Good morning. Good morning, ladies and gentlemen, and welcome to Rolls-Royce's Capital Markets Day for 2016. My name is John Dawson, the Director of Investor Relations at Rolls-Royce, and it's my pleasure to be the master of ceremonies for today. We have a pretty busy schedule, hopefully enough to keep you all engaged here, but also online for those of you joining us through the internet. All the materials from today's presentations and the breakouts will be available later on today, either live or later on today as downloads from our website or accessible on the website. Please, if you miss anything during the course of today, you'll find it later on and you'll be able to access it at your leisure. With a busy day, we're going to try and stick to a fairly packed agenda.
Our chairman's going to welcome you in a couple of minutes and then hand over to Warren, who will go through an operational and strategic update. He'll then hand over to David, who will take you through a financial update and some thoughts on IFRS 15, the topic du jour. We're then going to have a break, hand over to a session with our business leaders and different members of their team, who will take you through some fairly thoughtful, I hope, presentations and discussions on what they're doing to implement our strategic priorities during the course of this year and onwards. That will cover us through, including lunch, till about 2:00, when we'll all come back into this room and we will have a plenary question and answer session, then hopefully be wrapping up at around 3:00 this afternoon. A fairly busy day.
Lots to get on with. Without further ado, I will just mention a couple of safety notices, sorry. Mobile phones, if I could ask you all to just at least make sure they're on mute, just for the benefit of the speakers. All our comments are covered by safe harbor statements, which you'll find in the pack. From a safety point of view, you'll find the exit doors clearly labeled from this room and the other rooms, and the assembly point is the car park out front. Now I will hand over, without further ado, to the chairman. Thank you.
Thanks John, good morning, everyone. 12 months ago, I was in front of a number of you at a particularly difficult time for the company, and at that point, I highlighted some of the priorities and focuses of what we were going to do during the next 12 months and beyond. Since then, I'm very pleased to report that both I and the board are very satisfied with the progress we've made. I say very satisfied with some caution, because there's nothing to be very satisfied about in terms of our absolute performance, and we're very aware of that as a board and a company. What we've achieved and what we've managed to get going under Warren's leadership is something that we feel very good about. It's been a difficult environment, as you know, as well as I do.
Some of our markets, for example, in marine and in the business jet area, have been extremely challenging. Internally, we've also had an awful lot on our plate. We highlighted this last year. A number of new product introductions, which in this industry, in the civil aerospace industry, is a very challenging thing. A huge ramp-up in production, which is something we anticipated and which is going to be the seed corn for our future prosperity. A tough internal and external environment. The progress has, in my and the board's judgment, been real, and I hope you get a better sense of that over today and in the discussions that follow. Let me just give some highlights. Firstly, the top-level management restructuring has gone very well. This is never a pleasant thing to do. It's never an easy thing to do.
We've made real progress on restructuring the top management, from which will come subsequent restructurings. The transformation program, which Warren has talked about and will talk about later today, as will the management team, is really underway. This is a multi-year journey. You know that as well as I do. This is really picking up momentum, and I think it is confirmed, if it needed confirming, it's absolutely confirmed, the opportunities that we have to improve our efficiencies, reduce our costs, and most importantly, to improve the speed and responsiveness with which we do things. Real progress there. Thirdly, appointments. Warren talked about his plans for a new team, and I think we have got that in place. It's for Warren to talk about this.
Getting together a new team, and we've recruited a number of people from externally as well as internally, is something that's happened within a year. Very excited as a board and as a chairman about the potential for that new team. Then finally, and less glamorously, and this is very much work in progress, there's been real progress on the development of our strategy. You'll hear more about that in the months ahead and next year. Also on the crucial, if rather mundane, topic of systems and controls. A huge task for the company, but again, very real progress there. I think over the last 12 months, there's been very real progress. The board and I are very aware of it. We know there's an awful lot more to do, and we'll talk about that.
I do want to hopefully give you this sense of momentum that I and the board share. Let me be clear about our priorities. They are the same as last year. The overwhelming priority for the company is financial and operational performance improvement. They are very closely linked in this company. Finance and operations are the twin pillars. There are lots of other things we could be worrying about as a board, but we're not. This is our laser-like focus, financial and operational performance. At the same time, we know we need to improve our speed and responsiveness, and again, that's linked. Time is a very important factor of cost and performance. I just want to absolutely emphasize to you, our investors, the owners of our company, that this is what we're really going to be focusing on over the next couple of years in particular.
We've made real progress. A lot more to do. Our hope is that over today and future, you'll get a better understanding of what we need to do, what we plan to do. This day is part of our continuing journey that I committed to last year to improve transparency and improve communications. I know that some of the messages we've been delivering in recent times haven't been as good as they should be, as they will be. I hope you won't confuse that with any lack of desire on our part to be open with you, to improve the understanding of our company, of the problems, the risks, as well as the enormous opportunities. Today is all about that.
I hope, we all hope as a management team and as a board, that you will leave understanding the company better, knowing some of the people on the management team better, appreciating the upsides and the huge value creation potential, which I just absolutely know. I think many of you know exists in the company. With those words of introduction, I'll hand over to Warren. It's his and the management day. I look forward to seeing more of you over the forthcoming 8 hours.
Thank you very much, Ian. Good morning, everybody. Thank you for joining us today. For those of you who were here last evening, thank you for joining us last evening as well. Hope you enjoyed the discussions, both the formal presentation bit and the discussions that we had around the table. I'm going to just sort of outline where we are, as far as today is concerned. I'll start by talking about progress that we've made over the last 12 months. Go into a little bit more detail than Ian just covered. Talk a little bit about going forward in the next 12 months. David's going to give us an update on the actual business for this year, a little bit about the direction of travel going into 2017. One of the things that we talked about 12 months ago was additional disclosure.
We produced a little more disclosure in February. We're going to produce a little bit more disclosure today. After the break, the breakout sessions will be an opportunity, as Ian said, to meet some of the people who are actually doing the work, rather than people like me who just talk about it. I hope those breakout sessions will be informative. We'll be using material from what's going on in the businesses to bring to life some of what I talk about when I talk about transformation and improving our performance. A year ago, we presented a slide like this. I hope over the last 12 months we've delivered on the commitments that we made in that slide, or thereabouts.
A year ago, I stood in front of you and talked about some serious challenges that we had, some serious challenges around cost, fixed cost and product cost. I talked about challenges in terms of information flow within the business, the systems that we have to work with that information, and how it was really very challenging for the management to get hands-on information. I talked about some of the behaviors within the business. All the changes and improvements that we need to make there. I'm pleased to report, actually, as Ian said, if you step back from it, there has actually been some quite good progress. It has taken longer than I expected to make some of the progress that we've made. I can't hide my slight tinge of disappointment around that.
If I step back from it and think realistically, then I'm pretty pleased with the progress that we have locked in and made, and I'm very pleased with the platform we've developed within the business for further improvement. We have a lot of further improvement to go. Last year, from those challenges, we sort of extracted some priorities, things to focus on, and they became the goals for 2016. In February, I presented this slide, and talked about how we were going to strengthen our focus on some key priorities around engineering excellence, operational excellence, and concentrating on the aftermarket, allowing the business model to perform. Then transformation, then as Ian just alluded to, building trust with our external stakeholders.
Those external stakeholders are the investment community, also our customers, our suppliers, our other industry partners, actually moving inside the company to internal stakeholders as well. We need to improve trust. I'm just going to reprise on those goals for 2016 and the progress that we've made since then. Start with the transformation. I realize that was the middle bit on the slide, maybe logically, I should have started at the left-hand end, we'll start off with the transformation. A year ago, I talked about this concept of organizational hardware and organizational software, where the hardware is like the structure of the organization and the software is what people are actually doing. We made some good progress on early wins with the structure.
Actually, the good news is that, as I said in February, we're on track for delivering at the top end of expectations for 2016, in terms of the financial impact of that. We've actually made good progress since July. Now the focus is switching very much onto the organizational software, the things that we do to sustain these improvements. The key sort of issues are indicated on the right-hand side of the slide, the key things that we need to change. There's a theme that runs through the changes that we're making, the theme is about injecting more simplicity into everything we do. I'll come back to some of that in a moment. Graphically, the big hardware change that we made early on in the year was to say we're changing the structure, the divisional structure of the business.
We're removing a layer of management, we're targeting a reduction of 20% in the management population. We've created a good platform for structural change in that we have reduced the management population. We haven't reduced the management population by 20%. We're still aiming to go a bit further, there's a bit more work to be done on that. The important thing is that this hardware change has actually started to yield some software benefits as well. We have got a clearer line of sight from the center of the business out to what's actually going on with customers and how we translate from customer engagement through to eventually money in the P&L. We've got stronger accountability as a result of that clearer line of sight.
We're already starting to achieve a big sort of reduction in the number of interactions that are going on committees and so on. There's still a lot of complexity, there's still work to be done on responsiveness because we believe that world-class products deserve a world-class operation. I'm pleased with the progress that's happening. What does that leave us in terms of financial impact? At the half year, I said for 2016, we're going to deliver at the top end of the expected GBP 30 million-GBP 50 million benefit. We certainly are. Since July, we've had further progress on that, now we are expecting the run rate going out at the end of 2017 to be much closer to the GBP 200 million end of the range.
In other words, the top end of the range by the time we roll through to 2017 as well. Obviously, the savings are essential to improve the performance of our business. They're also, in some ways, delivering in terms of additional resource, we've got plenty of areas in which to apply that additional resource. That's transformation. I now want to talk about the 3 sort of success factors that we've been focusing on, engineering operational excellence, leveraging the aftermarket, letting the business model work. Start with on engineering excellence, I think you're going to see some examples in the breakout sessions. What we've tried to do is take these 3 themes and use examples from across our different businesses. It's not as easy as sort of the example you see is the only example of engineering excellence.
Clearly, there's examples of engineering excellence in bits of the business that we're using to demonstrate operational excellence as well. We have been focusing on that. The operational excellence piece, that's a lot about our manufacturing transformation, getting higher margins, lower costs. It's about delivering reliability and repeatability in what we do. We've made good progress over the last 12 months, I wouldn't want to claim a huge amount of credit for this because a lot of this is work that's been in progress, not just over the last 12 months, but over the last multiple years, where we've made huge strides in the improvement of the quality of our products. That is translating into a better reliability and operational excellence.
I'll talk a bit about capturing better value in the aftermarket, developing new value-added services. I'd encourage you in the breakout, particularly around the Civil Aerospace piece, to look at that, leveraging the aftermarket examples and the progress that we've made there. Really, the emphasis has been on changing the mindset, on focusing on what we absolutely need to do and getting people inside the business to say, "I'm coming to work today, and this is what I have to do. Can I do it in a simpler way? Am I doing it fast enough? If I can think of a simpler way of doing it, let's start doing it in a simpler way." Making sure that as a business, we're only asking people to do what is necessary for them to do.
There are a few examples there where we've made good progress. In July, I said progress is going to be the sum of lots and lots of little improvements. That's the graphic we used. I'll talk about a few examples of this. Operational improvement. I used this slide in July, but the number that I had in July was a different number, because we've made further progress since then. This example is about reducing the time it takes us to assemble a Trent 1000 engine. I visited Singapore, where we assemble our engines, our Trent 1000s, in February. I have to say, wandering around the final assembly line there wasn't a huge amount of activity.
