10, we are redesigning the corresponding blades on the 10 as well. And part of the costs that we've talked about and fully scoped out this morning include both the expected additional overhauls from the life limitation on the 10 that we have at the moment and on the precautionary redesigns. The PAC Bs and the PAC Cs also have some issues that we're dealing with in the turbine section of the engine as well. And we're not anticipating those issues to occur on the 10 because they're already a different design of turbine blade and they already have different coating. But the turbine blade lifing is something that we attend to in terms of putting engineering effort into taking cost out of the whole engine maintenance program. If we can extend the life of turbine blades generally, then we will, and we're doing that on the TENs as we speak, but it's rather separate from the question that you asked, I think. On the business jets then, yes, we're seeing a little bit of an uptick in the market at the moment, which is good. And as Stephen mentioned, from a sort of sentiment point of view, it's a good time to be launching a new family of engines. On the Pearl 15, on the Bombardier planes, Bombardier are really hoping, I think, to have those planes entering into service around the end of next year. And so in terms of sentiment and how they're being taken up, that's really a question for them right now. But we're seeing positive signs from all our business jet airframers in terms of demand signals as we look into 2019. So then I think we had a couple in the middle. Good morning. Jeremy Bragg from Redburn. I've really only got one question please and it's on Trent 1,000 again, sorry for that. You've described the situation as dynamic and without meaning to be sort of abrasive about it, the cost estimate has increased a couple of times. And at what point or what needs to happen for it to stop being dynamic, I. E, at what point do you think, okay, we can draw a line under this, it's not going to increase anymore? Or is there a risk that as we get through 2018 or 2019, you say, well, actually 2020 is a bit worse? So first of all, let me caveat the whole thing. On all of these engines, until you actually get a sustained period of operation between regular maintenances with no issues, then you can't guarantee that there won't be some other issue. And so I'll say everything I'm now going to say about the Trent 1,000 is about the identified issues. The identified issues came to light back 2016 through 2017, and it was described as a dynamic situation because we were learning about what those issues are. And that culminated in discussion with the airworthiness authorities just before Easter this year when we agreed with them airworthiness directives around the compressor. The turbine section was pretty much understood by that stage, but we had issues with the compressor, which, frankly, weren't really well understood until we got to around about the first quarter of this year and realized that we had to basically redesign these blades. I am, as I said, six weeks more confident in the final solution than I was at the Capital Markets Day. And in terms of the diagnosis of the problem and the manifestation of the problem, that has now not really evolved since around the end of last year. So it's pretty stable. So you can never say never. But as far as these issues are concerned that we're dealing with at the moment, we think we have them fully scoped. We have a maintenance program agreed, as I said, with the airworthiness authorities, and we have an operational program agreed on a customer by customer basis with each of our customers. And so as far as this set of issues is concerned, then I think we have a very good handle on it. And that's why it's sort of ceasing to be a dynamic situation. Nick Cunningham from Agency Partners. A couple of questions, a nerdy working capital one and then a more general question. On the working capital, short term trade payables went up a lot and long term trade payables fell. And I was just struggling a bit to understand that because you would have thought if the payables are reflecting the increase in LTSA receipts you've received ahead of overhauls. That would be a long term issue. So I wondered if one could get inside that a bit. Do I go on to the and the second question is a much wider one and slightly odd, but CFM and IATA announced a deal to liberalize the aftermarket for CFM56s and LEAPS early this week, sort of nicely timed for the Francophone world to be at the beach, I think. But the one suspects that was to fend off the European Commission enforcement action. And that would seem to be quite a monumental event, which might undermine the business model, at least for them, but maybe for the industry. I mean, do you see other OEMs, including you, having to do similar deals? That's one question. And then the second question is, would you go after the CFM aftermarket if it effectively opens up to you? Okay. So working capital, yes, you're right. It is a nerdy question. And I anticipated that, and I've got a pretty nerdy answer as well, actually. So I'm having a talk on the telephone with you