It wasn't a huge amount of activity because it took us a long time to assemble an engine, so everything took a long time to go through. You got a real sense of the fact that this thing could go quite a bit faster. When I visited a few weeks ago, I had a group of people with me a few weeks ago, it was a hive of activity. You could feel the increased tempo that is relating to a 30% improvement or getting on for 30% improvement in the cycle time. By the way, at July, the number there was 24%, not 27%.
We intend to go further, and when you attend the breakout session, please talk to the folk who are driving this in detail and understand how we've done that and the lessons that we're taking from that and moving around to other locations. There's more work to do. I'm really pleased, too, when going and meeting the people who are actually doing this, that the level of engagement we have amongst our people to really make these improvements happen and to in fact exceed the goals that we're setting. That example was about building engines in the first place. Of course, we also have to worry about the aftermarket and execution in the aftermarket. Here's an example, hit the newspaper headlines a bit in the summer, because, as you're probably all aware, ANA had some issues with some of our turbine blades.
Basically, these blades were not lasting as long as the design life, and we need to change them. We have redesigned the blade, and we will be introducing the new design in due course, and the aerospace people can fill you in on the detail. Meanwhile, we have to keep our customers flying their airplanes because the punters who want to fly from A to B aren't going to sit there and wait because we haven't got some turbine blades working properly. We have to come up with a replacement program that doesn't interfere with our airlines' operations and so on. When we looked at the task involved, then it was going to take a long time. Such a long time, in fact, that it would create some operational challenges and would also create quite a huge cost for us.
The behavior that drove this improvement was a behavior that said, "No, I'm not going to tolerate the status quo, how long it takes. We need to work hard to come up with a dramatic improvement." A dramatic improvement materialized, and the leadership in that part of the business said, "No, I'm still not satisfied. That's still not enough. We need to make a bigger improvement." Over a couple of iterations, the team worked out an alternative way of changing these blades that resulted in an 80% reduction in the time that it took. We could extol the virtues of the engineering analysis that went into what we actually need to do, and that was clearly part of it.
The thing that gave me most encouragement was the change in mindset that said, "No, I'm not going to be happy with the status quo. I want something a lot better." That mindset was there, and that's what drove that improvement. Clearly, that was a real-life service example. Since the aftermarket is such an important part of our business, it's worth noting that these improvements that we talk about aren't just in getting engines out of the door because the engines spend 25 years or so in active service. We need to look after our customers, and make money out of that throughout the 25 years. Another example from the aftermarket. Sorry, I think the battery might be getting a bit low in this clicker, or am I not pointing it at the right place? There we go.
We pointed out at the half year that our fleet is gradually getting older. That means that there are going to be more aircraft transitions. If an aircraft is on the ground for 12 months instead of 3 months, then we're clearly going to forgo a lot of aftermarket revenue. The team in the breakout session, again, there's an example here that I encourage you to talk to them about how creating a team to work with the leasing companies, to work with the airlines who are retiring airplanes, to work with the airlines who are going to buy secondhand airplanes. We can minimize the time that that aircraft is on the ground, and therefore minimize the aftermarket revenue that we forego with that transition. That's an example of how we're working on that aftermarket.
There are other examples from our Defence group, they're going to talk about how they're working the aftermarket more as well. Enough of anecdotes around the three priorities. I think it's me rather than the clicker, by the way, that's causing the problem. Progress on focusing around the three success factors, encourage you to use the breakouts to explore the detail on that, point out that it's not just Civil Aero applications, where we're making the progress. I'd now like to switch to the third goal here, which is around rebuilding trust. This is going to be bad because this is a build slide. Oh, no it isn't. The build slide is coming soon. Additional disclosures.
The ways in which we decided to talk about getting more trust was to be more open and share more information with you, actually make sure that we deliver on what we say we're going to deliver. I think we've made good progress on disclosure. You will see some more detailed disclosure in David's presentation today. Another example, in July, we talked about IFRS 15. We're talking again today in more depth about IFRS 15. We're bringing executives from within the company, that you can talk and exchange information freely with these people. I hope that's an indication of good additional disclosure. We'll be showing you, we put this slide up. We're actually going to fill in some of the blanks on this slide in David's presentation later today. That is more disclosure.
In terms of delivering on what we said we were going to deliver, this morning we confirmed our expectations as far as 2016 is concerned. That is delivering in line. We've talked about transformation program, the transformation program is delivering. As I said, it looks like it's going to deliver at the top end of expectations. On operational excellence, this is a graph that you're familiar with, hopefully, in the bottom corner there, showing the ramp-up of our large civil engines. Dealing with that volume ramp, you've all told us, is a big challenge. We didn't actually need you to tell us that. We know it's quite a big challenge. The good news is that if I look at the run rates coming out of our facilities today, the run rates support that ramp-up.
12 months ago, the run rate that we achieved in Q4 2015 supported the volume requirements for 2016. As we're going at the moment, a little bit more than halfway through Q4 2016, the run rates support the volume ramp that we need to do for 2017. I'm very pleased with the way that the business has actually been delivering on the commitments. Little bit of a reminder, those of you in the U.K. may have seen the Panorama programme a week or two ago. That is a reminder that we do have some legacy issues. As far as the investigation is concerned, we're fully cooperating. We can't talk about the detail of that investigation. Within the business, I can assure you that the huge changes that we set in progress a couple of years ago around this are happening and behavior is changing.
We have an absolute standard of zero tolerance to any misconduct here. In spite of the legacy issues, we just have to accept that and we're dealing with them. Now let's look ahead. As Ian said, one of the first things we've been doing is rebuilding the leadership team. Two key appointments, and I talked about some of this a year ago, and we've talked throughout the year. Two key appointments we've been able to announce. Simon Kirby's joining us as Chief Operating Officer, and Stephen Daintith joining us as Chief Financial Officer. Simon and Stephen are in the room. They're just over here. Just going to wave and say hello.
Hi, everyone.
Simon and Stephen aren't the only appointments. Ben Story joined us as new head of strategic marketing about a month ago. Andreas Schell will join us as the new President of Rolls-Royce Power Systems. He'll be joining us at the beginning of December, and he'll be taking over with effect from the beginning of January. If I take those four external appointments and combine them with the promotions that we made, the leadership team that I was talking about in aspirational terms a year ago, where I was looking for a blend of about a third of new people and about a third of people from within Rolls-Royce promoted, and a third of people that representing continuity, I think we're just about there. We've got a team, a leadership team.
One of the first things the leadership team need to start working on, however, is looking forward at our vision and our strategy. We know we've made progress on the operational performance. We know we still have a long way to go on improving operational performance. A year ago, I said we were going to make those improvements in operational performance, we were going to get on to updating strategic priorities and so on. As I said, it's taken a little bit longer than planned. The really eagle-eyed ones of you in the room will notice that in the bottom arrow there in the right-hand corner, we've sort of slipped the Q1 '17 in, which reflects a little bit of a slip.
The purpose of talking this morning about this is to say that we certainly haven't forgotten that we need to attend to looking forwards. When we do look forwards, we'll see it's a very long-term business. The operational improvements we're making are improving the platform and the platform on which we can build. We now have to think about the next several decades. A new engine that is going out of the door today is going to be flying in 20, 25 years. That's actually. Well, it is. It's 2040, which sounds like a heck of a long way into the future. I'll be delighted if I'm alive in 2040. We do need to think quite long term here. Framework. The framework that we'll be using is this framework. We'll be thinking about long-term trends in the industries in which we operate.
The presentation that you had over dinner from Paul Stein last night, that was no sort of coincidence. We do need to take account of the technology changes which are happening in the world. By the way, I come from the technology space, and I've seen lots and lots of companies wither on the vine through not embracing new technologies in time. I've also seen lots of companies wither on the vine because they enthusiastically invest in all sorts of fancy new technologies that no hope and the market doesn't want them just yet. It is a challenge, and it is a balance, but that's an area in which we need to focus. If you recall the matrix that we talked about with having market attractiveness and competitiveness, we need to review that in a little bit more depth.
We mustn't forget the effects of the transformation program that we're having on our business. We need to continue to drive the improvements, continue to improve the performance of our business, but take into account that we are going to do that when we make our plans. We need to consider all of that in the context of the capital that we have available to allocate, and how we're going to allocate that capital and how we're going to allocate the capabilities that we have around the business. A reminder, each part of our business does actually have attractive growth opportunities. Yes, there is some investment required in all of these sectors. There's certainly some steps forward which are evolutionary steps, and there are some steps forward that are perhaps a little bit more revolutionary, a bit more radical.
We need to think about all of that, think about the competitive opportunities and the competitive threats. Paul presented these slides probably a lot better than I can when he talked about them last night, and he explained both of these pictures. If I just take the top one here, where the two sort of internal boxes applying digital to what we do internally. Remind you of what he talked about there. I think there is significant scope in box 1 in terms of digital services and systems outward-looking to our customers. Some people are a little bit skeptical about the fourth box, the Internet of Things. My only comment on that would be, I used to work in communications in the late '80s and early '90s, and there was a thing around called ISDN.
The sort of cynical amongst us used to talk about ISDN standing for it still does nothing. It still did nothing for a long, long period of time. Then sufficient infrastructure became available, and it wasn't actually ISDN, but the whole world that we enjoy today of the internet, smartphones, connectivity, and so on, is a realization of the dream that was ISDN. The new technologies that we talk about today, the glimpses that we see, things like Paul talked about last night and the hype around Internet of Things, I would caution people being over-cynical about the Internet of Things because people have been plenty cynical before about these sorts of technologies that offer great hope. The actual manifestation tends to be a little bit different from the number you first thought of.
The reality and the impact on society comes through sooner than you think. Paul talked through the second slide on the bottom of this chart as well. All I'm saying this morning is that we will pay attention to these technology trends. It's a similar story that he outlined behind the enabling technologies in these boxes. Technology reaching tipping points. I'll remind those of you who were at dinner last night, those slides that he showed about the tipping points. I remind you of the Bill Gates comment about things always taking longer or not as much happening in the five years that people expect, but a lot more happening in the 10 years. That's the sort of time horizons, of course, in which our business operates on much longer time horizons. We really need to pay attention to that.
That's an area that will achieve significantly more focus. As far as our current portfolio is concerned, we need to update this slide from last year. I have no radical news for you on this this morning. I'd point out that about 80% of our activity sits in the top right-hand box, i.e., we think it's playing into markets that are quite attractive, and we think we've got a pretty competitive position. We will be casting a critical eye across all quadrants. I'll also remind you that the transformation activity that we're doing is lifting our performance in all of those boxes. The cost challenge remains. We've started, we've made progress, and we will make further progress beyond the GBP 200 million. Of that, I'm sure. There's a lot more to do. We will have to spend some money. There's some systems enablement activity.
There's investment, some of the technology investments I just talked about, this will all cost. We haven't lost sight of the fact that we have the cost challenge. If I put that together, this chart has a rather sort of nebulous vertical axis of goodness, okay? I'm not sure how otherwise to describe it, but that's what we came up with. Here we are at level 1. How do we get to level 2 at the other side? Well, clearly the cost activities, there's a lot of creating greater efficiencies within the business.
When we get into growth and mix, we're talking about the mix of products and the challenges of product cost, and getting a greater proportion of products that are competitively costed within the mix of what we do and taking advantage of the growth that is available in all parts of our business. A lot of that is unlocking the order book that already exists in our Civil Aerospace business and making sure that as we unlock that and deliver those engines, then we make significant progress on the costs. Experience tells us that we can make progress on those costs, and we have plans to make progress. Right now we're tracking those plans pretty well. If you look forward to a world of twice the installed base in our large civil engines, then I think you'll see quite a transformational effect on the cost base.
You add all those three things and you move up the nebulous vertical axis of goodness from where we are to a much better place. In summary, it's been a year of pretty good progress really on the transformation program. I wouldn't be doing my job properly if I wasn't a little bit dissatisfied with the speed and I wasn't continually trying to push and encourage us to do even better. I am actually quite pleased with the progress that we've made on operating performance. I've talked a little bit about the fact that we haven't forgotten moving forwards. We've laid out some areas in which we're going to apply our efforts looking forwards. There'll be more updates on that in 2017 as we go.
For now, I'll hand over to David to talk about our financial progress and looking forward, little glimpse of the IFRS 15 update. David. Put this down.
Good morning, everyone. There are a few things I'd like to cover in the course of the next 30 minutes or so. Firstly, as we're nearing the end of the year, I'll provide a brief update on 2016 performance and set out some of the market developments that may play into 2017. It's also time we gave you an update on our transformation program. In addition, as Warren has already said, I'll give you some additional revenue and cash flow disclosures as we set out last year. As some of you will no doubt be pleased to hear, these will include revenue and trading cash flow directional analysis through to 2020 for our Civil Aerospace business, as well as near-term directional guidance. I should emphasize this directional guidance will reflect our current accounting.
We're also going to use today to walk you through the assessment of the differences between our current accounting and IFRS 15 for the 2015 financial year, and likely future trends in order to help you think further about how to model the impacts of IFRS 15 moving forwards. I'll talk to you about the key figures in this session, and then we'll be running more detailed workshops as part of the breakouts, the first of which will also be webcast live. Turning first to 2016. Around this time last year, we set out the main headwinds we saw affecting our business in 2016. The majority of them were in the Civil Aerospace business. As we've moved through this year, they've mostly materialized at around the levels we forecast.
In addition, there have been a number of other developments which have mostly netted off with other changes, and these include some foreign exchange benefits in Civil, which we expect will at least offset some of the incremental market operational engineering and program costs we've incurred this year. At a group level, we expect to act, therefore, broadly in line with overall expectations, despite some of those mixed market conditions affecting some of our businesses. For cash flow, we maintain our range of minus GBP 100 million to minus GBP 300 million. On transformation, our legacy programs are largely complete now, providing the benefits we expected. As Warren has touched on, we've made further progress on the additional transformation, and you'll hear about this in our breakouts.
We previously told you that we expect to bank up to GBP 50 million of savings in 2016, and I believe we will exit the year at an annualized run rate higher than this implies, at around GBP 120 million. We're working through the potential benefits for 2017 right now, and we'll not announce these until we've passed a key review stage where we can review them as banked and sustainable. The majority of our identified savings to date have come from the management restructuring activity, together with a number of efficiency savings, particularly in engineering and purchasing. Making these savings has been essential to help offset the investments we've made to support our manufacturing and engineering activities as we ramp up production in the new facilities around the world. Just want to actually touch on transformation in finance as well. All business areas have made transformation commitments.
Within group finance, we've also sought to deliver meaningful savings, as well as making solid progress in improving and simplifying our reporting and forecasting processes. One example, we recently consolidated four of our U.K. defined benefit schemes, simplifying both the administration and governance. We'll now have only 10 trustees, whereas before we needed 40. We'll also benefit from scale, reduced advisory costs, more efficient asset management to generate annual savings of GBP 2 million to GBP 3 million a year. We've also taken a number of actions to control the future costs of benefits accrual in consultation with our employees. The overall impact on pension costs charged through the P&L will be around GBP 5 million a year.
In addition, you'll have seen that last week we signed an agreement with Legal & General to take over our Vickers defined benefit scheme with over 10,000 members, and this will remove risks from Rolls-Royce and also reduces our global pension liabilities by around 6%. On a technical point, we'll therefore have to recognize a settlement charge of about GBP 300 million due to the rules under IAS 19 to discount liabilities using AA bonds as a reference, and we'll exclude that from our underlying results. In other words, the surplus for that scheme that's on our balance sheet will no longer be there. Turning to current market developments, the picture is mixed.
In civil aerospace, we've seen a slower year for new orders, as expected, but deferrals and cancellations have also been very modest, and with a substantial backlog of orders, we feel well protected for the next few years. At the same time, the outlook for our aftermarket business has remained solid. Looking at our large engines, parking levels are stable. We've seen a handful of older Trent-powered planes, such as the Airbus A340s being removed from service, along with some of our more legacy RB211 fleets. At the same time, we've had good success now with our Trent 800 transitions on the 777, with 11 year-to-date compared to one last year. From an OE point of view, the underlying business jet market has continued to weaken.
As a result, taken with the loss of some key platforms, we continue to expect revenues to fall over the next few years on an OE basis. Turning to Defence, the market looks okay, roughly in line with our expectations. In Power Systems, the picture remains mixed. We aren't immune to the weakness in end markets such as industrial or oil and gas, but we also continue to do well in some of our strongest areas, such as power generation and Marine, and believe therefore, we are gaining some market share. Within our Marine business, there's really no sign of recovery in offshore markets, and order intake remains very weak, particularly now also in services. You will hear from the team later about the efforts they're putting into cost management and seeking opportunities in adjacent markets.
We must therefore remain very cautious about 2017 as the prospects for the year, and expect revenues to be lower next year. Finally, the nuclear business continues to focus on delivery against our long-term contracts within the submarine business and build out the capability within the civil nuclear business. We're pleased with some of the market developments, but they won't have an immediate effect on results. Looking forward, we'll probably provide our first detailed view on 2017 at our full year's presentation in February. Warren and I think it's only fair that Stephen and Simon, assuming they're on board by then, have a chance to review our plans before they're finally approved. Moving now to some of our new disclosures. The next slides are intended to help you understand how we see the civil aerospace business developing over the next few years.
The first covers revenue and is prepared, as I said, on a basis of current accounting. The arrows themselves signal the direction of change year-over-year, the key message here is that we expect overall OE revenues to grow year-over-year through to the end of the decade. This is underpinned by our order backlog of large engines. Whilst the absolute value of our linked and other sales should continue to rise as we deliver more Trent 1000 and 900 engines, the more fundamental revenue driver comes from unlinked sales with the XWB engine, in particular, the significant contributor. Of course, these come with a negative cash flow. Based on current projections by 2020, broadly, we're expecting to deliver the same number of XWBs as our total large engine deliveries last year.
It's a different picture across our other engine programs, with deliveries of the V2500 modules dropping off quite sharply after 2017. Although we are currently enjoying a bit of an uplift to revenues because of issues elsewhere in the A320 supply chain. I've already mentioned the weakness with the business jet OE market, which will be compounded by a number of new airframes entering into service, replacing our BR710 powered predecessors. Consequently, OE revenues from our business jets will continue to decline over the next few years. We still regard the top end of the business jet sector as strategically important and are targeting opportunities there to regain our market share over time. Turning now to the aftermarket. We expect revenues to grow modestly at first and more significantly as revenues from the installed base of the newer engine programs build.
We're anticipating a slowdown in revenues from some of our mature large engine products, like the Trent 500. The important thing to note is that we continue to see double-digit growth in our new Trent aftermarket revenues and flying hours. Aftermarket revenues from regional aircraft will decline year-over-year, over the next few years, as aircraft that we power are replaced by larger cabin alternatives, while the V2500 and business jets should remain reasonably stable. Turning now to cash flow again. Again, this slide is on a current accounting basis for all years. As before, the arrows reflect year-over-year changes with an upward arrow indicating an improvement from this factor on the year before. There's quite a lot going on on this slide, and I don't propose to take you through it arrow by arrow.
The main areas I'd encourage you to focus on are the developments of profit, the movement in contractual aftermarket rights or the CARS additions, and the movements in the TotalCare net asset. Taking these in turn. On profit, we're expecting modest improvements as we move through the next few years, and those will accelerate as we get closer to the end of the decade. This reflects the growth in the large engine aftermarket, plus the production efficiencies from increased volumes and the benefits of our transformation program. Offsetting these will be reductions in our business jet and V2500 OE sales and reductions in our regional aftermarket. Let me perhaps use the CARS additions line to explain a little bit more how we are using the arrows in this chart. As you know, CARS additions represent the aggregate cash loss in the year from unlinked OE contracts.
In 2015, our CARS additions were GBP 161 million. As we move through 2016 and 2017, our engine deliveries of unlinked contracts will grow, and the aggregate cash loss, therefore, rises year-on-year. This is illustrated by the downward arrow within 2016 and 2017, i.e., indicating that total cash losses or CARS additions are increasing and therefore negative for cash flow. In 2018, we have an upward arrow to show an improvement on 2017. Although we're still actually increasing our volumes at that point, we're managing down the average loss per engine and are expecting, therefore, that the total value of cash losses from unlinked engines to be lower than the year before. This doesn't mean that the CARS balance has peaked, but that the rate of growth has slowed. Finally, let's look at the TotalCare net asset.
We expect this to peak in the next few quarters and then start to decrease as previously pulled forward profits on linked sales are unwound against linked aftermarket contracts. I'm now going to move into IFRS 15. Before I go into detail on the numbers, I think it's worth reminding you that the implementation, firstly, is still a year off. Given its likely significance to our underlying results, I think it's appropriate that we keep you informed of our progress. Overall, revenue recognition will now be linked more to the actual timing of costs incurred in providing goods and services rather than smoothed over the lifetime of service contracts. For fear of repeating myself, although I think it's important that I do, the one clear and firm constant is that it does not change the cash flow profile, and therefore, the embedded value of the business.
Let's quickly recap on the high-level principles we shared back in July. Firstly, the CARS concept would no longer be applied to our contracting arrangements. We'd recognize any cash loss upfront on engine sale at the point of sale. We would no longer do linked accounting and pull forward some of the profit from our aftermarket contracts on the sale of the engine. For the aftermarket itself, the timing of revenue recognition and offsetting concessions would change to an input or cost basis with the consequences having very different profit and loss timing effects. I'd probably describe the introduction of this standard as a painful but welcome step on the journey to increase transparency, for our OE revenue at least. By removing our CARS and linked accounting, some of the accounting fog will be lifted.