later, if you'd like, to go through it. But right now, I'll just go through the key drivers of each and then without specific numbers, and we can if you want to follow-up, we can do that. So on the increase of 1,400,000,000 in the current liabilities, We moved Commercial Marine to assets held for sale, that's a big chunk of the adjustment. And the civil and also includes the civil LTSA revenue on shop visits that are greater than the cash received. So that's two of the big drivers in there. And then the 1,700,000,000.0 increase on the sorry, delta on the other side, on the current liabilities, it represents civil and defense deposits, the AE1107 in particular. Then the civil LTSA cash received has been greater than shop visit revenue for certain items there. That's in advance of the shop visits. We've also included in that movement is the civil LTSA catch ups of around £150,000,000 that I highlighted earlier. There's also some risk and revenue sharing partner deferred income money that's in there. And finally, there's quite a significant movement on the regional and business jet LTSA movement as well. So there's a lot of things going on in this classification. Again, if you'd like to have a follow-up, then I'm very happy to do that. But that's the best answer I can give you at the moment. Okay. And on the general question, I'll try to be brief because we could go on about that. It's an interesting topic. So the EU inquiry that came to light or that was launched a couple of years ago that this appears to be related to, yes, we did respond as requested to the inquiries. We've actually heard nothing about this since, at the time, we said we think it's rather more to do with the narrow body section of the market than the wide body section of the market. And indeed, that looks like that's the case. To your sort of then broader question about what happens to the service market, well, there's a profit pool there. And the relevant interested parties are the airlines themselves, independent repair and overhaul operators, airframers and engine manufacturers. And our hook to maintain a claim on that profit pool is the knowledge that we have of our engines and the intellectual property that's embodied therein. And I see that profit pool and the different players as a sort of normal market evolution. You take a snapshot today, and this is how it works. Clearly, there's scope there for evolution as different players jostle for different shares of that over the future. And all the engine manufacturers have the same hooks as we do in terms of knowledge and intellectual property in their engines. And so I can't predict exactly how that will play out over multiple years. What I could say short term about our intention to go and service a load of CFM engines and vice versa is that we all are playing battles with the boundaries of the laws of physics. We've all got what you might call issues with our engines and our customers in terms of durability of components and reliability and so on. And I don't think I think all of us are pretty occupied with dealing with our own issues for now. You. Thanks. Can I hijack it as it's next to me? It's Harry Breach from Raymond James. Just two. Firstly, I was really struck by the strength of T and M revenue growth at Civil in the first half. Can you give us a feeling about the particular engine programs driving there? On the margin impact of the T and M revenue growth being so far in excess of the LTSA growth and how you're thinking about T and M in the back half of this year, is it sustainable? Was there some big lump in overhaul scheduling given how you're seeing the lives of those T and M engines? And then just turning on to maybe a much simpler thing. The R and D capitalization resulting from the policy change is clearly very significant in the context of operating profit overall. As we look to the sort of second half, should we be thinking about roughly double that number in the second half? And can you give us some feeling for how that net capitalization number is going to be evolving, given it's sort of looking like about GBP $350,000,000 on an annualized run rate? Okeydoke. So on the time and materials, the two key engines that are generating revenue there are RB211 and the 700. And these are the more mature engines that are not necessarily on long term service agreements. The margins are good margin on this business, and it's revenue stream that we don't probably talk about as much as we should do. It's nicely profitable. And clearly, over time, it will become smaller over a long period of time as we move to a very much sort of total care agreement type basis, but it's going be with us for quite a bit of time to come and at a very healthy margin. And I think I've answered the sustainable questions there as well. R and D capitalization, you should be thinking around £400,000,000 or so on a full year basis, the capitalization. And then that will be a pretty good sort of steady state amount for the next few years, particularly as we go through relatively new engines, finally getting certified, finally getting on wing, and then we'll start to tail down as we get into sort of, I would say, the 