Our accounting for a portion of the aftermarket's profits goes away, and any loss we make on engine sales will be more apparent. Therefore, as we ramp up our large engine production over the next few years, the switch to IFRS 15 is going to have a negative effect on our OE revenue and profit relative to today's accounting. This will continue until we've made progress on our program of cost reduction and have traded through the launch pricing of our new engines. On the aftermarket side, I'm afraid it's not quite so straightforward. In fact, for business jets and even for our large engines, in a way, it lacks some logic and leads to some counterintuitive outcomes, both of which I will explain later. IFRS 15 defines the timing of revenue and profit recognition during the course of a contract.
It doesn't change the overall level of profit from the contract itself. Of course, as I said, it has no impact on contract cash flows at all. Over the next few hours, we'll have a couple of chances to explain these changes to you. I'll share the high-level principles and outcomes now, and then in the breakouts later, Andrew Dickinson, the Civil Aerospace CFO, and myself will give you a more in-depth analysis and answer any questions you may have. Before I do that, let me first explain the legend on the right-hand side of this slide, which you'll see used again on the subsequent pages with the numbers.
Where you see a fully colored block on the right, this is intended to show you where we've already disclosed the principles and the quantification of the impact has been largely available to you from our prior year results. For example, where CARS additions represent the cash loss we incurred from our unlinked engine sales. The second half-colored block is where the principle has also been clear, but not all the financial information has been available before now or was only partially clear from our statements. A good example would be catch-up adjustments. The uncolored block represents a new disclosure as we've developed a detailed understanding of implementation of the principle. For instance, the quantification of the impact of the change from recognizing long-term contract revenue on a flying hours basis to a shop visit basis, or the impact on the business jet aftermarket.
Before we go through the numbers as well, let me just explain which parts of our civil business are affected by this change. Looking first to OE, the elements that are cash positive today, such as business jets and V2500 modules, as well as profitable spare engine sales within civil large engine revenue, these will be largely unaffected by IFRS 15. Where we will see the difference is in our negative cash margin in stored engines. Unlike with current accounting, where we capitalize those cash losses either as a CAR or by linking with an aftermarket contract, under IFRS 15, we'll recognize a cash loss when we sell the engine.
Our range of cash losses today on engines is typically in a broadly GBP 1 million-GBP 2 million range. We expect this to reduce quite dramatically over the next few years as we execute on the program of cost reduction and benefits from pricing on some of our new programs. Turning to the aftermarket, it's our pay-as-you-go long-term service contracts that are most affected by IFRS 15. Our time and materials based business and royalties on the V2500, for instance, will be the same as today. Overall, around a half of the civil OE business and about a third of the aftermarket revenues are unaffected by this change. Turning to the civil OE effects, the total effect on 2015 full year results would have been around GBP 700 million for OE. OE is most significantly affected because of the removal of linked accounting and the removal of the CARS.
All of the changes here affect both revenue and profit, apart from amortization of CARS, which only affects profit. That's because under current accounting, when we amortize the CARS, it flows through cost of sales, not revenue. While we can no longer capitalize losses and pull forward profit from the aftermarket under linked accounting, we won't also have the unwind of this on the aftermarket revenue in the future, which is a positive that you'll see on the next slide. All the items, apart from the treatment of the guarantees, were actually highlighted in our 2015 year-end results. The new item is the change in timing of recognition of some of our performance guarantees, particularly on early Trent 1000s, where we now have to recognize the net present value of any expected payments of, for instance, the fuel guarantees.
When we make the engine sale under current GAAP, these are generally included as part of our aftermarket cost. Turning now to aftermarket accounting, here the changes are more complex. The change to an input approach has a marked effect, and we'll explain details more about this in the breakouts. Basically, when we remove the effects of linked accounting, we won't be pulling ahead aftermarket profit or capitalizing cash losses. This means we'll recognize all of the aftermarket profit during the aftermarket contract and not take some of it up front. Therefore, we'll no longer have a large long-term contract debtor comprising capitalized cash losses and pulled forward aftermarket profit, which we need to unwind against our profitable aftermarket cash flows. The GBP 268 million benefit on the slide is the positive effect that we would have seen for this in 2015.
In 2015, we also had the effect of our change, if you remember, on provisioning against contract risk, which gave us a GBP 189 million benefit in 2015 profits. Because there's no linking under IFRS 15, our positive long-term contract balance would actually have been a lot smaller, and we would have needed a far lower risk provision. Our change in provisioning method would have only been worth GBP 33 million, We'd have seen GBP 136 million less benefit in 2015 than we actually reported. The level of other catch-up adjustments, such as life cycle cost improvements, would also have been far lower for the same reason, because in part, this is driven by the removal of the linked accounting. Through the change from output to input, from flying hours to cost activity profit recognition, this has an important effect, driven by both program and portfolio maturity.
For instance, the relative position of the Trent 700 and Trent XWB. Andrew's actually going to cover this in more detail later on. In addition, what is perhaps more counterintuitive is the change the new standard will bring for profit recognition on our business jet fleet. Again, these are profit and not cash effects, remember. Because business jets are flown far less than wide bodies, the first overhaul actually often happens after the expiry of the first contract period, which on average is about 10 years. Very different profit recognition pattern from one contract to the next. The result of this is that under IFRS 15, the timing of when we can recognize revenues from this business contract is actually going to be deferred for many years. This compares to today, where we're recognizing revenue and profit as we collect the CorporateCare payments on a pay-as-you-go basis.
It's worth noting that the estimate of the impact in 2015 of around GBP 120 million is particularly high. We expect this will reduce over time as the average age of the fleet increases over the next few years. Let's next turn to the balance sheet for Civil Aerospace, obviously. We've performed a restatement as at the end of 2015 for illustration purposes only. By the time we do the actual transition adjustment to the opening 2017 reserves, we'll have moved on another year and have a slightly different mix of contracts. The magnitudes of the actual transition impact is likely to be different from what we're showing today. The main changes are no CARS balance.
The debtor balances within TotalCare assets, which represent linked profits reported ahead of cash will no longer be there, as there is no linking under IFRS 15. Thirdly, the transition from flying hours to a cost basis means that we'll actually be receiving cash revenues ahead of when we perform overhauls. That's the trigger for the ability to recognize revenue and margin under IFRS 15. As a result, the balance sheet will actually show a creditor through receiving cash received from customers ahead of recognizing the profit. We've shown all this information pre-tax. When we do the actual transition, we'll have to work through the very detailed country-by-country tax adjustments to our assets and effective tax rate.
I think very approximately, if you use your normal effective tax rate, in other words, 20%-25% for the tax rate, that should give you a good guide. I've talked about how estimates on IFRS 15 would have affected 2015. What I'd like to do now is explain how the direction of changes over time. I'm going to do this using a build to show the effects. The horizontal Y-axis here represents the difference between current profit as recognized on the current GAAP and IFRS 15 for each year. Once again, very obviously, I remind you that cash flows, the blue line here, over the life of the contract are completely unchanged. Hence, that blue arrow is flat. Initially, the gap between current GAAP and IFRS 15 for OE accounting is large, as I've just pointed out, about GBP 700 million.
As we reduce the unit cost of our engines and move up through the bands of launch pricing on some of the engines, we'll expect this gap to close as we have forecast over the last few years. As a result, the gap will close slowly at first as we ramp up production, but more quickly as key programs such as the XWB-84K mature. Thereafter, with a mix of high and medium volume engines and inevitable variations in price for different fleet operators, we'd expect the trend line to stabilize. For those of you who are looking at the size of the area on the curve, I should point out that the overall revenues and profits over the whole lifetime of the business will be the same under both accounting methods.
However, for OE, IFRS 15 will never actually catch up with current GAAP because of the effect we would have seen under current GAAP for linked accounting. Conversely, because of the way we currently report aftermarket revenues for linked engines, effectively suppressing the cash aftermarket margin by the unwinding of previously pooled ahead profit, our overall IFRS 15 aftermarket revenues will be higher. Aftermarket forecasting is going to be more challenging, I'm afraid, as it will be quite hard to predict when engines are being serviced and how much of the expected contracted cost is incurred. However, as we'll explain later, the basic difference should close as overall engine programs mature. This reflects the fact that we catch up in profit terms around the time of the second service on most engines.
The more mature the fleet, the higher cumulative profits you'll be recognizing, and therefore, the higher the reported margins. However, we have a relatively small and young fleet today, as the average age of our Trents is only around seven to eight years, and it is reflected in our low overall TotalCare creditor balance today. The significant growth in our market share over the next few years means it's going to take some significant time for our average age to mature. The service revenue is likely to lag between current GAAP for many years. Our focus so far has been on civil, and it's where the most significant differences are. There will be some effects on our other businesses, although a great deal smaller. In Defence, for instance, the OE impacts are likely to be de minimis in the near term.
There will be changes in the aftermarket for Defence, as we do have some long-term MissionCare contracts with a flying hour element to them. Of course, how they're serviced is completely different. MissionCare is less than 30% of Defence aero services revenue. The effect actually will be quite small. We're still evaluating the other businesses as well. All have some long-term contracts in them, but we're not expecting major changes. We've covered the main adjustments to 2015. In the workshops later, we'll spend some time contrasting current GAAP and IFRS 15 in a bit more detail, as well as trying to help you think about the modeling moving forward. We'll give you as much directional guidance as we can, but please bear with us.
Views on the actual outturn in 2018 when we implement IFRS 15 are highly subjective and not something we can be definitive about yet. We spent a lot of time over the past few months working on some of the more detailed principles in the interpretation of IFRS 15 and how this would have applied to our 2015 results. Looking forward, we'll be providing some similar adjustments for our 2016 results around the half year. In February 2018, when we represent our 2017 results, we'll then provide them under both sets of accounting standards. I used this slide earlier, so I'm just going to keep it short now. There are likely to be some big non-cash adjustments that we've just seen, particularly on OE and some aftermarket profit under the new standard. Of course, cash flows are unchanged.
The impact of IFRS 15 is really just a timing difference on how we recognize the returns over the whole life of the product. In the end, we'll make the same cash flow and the same profit on each engine, regardless of the accounting. Let me briefly wrap up. We expect to deliver 2016 broadly in line with our original expectations, despite some mixed market conditions affecting some parts of the business, and some of those will play into next year. We've made good progress with our transformation program and increased our banked annualized savings to around GBP 120 million. When we adopt the new standard from 2018, it will initially have a negative effect on our reported earnings. The most important thing to take away is that fundamentally, the net present value of the business hasn't changed because there are no changes to cash flows.
Thank you very much. I'm now going to hand back to John. Thank you.
Thank you, David. That brings the two opening presentations to a close. We're going to take a short break, give you a chance to get on your feet and have a coffee. We are running about five minutes late, so if we can come back in here at 10 o'clock, that would be greatly appreciated. Coffee is back in the reception area at the front of the hotel. Thank you very much, and see you in 20 minutes time.
Hopefully everyone is refreshed. We will move on now. I'll just introduce what's going on in the breakout. We had these three themes about engineering excellence, operational excellence, aftermarket excellence, all a little bit nebulous and intangible. What we're going to try and do is bring some of that to life with examples from the business. As I described in my presentation this morning, we can't sort of do it perfectly because we'd be here all day with examples Everywhere. You will see a cross-section of what's going on in the businesses and a cross-section of activities aimed at these three themes. The ones that we've actually got set out in the rooms, in engineering excellence, we're going to have Power Systems and Nuclear. Operational excellence is in Civil Aerospace and Marine. Aftermarket is Civil Aerospace and Defence.
Underlying all of that, as David promised you in his talk, we've got a detailed deep dive on our interpretations of IFRS 15 and the difference that is going to make. Before we start on all that, all of our business presidents are here to give a quick introduction on what's going on in their businesses. We'll start with Civil Aerospace, and Eric Schulz is going to kick off.
Thanks, Warren. Good morning. Really pleased to be here today. My name is Eric Schulz, and I'm the President of Civil Aerospace. I've spent my entire career in aerospace, from airlines and airframers and suppliers, various organizations around the world. I joined Rolls-Royce in 2010. I became president of what was, at the time, civil large engine in 2013. In January 2016, Warren asked me to take the reunification of the small engine and the large engine and the supply chain within combined Civil Aerospace. Today, I will show you a little bit of our view of the market environment and what does this mean for Rolls-Royce. I will also give you a snapshot of our priorities as a business. I will introduce the two workshop that you will be in with our Civil Aerospace representatives, I will conclude with a very short, brief summary.
If I start with the market environment, these are the basic slides we are always contemplating. If I look at the order and delivery, the business is a little bit uncertain today. For the first time since a long time, we have had less order than deliveries within a year on either airframe or engines, as it goes together normally. Clearly, this is the first year. It doesn't mean that we are anxious about the future of the market. It's just one year, and you can argue that we have catched a lot of orders in the previous years, and that may be just a natural kind of a pause in the system, waiting new orders in the future. Nevertheless, we see a rebalance compared to the start of the decade.
We believe, in terms of business, that we are quite insulated from it because, as you know, we have a very massive order book. We've not seen that many cancellation. We've seen a little bit of postpone, but not something that we are really anxious about. Again, we are putting a lot of attention to the market, looking at this. It may not be anything. It might be a first sign of a slowdown. We don't know yet, but we are watching this. Air traffic, which is very important because this is clearly the end customer flying the airplane. Air traffic is somewhere on the same lines. If you look at the Western world, it's kind of slow. It's a 1% growth over the year. Of course, there is always that real imbalance between Asia-Pac and namely China and India versus the rest of the world.
The load factors are fantastically well. I remember my time, I would have dreamed about load factor of these levels, 80% plus. We believe the long-term fundamentals are still around 5% CAGR overall. Clearly, it's also something to watch. If we focus on parked aircraft, we had a difficult year last year in 2015, which was, I would call it based on two very specific things that happened to our customer base. One was Malaysia, that started to stop 13 777s with the Trent-powered. Also the bankruptcy of Transaero, which parked quite a lot of airplanes. These were the two main event. Since, the situation has recovered. When I look at 2016, we've done 24 Trent-powered transitions as compared to 10 last year at the same period. Clearly, we have accelerated. We have, as you probably know, we've been quite public with this.
We've set up new structures within civil aerospace to serve our customer and be more flexible, adaptive. Of course, our target is always to be better than the competition. If there is a 777 or if there is an A330 to be parked, I rather prefer to see a Pratt or a GE aircraft being parked as compared to mine. What we are doing, we accelerate the transition. We try to get very close to the customers and get that motion moving. Now, there is a point of caution I want to give everybody is, as we will reach 50% of market share in the future within the next three or four years, we should expect to have more aircraft parked because this is just a sign of maturity.
Again, this is why it is very important for us to work on transitions, mainly with leasing companies, such that we ease the Trent-powered transition and we protect our market like this. In business jet, these charts represent the projected number of billionaires around the world, you probably know that probably better than I do. We expect that number to continue to grow, especially in emerging countries. I believe that when I speak to the airframers, Gulfstream, Bombardier or Embraer I always get the same signal, which is the last year and this year and the next year look a bit difficult. The long-term growth in the business seems to be quite sustained, largely because of these people will be future customers of global corporate jets.
One of the key things as well, which is always of note, is that when we talk about this market, the corporate business, the large cabin, which is clearly the niche where we play, the large cabin is expecting to grow much faster than the rest of the corporate jet business, which gives us more opportunities. This is a little bit of view of the environment. Warren described the chart on the left, this shows that we are pretty strong on the market where we are, especially well-positioned on widebody, but also well-positioned on narrowbody. The brand on the corporate jet is really, really strong. I have to say that every time we go to people like Gulfstream, our brand means something for that niche of the market. We'll continue to innovate in aftermarket.
You could see the growth in aftermarket on the right-hand side. In 2015, we had about 3,500 engines in the world flying, within 10 years, we will barely double that number. This means we are doing a lot on aftermarket. We are doing a lot on the network to prepare and to serve these engines, because all of these engines will require maintenance. Clearly, the use of big data, which connect to the presentation that Paul has made yesterday, is really, really important because we count on a level of efficiency which is given by managing big data, EHM solutions, and being more interactive with the airlines. If I go to the key priorities for the business, if we had an elevator conversation today, you ask me, "What are your big priorities in the business?" Clearly, the first one is ramp-up and capacity.
We have a massive order book. We have to grow our capacity, especially on the large engines, it's a growth of about 20% year-over-year. We've done 20% last year. We are doing 20% this year. We'll have to do 20% next year until a point where we reach a peak of about 600 large engines in year. Clearly, this is all about capacity. This is all about efficiency. This is all about having the supply chain right-sized, either internally or externally. The second big thing we have in front of us is what we call NPI, new product introduction. As you know, we have three programs in parallel that is unprecedented in Rolls-Royce with three big programs, which are very, very close to each other, the Trent 7000, the Trent 1000-TEN, and the Trent XWB-97. These are the ones that we can start now to see.
I hope within weeks you will hear more about where we are, we'll be able to be a bit more public about this. You will see that I think the bulk of the effort has been made, there is still a lot of effort to get to entry into service. The third one, which is also very, very important, are the fleet issues when we have one, the ability of the organization to be flexible, to be agile, to propose new solutions, to use data, to be able to serve the customers in the art and really as close as we can be, as Warren explained what we've done on the Trent 1000. I think coming from the airline industry, I can say that people understand that these are technological products, sometimes you have something you get surprised by.
I think the reaction and the reactivity that the system has is the way you keep the customer with you or not. This is really, really important for us. Again, we'll show you a little bit more example in the breakout sessions today. Transformation. Transformation in our system, as it has been presented this morning by Warren and David, it's not just about restructuring. Yes, we have reduced by more than 20% the level of overhead in civil, despite the fact that we are growing. On top of this, it's more about changing the way we do business, changing the pace, changing the actions, changing the accountabilities.
I mean, not having three people believing to be in charge who can make 180-degree directions, but having one pilot on board and only one pilot in command at any time who is making decisions, consulting others, but making decisions. That's what the transformation program is. For civil, it is also a roadmap that identified where best practices are in our whole business, which includes procurement, includes manufacturing, includes engineering, includes production, includes aftermarket. Where are these pockets of best practices around the world, and how do we get these views and these methods and these tools and processes back into our business so that we improve efficiency? The transformation program goes over the next three years. We have a clear roadmap on that, and I think it will deliver. It is delivering, and it will continue to deliver.
Last but not least, in an organization, in a business like ours, it's all about technology. We sell technology. Sometimes we forget. We believe we sell only product, but that's not the case. We sell technology. We sell fuel burn. We sell SFC. We sell reliability. We sell all of these values that we serve are coming through technology. The reinvestment in the program, you all know about the Advance program, you all know about the UltraFan, this is preparing the 2025 deliveries from Rolls-Royce, and it's absolutely important. The world has changed a little bit. Boeing and Airbus, just to take these two, I think they have been impacted and hit in their reputation, but also in their numbers, financial numbers, of delays for airplane. The problem that they have now, they are asking for demonstration of technology.
It's no longer a world where you can show a nice PowerPoint. You need to show products. If I go back to what we will present to you in the breakout rooms. We'll have a session on operational excellence and Mike Mosley. Mike, can you please stand up? Mike Mosley, he's the VP in charge of all of operations for civil. He will walk you through what we are doing to meet our operational targets, ramp up, and quality, in particular. I won't go into any detail. You will have the sessions with Mike, and you will be explained, and you will have an opportunity for questions. Likewise, on aftermarket, Dominic Horwood, who is the VP, in charge of customers and aftermarket. Dominic, can you please stand up? Yep.
Dominic will walk you through what we are doing in the fleet to serve the customer better, get closer. I won't get there, in order to save a little bit of time. In summary, this is where we are. We have a massive ramp up, unprecedented for Rolls-Royce, but we are on it. We know what we have to do. You will see good pockets of examples of how we move the needle. The transformation program, which we call Fly, I mean, why not, in civil aerospace? The Fly program also delivers well, and you will see in both aftermarket and operations presentations, examples of things that we are transforming. Addressing the in-fleet issues is absolutely key to preserve our reputation and keep the customer with us, and that's a big focus for us. The long-term outlook of our business looks very positive.
I mean, we are moving the needle. I mean, this company, by 2020, will have beaten GE on the large engines. This is something sometimes we forget, we should not because the customers and the market does not. We will have beaten GE by 2020 in terms of market share and in terms of engine deliveries. With that, thank you very much.
Well, good morning, everyone. I'm Chris Cholerton, President of the Defense Aerospace business. I'm going to start today with just a short overview of the business, giving some context on the market and then focusing on our three strategic priorities and what I think is an exciting time for the defense business. We operate in all four segments of the market, in transport and patrol, where we're the market leader, particularly focused on tactical transport, in combat, in trainers, and in helicopters. Our core markets of combat and transport and patrol, we have strong positions. That's 80% of the revenue in the business. We also have a large and mature installed fleet of some 16,000 military engines. Actually, on top of that, you could have 15,000 civil helicopter engines, which the business produce and support.
It drives a strong focus in maximizing value from that aftermarket, and that's the breakout session, which you'll see later, which I'll describe shortly. If we look at the market environment, defense spending. Well, it was a very hot topic last night at dinner and in conversation, particularly in light after the U.S. election. I think all forecasts will show that defense spending over the next five or 10 years is growing at a compound annual growth rate of just under 1%. There's some differences around the world. Broadly flat in U.K., U.S., and Europe, growing in the Middle East, which is 17% of our revenue, and growing even more strongly in four countries I pick out there, which we've given some particular focus to, in South Korea, Turkey, India, and Japan at close to 3%.
Clearly, I was asked many times last night about the impact of the U.S. election. Clearly, we're seeing some very positive intent, and I think we just need to see how that converts into policy and action. Clearly, some positive mood music. It'll have to include repealing the Budget Control Act, of course, which is currently still in place till 2021. I think also now the environment of our market is very competitive. There are few new platforms, so that gives intense competition when there is a new platform. We're seeing affordability at the heart of every customer decision. Some regulatory pressure coming on the Single Source Regulations Office in the U.K. We're seeing pricing pressures, and that's caused us to drive significant and aggressive cost reductions in recent years through our business.