2021, 2022 type time period. And you would naturally, given as the engines become more mature, that the capitalization will cease and move into a steady state. Okay. Over here. And then we must remember, we've got a couple coming through online. So let's go just there first and then down to the online ones. You. Rami from Investec. Three questions. On the free cash flow guidance, in the AGM statement, talked about a similar cash outflow to H1 twenty seventeen, and you've obviously done a lot better than that commentary provided at the trading statement in Q1. But guidance is still the change is smaller than we would have anticipated. Is there something we need to be concerned about in H you're concerned about in H2, which limits the upgrade to guidance? Second, on Trent 1,000. We understand that part of the compensation some of the engine manufacturers have provided to airlines has been through credits on future engines, sales and on maintenance events. Does the GBP 1,400,000,000.0 include the credits that you may provide to some of the airlines for future engine sales and maintenance? And the last one, just on the French German, the SCAF program, would you be able to bid for that via your German facility in the future? Okay. So free cash flow on a full year basis. I think Trent 1,000 cash costs, in particular, will be more second half weighted than first half weighted. So that's another reason. And I don't want to raise the I'll come back again to the sort of the working capital subject, but I think it's just it's difficult to be precise around working capital given the very nature of the sort of items that take place. You've got concessions, got you've customer deposits. You've got repayments of customer deposits. You've got collection or payment of risk and revenue sharing partner fees. So we naturally build in a degree of estimation around working capital, therefore. So as it stands, we're comfortable to give the guidance that the updated guidance that we've given to finishing the top half of the range and nothing more beyond that. Then the second question, the short answer is no. And the third question, the short answer is yes. I think, Jennifer, we have to come to some online just to be fair. Yes. This a question from Chloe at Exane. How should we think about the margin profile for the Trent one thousand aftermarket? Arguably, at this stage, you've put quite a lot of costs on a small margin. So going forward, does that mean that margin improve could improve slightly with time as risks are retired? Or will the margin remain depressed through the life of the engines, which are affected by the current issues? I think, well, the Trent one thousand margin has a lower aftermarket margin than, for example, the Trent seven hundred, which has a good aftermarket margin and XBB and so on. But we do as the questioner has asked, we do expect that to improve as we retire the risk and the costs that are attached to the remediation of the current issue. Around 2021, 2022, we will start seeing improvement there. One further another question. In terms of the restructuring in Warren, how do you plan to keep the restructuring in line with your current long term strategy post 2020? I guess this is with regards to increase in development costs of new products post-twenty twenty and keeping a cap on our indirect costs. Yes. So what we're doing with the restructuring at the moment is basically a bit of long term maintenance on the organization. We are modernizing a lot of behaviors and processes and simplifying, removing activities that perhaps were appropriate at one stage in the past that are no longer appropriate going forward and behaving a bit more like a sort of modern competitive company. I think that is a one off change, and we hope to get through most of that change during 2018 and 2019. Of course, then companies such as ourselves that depend on technology as the sort of lifeblood of our future products and business, of course, we have to spend money on that. And that's the very reason why we're doing all this effort on transformation. We have to generate a sensible competitive amount of cash so that we can reliably continue to invest in R and D at the sort of levels that we need to invest in. I don't anticipate any great kick ups in investment in R and D after 2020. It's business as usual, and you'll see us investing a sensible competitive proportion of our annual turnover in R and D generally going forward. Right. We don't have any more from online? We have one. We have a few from David Perry, but some of them have been answered already. So this is his third question. And he's just suggesting that he wonders, Stephen, whether you answered Jamie's question around if any of the Trent 1,000 cash costs would be treated as exceptional items in free cash flow. No, sorry. Just to absolutely clarify, our underlying free cash flow will include all the cash cost outflows in relation to the Trent 1,000. Thanks for that clarification question. Any others in the room before we wrap up? Great. Well, in that case, thank you very much, everybody, for your support, and we'll be back with some full year results early next year.