You've seen that's been successful in actually protecting some very attractive returns through that period. We continue to drive cost-based reduction to sustain returns in the level of 15%-17% return on sales. Our strategic priorities are in combat. We need to secure a new combat position, perpetuate our capability in military engine design. In transport and patrol, it's about defending that market-leading position and growing where those new opportunities arise and in services to continue to innovate to maximize that value from the aftermarket. Starting with combat. On the right-hand side, let me just touch briefly on a couple of our existing programs. The innovative LiftSystem on the F-35B Joint Strike Fighter, a hugely valuable program to us and one which is now ramping up and growing. Output of that will double over the next 3 years.
The Typhoon with the EJ200 engine, in which we have a share via EUROJET. Still active campaigns currently in the Middle East, but other opportunities in Europe and later in Asia. Our primary focus in the combat sector is to secure new opportunities, and we're delighted to be part of the Anglo-French FCAS program, a EUR 2 billion investment in a development of an unmanned combat air vehicle in its formative stages. We're also pursuing opportunities to power the indigenous fighter aircraft, which are being planned in a number of countries, Turkey, India, and Japan in particular, with intense activity currently in Turkey. In each of those markets, technology transfer and localization of manufacture are highly valued. The same problem we're going to have. There we go.
In transport and patrol, our priority is to defend our market-leading position and grow via new applications when they arise. An example being the future vertical lift program of the U.S. Army, which is starting to gain some traction. To this end, we're investing heavily in both product technology to show we have a competitive product when those competitions arise, and also in our operational capability to ensure we have a competitive facility from which to deliver those products. In technology, we're investing both in increasing the scope on our existing products, and an example shown there on the bottom left is an infrared suppressor for the V-22 and also for the C-130, adding some scope to our supply, and we just received a little bit of a small first contract so far for that technology.
Also investing in component and system-level technology for the next generation of engine in this segment. A big and significant investment is in Indianapolis, in our operational footprint, where we're completely revitalizing that operational footprint. We're going to halve the footprint there and repurpose the remaining footprint and also invest in new manufacturing technology. Significantly reducing our operating cost of that facility and driving up productivity. It's another example of the continued drive we have in the business on reducing our cost base, which is critical to that future competitiveness. On aftermarket. This is the breakout session you're going to see, which will be led by Paul Craig, my Director of Services. It's a hugely important area for us. It's something I think we do very well, and something where we're continuing to innovate to release and maximize more value.
I have a few takeaways I'll bring out before the breakout session. Enhancing value at lower cost. What we're doing here is seeking to upsell our level of services with customers. We have roughly a third of our aftermarket revenue is from time and material, about a third is on fixed price repairs, and about a third is, roughly, on long-term service agreements. Again, we can realize value by upselling those who are not yet on the full long-term service agreement. Also driving lower cost. This has been a successful area for us in recent years, and we continue to push it hard via investing in new repair technology and also in the use of data, both operational data and data we have via being the OEM to have more optimized and intelligent work scopes at MRO, which drives down the cost.
It's important to us with such a mature fleet that we work to extend the life of those fleets in service. Examples here that Paul will share around inserting technology kits to old engines, which transforms their capability and their performance, and therefore extends their life and service to both the customer's benefit and our benefit. We've opened service delivery centers in the U.K. and the U.S., Saudi Arabia, and next year in India, to that end. In summary, I think strong positions in our core markets of transport, patrol, and combat . We're investing in technology to protect those positions and in our operational capability to drive competitiveness and a real focus on delivering further aftermarket value from that very large and mature installed base.
As I said, I think that continued drive on cost base with those strong positions will give returns in the 15%-17% return on sales through that period of investment and with that pricing pressure I described. I think some exciting times and some exciting opportunities ahead in the defense world. Thank you.
Very good morning to you. I'm Marcus Wassenberg, the CFO of Rolls-Royce Power Systems, and very grateful to be around you and to introduce my company to you. We have been founded in 1907 by Wilhelm Maybach, one of the pioneers of the diesel engine. I think this is why our company is still thinking engines first. May it be Bergen engines for medium speed or the 1600, 2000 or 4000 series for high speed, we're thinking engine first, and then actually we're thinking about the market and how we address the market. That leads to a broad portfolio of applications that we address in the marketplace. You can see basically that we're rooted in governmental and marine, which account for around about 45% of our business. That is business that is long cycle. When I talk about long cycled business, I mean 9-15 months.
Completely different from Aero, obviously. Power gen, which is a business that is bringing high volume. We are in applications as rail, mining, oil and gas, and David has alluded to that. Agriculture, which roundabout account for 20% of our business, and injection systems. It's that portfolio, actually, that makes it easy for us to bring in a revenue stream that is more or less stable within a certain corridor. Even when David alluded to the problems we see in the oil and gas market, it will not shake us as much as part of our peer groups. On the other hand, it comes with a certain level of complexity due to the increasing number of regulation on a global scale, because obviously we have to maintain the technological leadership in all of those applications and adjust it to the increasing number of emission regulations.
We're addressing a market, or the global market is around about GBP 17 billion. It's growing faster than the GDP driven by mega trends such as urbanization, mobility, higher energy demand. If you were to look at the market and split it's basically centered around power gen, which is close to almost 50% of the market. If you were to combine governmental and marine, it would then give you the same share of market size for governmental marine, rail, mining, oil and gas, and C&A. If you were to look at how we are positioned in the marketplace, then basically we're on a top 3 level where IP and content is very, very important, such as naval and defense, yard business, or mission-critical applications in the power gen area, where reliability is important and performance is very important.
On the other hand, you can see that there are areas of growth that are interesting for us because we have a meaningful footprint already, particularly in the power gen application. That translates into a very simple strategy. Our core basically is the naval and defense business. This is where our DNA comes from. This is where we're strong, this is where we benchmark of the peer group, and we need to maintain this position by all means. Secondly, because this doesn't load the factory alone. Secondly, we need to grow in high volume power gen applications. We're very strong in mission critical applications such as applications for data center or hospitals. We need to grow in the applications that are continuous power gen and standby power gen. We need to grow our service offering. Service is already a very significant part of our business.
We need to grow it thus, we do that not only by increasing the fleet, obviously in naval and governmental or power gen, but we have to selectively invest into industrial applications that are service intensive and grow our business over there. That then forms the pillars of our transformation. Sorry, I need to go back. Then on the other end, if you ask for strategic priorities, it's, A, delivering on our transformation program, and I will come to that in a second. Secondly, we need to maintain the leadership and technology that has characterized our business for over 100 years. It's crucially important for us. That means that we have to invest in hybrid solutions. You saw the hybrid train in the beginning of the presentation. We need to invest in gas. We need to invest in systems.
That's very important to us. We need to replace our existing product range with succeeding products that really fulfill customers' needs. We need to pursue additional growth opportunities, and that very much alludes to the things that Paul said yesterday. We have to increase our digital offering and harvest the knowhow that is available in the group for us, as well as partner up with strategic partnerships as we just did with Yuchai in China or with Weir in the fracking area to offer system competence to our customers. Talking about the transformation, this picture is just a very simple expression of the four modules that actually form our program, our PS 2018 Shaping Our Future. It's not only a cost program.
It is very much driven by the thought that we have to shape our markets, basically our revenue stream, the composition of our revenue stream, the composition of our product, because we need to take out complexity of the business in order to cope with the magnitude of applications that we're seeing, but not in every applications we need to be full range. Therefore, this is very important to us. From there on, actually, we're then streamlining the whole organization by taking cost out, partnering up with other elements of the group to offer shared service solutions. We try to speed up decision-making by bringing decision closer to the business, closer to the market, and therefore improve flexibility and resilience. At the same time, we need to sharpen our ambitions in the sales and service department.
That sounds a little bit technical maybe, but basically what we're trying to do here is, for example, we're taking down lead times for great engine overhauls by half. Actually achieved that already, and we are sure that this will bring us more orders in the years to come in the service department. Shaping Edges is about China. Just talked about the joint venture that we just announced with Yuchai, which is about the Series 4000, lowering our cost base on the one hand, on the other hand, bringing in more market access for us in a very important market and leverage the opportunities that digital brings, Industry 4.0 brings with it. Actually, there's a huge opportunity for us at Rolls-Royce Power Systems because we can leverage on the experience that our colleagues in Aero and Marine have.
Leverage digital opportunities in manufacturing and service offering is very important to us. If I'm now taking those elements and transform it into R&D. Actually, Peter Pelmus , Director for Product Strategy, will talk about that in the breakout session. The priorities that this brings along for R&D, and I put it in my non-engineering, more simple terms, is basically focus on customer requirements, i.e., an improved life cycle cost situation, focus on investments for the lead applications. Lead applications are governmental, Navy on the one hand, power gen on the other hand. Invest in new growth areas such as gas system and hybrid, and offer new services based on digital and system integration offerings. With that, I hope I was able to talk about the broad and diverse market positioning that Rolls-Royce Power Systems has.
I made clear to you the clear strategic direction that we are following, that the transformation program that we initiated is well underway and first results are already achieved, and the increased focus that we have from limiting, shrinking, focusing on the product portfolio, and the discipline that it brings now in the R&D program that Peter will elaborate on the breakout session. With that, I thank you very much and hand over to Mikael and Marine.
Thank you. Yes, my name is Mikael Makinen, and I am heading the marine business. I have been with the company for two and a half years. Marine. We all know what has happened to the oil price. We all know what is happening to the day rates and so on. We have to remember a few things. I have been in the business my whole life, and it is a cyclical business. It will come back. It will change. It will be an other type of business, but when it comes back, it will be, again, a very interesting business. The first slide here is a Hurtigruten cruise vessel. Nothing happens on the offshore market in Norway right now. Very few projects. At the same time, our offshore people managed to get an order for Hurtigruten.
We have designed the ship, we have done all the propulsion systems for it, the whole bridge, communication systems, some very exciting future possibilities of using batteries, and so on. Using that knowledge that we have in offshore, it is not so that it disappears and it cannot be used anywhere. We just have to find other applications for it. Oops. Let us have a look at the market. Yes, I have here a few slides. If you first look at the dotted line on the left-hand side, Clarksons in March, what they said, how the market will go down, it will come up later. Six months later, Clarksons is more pessimistic. That is typical in a market where you do not really know what is happening, where is it going. If we look at the light blue curve, that is the Douglas-Westwood exploration and production spending in offshore.
Again, same type of curve, coming back. Do I believe that these curves are right? At least the history is right, yes. I do not think that we will tomorrow see a big upturn in the market. It will come back. I think it will be a slow kind of a U-turn coming back, let us say, one year later than this. Exploration and production will start coming back about one year before you will start to see big orders. We have to remember that there are a lot of idle vessels out there right now that will be first fully deployed before the market turns back. How was our performance? It is very similar. You can see revenue, profit going down. That created, in my opinion, both opportunity and the need to do a transformation.
You can say that we are behind the curve. I think we are taking very decisive actions here. You will hear about it in the breakout session later, what we have done. Going from 2.5 years ago, we had 27 operational sites. Now we're going down, you will see later, to very few. A big transformation had to happen. Our strategy. As I said earlier, we are very good at solutions, very good at complicated solutions, applications, designs for customers. Let's use it in wind power, in Navy, in other types of applications now when offshore is down. I think we have to protect our unique offering. Don't let that go. Second thing is, Paul Stein talked about digitalization and 4.0. We are talking about Marine 4.0. I think this is a huge opportunity.
I think marine is a very conservative market. I feel that this downturn has led to the fact that we will see marine being in the forefront of something called Marine 4.0, digitalization, reduced crew, how you transfer data from a ship ashore, how you analyze the data, what do you do with the data, and so on. I think this is very big. During my whole lifetime, I haven't seen this big a change. In some literature, it's said that the previous change was when the container came about 50 years ago. There is a big change happening in the marine market. I think because of our unique position, when we have the knowledge within the group, whether it's defense or it's civil or it's nuclear or power systems, I think we can be one of the forerunners here if we do it right.
The third one, becoming Ship Shape. We call our transformation program Ship Shape. Ship Shape because it will never stop. Every time when a ship goes out to sea, it has to be ship shape. It's not a one-time program. We have to drive efficiency. It will never end. We have to take a big boost now and then. We have to continue with it. The next one is winning the customer engagement. Very important. Don't forget to focus on customers during a big transformation. Don't turn inwards. Marine, I think that we will talk about this in the breakout session more. I won't go into all the details here. As you can see here, it's very much in line with what Paul Stein said yesterday. This is what's happening in Marine.
If we do it right, we have very exciting projects and development going on here. It's a long term. It will not create a huge revenue 2017 or 2018. I think that if we do it right, it will be a winning concept. What will we look like in Marine? Going from 27 production sites, what will we be? We will have our naval business based in U.S., based in U.K. We will have innovation, mainly Norway, Finland, and Singapore. Those will be our innovation hubs. Those will also be our hubs where we produce very complicated products. New capabilities, Eastern Europe, where we are already moving some of the high-end engineering to Eastern Europe.
We have a big setup in India where we move the rest of the engineering, and we have a very good facility in Vietnam, which will be our production site for those more commoditized products or components. Then, of course, you need route to the market, and that's very much focused on Asia, which is the biggest market for Marine. I think that we have responded well to the market challenges, not losing what was good in the company. We continue to lower the fixed cost base. I think that that's a must. I don't think we were as flexible as we could have been. In a cyclical market, you have to take it down to a certain level, and then you can always take care of the better market conditions. Focused investment.
I also want to focus investment on those products that will create a future, not just spreading the investments all over. That means that some of the products will not have as much investment. Some of the products we will maybe stop over time, use them as cash cows, and then they are phased out. With these words, thank you very much. Now it's over to Harry.
Thank you, Mikael. Good morning, everyone. I'm Harry Holt. I'm President of the Nuclear business, and I'll give you a very brief overview of the business before leaving you with some of the key messages that I want you to take away from the breakout sessions that we've got later on. The Nuclear business addresses both the defense and the civil market. In defense, we're the sole supplier of the nuclear steam raising plant for all the Royal Navy submarines, and we've been doing that for nigh on 60 years.
In the civil market, we provide safety critical instrumentation and control systems and a range of other products and services, from engineering support through the licensing process, through to the supply of high-value components and systems on the nuclear island, and all the way through to service support during the operational life of a reactor across many of the world's civil nuclear power plants. We've been doing that for 10 to 20 years. A slightly more recent journey in the civil side of our business compared to defense. The revenue split is 80% in the defense business, 20% in the civil business. As you can see, we're split roughly 40% OE and 60% services across both sides of the business. Both sides have grown strongly over the last six to seven years, and as a sector, we have trebled in size since 2009.
Our submarines business, you'll hear more about this later on, we design, we manufacture, and we provide through-life service support as a technical authority for the nuclear reactors on the Royal Navy's fleet of submarines. At the moment, that fleet consists of 4 Vanguard-class deterrent missile submarines, providing the U.K.'s continuous at-sea deterrence, and seven hunter-killer or attack submarines, currently 4 of the old Trafalgar-class boats and three of the brand-new Astute boats. Both these submarines provide a strategic capability for the nation. The Vanguard class of submarines is obviously our ultimate guarantee of security. The other boats, the attack boats, also provide a range of strategic defense tasks for the nation, including the anonymity of the deterrent, keeping open our sea lines of communication, strategic national intelligence gathering, and support to covert operations.
The reason for mentioning that is it gives this business strategic relevance at the very highest levels, it's resulted in a largely customer-funded business model that's very predictable and stable, offering pretty attractive financial returns. Of course, it provides the bedrock on which we can grow our civil nuclear ambitions. On to the civil nuclear market. Everyone's aware of the world's increasing demand for energy. You all heard Paul talk last night about electricity being great stuff, I think you said. Most forecasters predict that the world's demand for electricity will increase by well over 60% in the next 20 or so years. How that electricity is actually generated depends on a number of things. It depends clearly on the relative economics of energy technologies. It depends on the makeup of the power market.
It depends increasingly on government legislation around emission control and energy security. One thing everyone's agreed on is that low carbon electricity will form an increasing proportion of that energy mix, and all respected forecasters expect nuclear energy generation to be a stalwart within that sector, providing safe, secure, reliable, continuous carbon-free baseload power. That results in a market of about GBP 80 billion per annum across the next 20 or so years. That market covers the entire life cycle, from uranium mining all the way through to the civil construction of a power plant and the operation of that power plant. We, as a company, have capabilities that address about 25% of that overall market. In big chunks, the things that we don't do are obviously uranium mining, fuel processes, fuel processing, and fuel fabrication.
We're not involved in the civil side of the construction of a nuclear power plant, and obviously, we're not involved in the actual operation of that power plant throughout its 60 to 80-year life cycle. We have an addressable market of some GBP 20 billion per annum. Then there's some other genuine constraints that we have to work within that bring that target market down to about GBP 5.5 billion per annum. One of those constraints is a geopolitical one. We clearly can't do business with countries that don't have a nuclear cooperation agreement with the U.K. That rules out, for example, India. Many of our utility customers have in-house capability, particular engineering, which is not necessarily fixed in stone, but provides, in the short term at least, a little bit of a constraint on the available target market size for our business.
We address that market in three major areas. First of all, in new build, where our geographic focus is here in the U.K., supporting the U.K.'s ambitious new build program. Secondly, in through life service support, where the geographic focus is in North America and Western Europe, which has over 50% of the world's current operating nuclear reactors. The final area is modernization and upgrade projects, retrofitting, in particular, safety critical control systems, where the geographic focus is, again, in Western Europe and North America, and at the moment, a particular project that we're running in Finland. As you go into the breakout sessions and come to my session on engineering excellence, there's a number of key messages that I want you to take away.
First of all, our defense capability, of course, some of this is classified, I am slightly restricted in what I can and can't say, but it's a genuinely unique national capability that we have. We have nigh on 60 years of experience in designing, manufacturing, and providing through life service support for nuclear reactors that have powered the Royal Navy's fleet of submarines successfully for the last several decades. That does provide a strategic relevance at the highest levels. It does result in a largely customer-funded business model that's predictable, stable, and offers pretty attractive financial returns. Of course, it gives us a bedrock of capability and credibility that we can leverage for growth in the civil nuclear market. That market in the civil application of nuclear power is very substantial.
It is growing, if you look at it across all phases of the life cycle, it's pretty resilient. We have grown capabilities over the last few years to address that, particularly in new build and in through life service support and in major modernization projects, that offers us attractive opportunities for organic growth, we believe we've created the platform for further optionality around growth options in the civil market beyond that. Thank you.
Very much a whistle-stop tour of the businesses, hopefully a little bit of a clue as to some of the things you're going to be getting from the breakout sessions that now follow. Our intention here is to get you on your feet a little bit. Some of it will be here in this room, other rooms will be used in the hotel, you'll be moving around from place to place. The intention is to give you more of an insight, as both Warren and the business presidents have said, around what they're doing to drive engineering excellence, operational excellence, and aftermarket excellence within the business. What we're going to do is divide you up into groups. On your badges, you will find a colored dot.
About the investors and analysts in the audience, I'm afraid advisors aren't included in this because the capacity is limited. We've divided you up into four groups of roughly 20. You'll have a chance to go from place to place. You'll start off in these rooms, depending on the color on your dot. If you've got a blue dot, your host in my IR team is Ross Hawley, and you'll start off as it shows on this diagram in the drawing room. Follow the structure. We're going to sequence you through every 40 minutes. We'll allow a little bit of time in between for natural breaks, but about five minutes to get from place to place. During the course of this session, you'll also have a chance to have lunch back in the main restaurant. Hopefully a fairly balanced agenda.
One of the sessions will be in here to do IFRS 15. Please, when you're in this session, use the tables at the front. That will make it a little bit more engaging for the speakers, and give you a chance to ask questions without a microphone, and so on and so forth. In the other rooms, I'm afraid there's a bit of standing, there's a little bit of sitting, and of course, there's a bit of food. That's the intention. We're running about 15 minutes late, which is not a big deal. No discredit to any of the speakers. We've started off late and we're finishing late, and so be it. The sequence basically follows this, depending on your colored badge.
Take your pack with you and you'll have this as a frame of reference, but add roughly 15 minutes to the time for each session when it starts. If you decide to go off and do something else, please rejoin. You'll find it a very interesting and very engaging three-hour session. Thank you very much. I will let you gather in the rooms that you've got to go to. Have fun.
Welcome back, everybody. There are a couple of people, in fact, I think one of them is not here, but I was going to just introduce as well that are joining us. They'll probably prefer to remain anonymous, but Neil Gilliver, who's been leading the whole IFRS 15 task force within the company. Will Mansfield, who's a real technical accounting expert. If I get stuck, then I may call on one of those two. Obviously Andrew Dickinson, who's going to be co-presenting with me. Welcome back. To those on the webcast, I'm repeating this IFRS 15 breakout session four times today, but we're only going to webcast once as we're using the same material for each group.
In this workshop, I'm going to briefly run through some of the slides I took you through earlier, then I'm going to hand over to Andrew Dickinson, CFO of our Civil Aerospace Division, who'll be taking you through examples of how IFRS 15 differs to current GAAP, then try to help you think about how to model the business in the future. As I've mentioned before, whilst the aim here is to give you as much directional guidance as we can, please recognize that we can't be definitive as how it will all work exactly before we actually implement IFRS 15 in 2018. As a quick recap, I explained earlier the removal of CARs and linked accounting. This impact is significant in terms of non-cash adjustments to OE revenue and profit, and these will be particularly felt in the near term given the current engine unit losses.
There is no change to overall profit achieved over the engine life and of course no change to cash flow. This slide is also to help you think about how to model the different elements of our revenue. The application of the new standard requires us to treat our contracts with airframers and airlines as independent, even though the economic substance of the overall transaction is to generate overall positive cash returns from the combined arrangement. The standard removes the option of capitalizing cash losses that we make when we sell as an installed engine and spreading it over the lifetime of the aftermarket contract. As a consequence, around half of our current civil OE revenues are quite significantly impacted.
For the rest of the business, the application will not really change the way we report, principally as they generate positive OE cash margins today and hence there's no need to capitalize upfront losses. This includes spare engines, business jet engines, and the V2500 modules, which we'll continue to report it pretty well on the same basis as they are today. In the aftermarket, roughly a third or so of our revenues come from time and material style arrangements, which will continue to be reported in the same way given there's no long-term contract. It's really in our pay as you go flying hour based long-term service contracts where we switch to a cost of shop visit recognition basis where we'll see the change.
This is because currently we recognize more revenue in the initial years of the agreement to smooth the margin, and that's going to be deferred under IFRS 15. When adding OE and aftermarket together, getting on for half of our revenues will be impacted while the other half remain broadly unchanged. This is again is the same slide as before. It illustrates the level of adjustments between IFRS 15 and current GAAP for OE that we would have seen in 2015 if we'd applied the standard then. The largest item is the GBP 370 million, which represents the aftermarket profit pulled ahead into OE contracts on linked contracts. That won't exist under IFRS 15 as we'll no longer link the two contracts. Then the other items are the cash losses on installed engines.
The GBP 150 million is a loss from linked and GBP 161 million from unlinked contracts. That in future will be a single combined figure. On the positive side, there is an annual benefit to the profit line through not amortizing CARs in IFRS 15. Note that in 2015, we also had a GBP 65 million one-off benefit release from a CARs related provision, if you remember on the launch Trent 1000s. Neither provision nor release would have existed under IFRS 15 because we'd have already taken the cash loss through the income statement when the engines were sold. Moving now to the aftermarket. The GBP 268 million at the top is the positive effect under IFRS 15 of not having linked contracts and therefore having to unwind the aftermarket profit that's already been pulled ahead into the OE sale as we move through the aftermarket contract.
In 2015, we changed the way we provisioned risk against our positive long-term contract balances. If you remember, this gave us that GBP 189 benefit. The GBP 136 million negative you see here is a reduction in that benefit we'd have seen under the new standard because we wouldn't have been linking that contract and our contract balances would have been so much smaller and therefore the adjustments are smaller as well. Conversely, we'd also have seen a lower level of positive catch-up adjustments in areas such as life cycle cost improvements under IFRS 15, again, largely because we wouldn't have had that linked accounting. Finally, the change from a flying hours to a cost activity basis of recognizing revenue and profit in the aftermarket is quite complex. Andrew is going to explain how this works in a bit more detail in a few minutes.
The final slide here, again, helps you appreciate the magnitude of balance sheet transition adjustments. By the time we come to do the actual adjustments for the opening 2017 balance sheet, clearly the actual impact will be different as we will have completed another year of trading and have a higher CARs and TotalCare net asset balance, for instance. As I said earlier, this is on a pre-tax basis, and clearly there will be a tax effect. I would suggest for modeling you use the tax rate you're already using, something in the 20%-25% range should be appropriate. If I think about how the balance sheet develops going forward under IFRS 15 as opposed to the initial adjustment itself, it will be the deferred revenue creditor now which grows as we receive cash from flying hour payments ahead of recognizing profit.
Look further ahead, it's going to take a while, therefore, before revenue and profit recognition under the IFRS 15 standard for OE moves ahead of current GAAP. That gap will narrow over time as we reduce the unit engine costs. In the aftermarket, it's fleet maturity that will lead to reporting under IFRS 15 moving to positive territory versus current GAAP. This reflects the fact that we will be catching up in profit terms around the time of the second service on most engines. The more mature the fleet, the higher the level of servicing, and therefore the higher the reported margins. However, there is some near-term upside.
The absence of linked accounting under IFRS 15 also means no unwind, as I've already said, of pulled ahead profit against the aftermarket, and therefore we'd expect to see our aftermarket revenue and profit under IFRS 15 becoming greater than under current GAAP before the middle of the next decade. I'm now going to hand over to Andrew for the next section.
Thank you, David. Morning, everybody. We've seen some of the IFRS principles this morning. What I'd like to do in my presentation is actually just take some of those principles and just use them in some practical examples so you can see how we think of IFRS 15, and maybe give some indication how we can actually model the business going forward. As I said, I'll go through some examples, and then we'll go through some modeling on some engine-specific projects that we've done. The example I've got here is a very simple example. There are some more detailed examples laid out in your packs. What I'm looking at here is an example where we have a gross revenue of GBP 100 million, we have a concession of GBP 60 million, and a net revenue of GBP 40 with a cost base of GBP 50 million.
Under our current accounting, and this is an unlinked example under our current accounting, what we were doing today is the cost of sale would remain unchanged at GBP 50, but it would actually gross up the revenue to equal to GBP 50 and show a zero margin at point of OE sale. That GBP 10 million that we grossed up, we would create a contractual aftermarket right, and we would amortize over 15 years. Under IFRS 15, because we're no longer creating contractual aftermarket rights, we will now recognize that GBP 10 million cash loss in year, as you can see in the example in the bottom left.
I think it's important to note that because we are no longer linking contracts and we're seeing airframer contracts as distinct to contracts that we have with the customers, with the airlines, that all OE sales effectively will be treated in this manner under IFRS 15. Whether they were previously linked or unlinked, this is how we will account for them going forward under IFRS 15 and in the manner that all OE profits and losses will be recognized at the point of OE sale. I think we hopefully believe that this will significantly improve the transparency in our accounting around the OEs, because it's pretty much just cash accounting on the net revenue versus what the cost of the engine is when we sell it at point of sale. Aftermarket. This is not so straightforward as OE.
We are moving from a revenue recognition on a flying hour basis, which does today occur smoothly over the contract period. We're moving to a position of revenue recognition on an input basis or on a cost basis. This will mean that our revenue will no longer be linear over the contract period. The example that I've got on the screen here, for illustrative purposes, I presented a contract period that has two engine shop visits in it. Approximately about 20% of our costs occur outside of the shop visits, and thus we will continue to recognize this cost and revenue on an ongoing basis. You can see this depicted in the diagram here between start of contract to where the shop visits occur. This is this cost that we incur for engine health monitoring, operational service desk, leased engine cost provisions.
These are ongoing costs that we will see throughout the contract. The balance of the revenue, though, and the profit will be recognized at timing of shop visit. In this two shop visit example, you can see that revenue recognition profile increasing at first shop visit and at second shop visit. We just put for some help here that in terms of the cost of the shop visits, we see the cost of a second shop visit about 1.2 times the cost of the first shop visit. You will also notice in this example that there is an inflection point between current accounting and IFRS 15 around the time of that second shop visit. We expect second shop visits to occur between years eight and years 12, depending on what operation the airline is using the engines.
Therefore, at a portfolio level, we do see a correlation between this inflection point and the maturity of the fleets. With that correlation in mind, this table shows our view, just using the selection of some of the large engine fleets, and looking forward at their fleet maturity levels. Starting at the top with the Trent 700, the fleet today has an average age of eight years, and by 2030, will have an average age of about 20 years. The bottom line on this chart is XWB. This engine has only just entered into service and is a steadily increasing new engine output volume ramping up over the next few years, over the next five years. Based on our current estimate, will reach an average age of 10 years of fleet maturity by 2030.
We've seen some examples of how we see OE being accounted for under IFRS 15. We've had a look at some of the revenue recognition for aftermarket under IFRS 15. What I'd like to finish on, really just taking a couple of engine projects. We're taking the Trent 700 and Trent XWB and actually walking through those two engine projects and just seeing the differences between current accounting and IFRS 15. The first thing I'd just like to point out that the legend on here is Trent 700. This has been updated on the screen, and I think in your packs it says XWB, but this is a Trent 700 example. I'm going to start with OE, which are the bottom two lines on here. The dotted line is current accounting. The hard line is IFRS 15.
You can see on the current accounting that we are making profit. That is because of the linked accounting that we're applying predominantly on the Trent 700 contracts. As we switch to IFRS 15, we will start to recognize cash losses at point of sale, which is why the hard line falls under the zero Y-axis here. It is worth noting, though, that historically we have made profits on the Trent 700 on OE, and that these cash losses that you see here are a reflection of the price reductions that we've given to secure end-of-life volume on this program. On aftermarket, which are the darker lines, the dotted line again being current accounting, the hard line being IFRS 15. We see the Trent 700 having a pull forward on revenue recognition under IFRS 15, this is driven by two reasons.
One is the average age of the Trent fleet. I talked about this average age of Trent of eight years today. The other reason is that it benefits from the absence of amortization from previously linked profit on OE. If I then look finally to XWB example, again, starting with OE, we see small losses under current accounting. I guess these are reflecting amortization of historical cash losses and sale of the spares engines. You see under IFRS 15 on the current accounting on the hard turquoise line here, that as we start to see the cash losses on these engines that we've talked about previously, the comparison here to current accounting will narrow as we improve our drive on cost reduction and move away from launch pricing on the XWB.
On the aftermarket, however, due to the age of the fleet, we will see a revenue and profit drag on the XWB in the near term, this importantly, I think it will self-correct as the engine portfolio matures, just as we've seen on the Trent 700 program. In summary, as we mentioned previously, we will see significant non-cash adjustments to OE and aftermarket revenue and profit, these are influenced by high volume new engine programs as we grow our market share from the 30% today to the 50% on wide body over the course of the next five to six years. There is no change to profit over the life cycle of the contract. It's just a different timing of recognition of that profit.
There is absolutely no change to the cash flow and the years of that cash flow falls over this change to IFRS 15. That concludes my presentation. I guess we're opening the floor to Q&A now, Helen, yeah?
Yeah, go.
Thanks much. Maybe starting off with that slide 15, the one with the XWB margin. That looks like a pretty punchy margin for OE engine deliveries. How does that compare versus history, in terms of mature Trent engines you've been able to get up to that sort of level? That's the first one.
Yeah. Under current accounting, this chart is very much recognizing the sale of spares that we do through the contract life cycle as well. Under current accounting, we'll be recognizing zero margin on the installed fleet. This is just the growth of the fleet and the spares % that we sell through the life cycle of that fleet.
If I'm looking at the right line, Trent XWB OE IFRS, it's a right mouthful. That implies still a pretty healthy cash and profit margin on OE deliveries for XWB, when we get out into 2024. How does that look versus Hello? How does that look versus what you've seen on older Trent engines on the A330 and things like that?
Yeah. It's reflective of what we've seen on the Trent 700 historically, when the program was at a level of maturity. It's historically reflective of what we've achieved.
Okay.
It's really the last couple of years where we've had the COO run a program that's declined, but I think on the other chart you can see it's come off quite a bit, but it was at much higher levels going back two or three years.
Right. It's not blue sky thinking.
We're not doing anything differently. No.
Okay. Secondly, I don't think it's an issue at the moment, but how are you going to treat risk revenue sharing contributions by suppliers going forward?
I think it was said, there'll be no change to the cash flow that we have on risk and revenue sharing partners. There will be a difference to the timing. Today, because we smooth the margin over the contract period, under IFRS 15, we'll be recognizing the RSP contribution as a cost at shop visit. We'll be taking that cost at shop visit and taking a margin on that at the shop visit, but there'll be no change to the cash flows or to the commercial construct that we have with the RSP partners.
It's a relatively small effect today. I think it's within the lines that we showed. It's within the aftermarket timing difference, effectively. It's relatively small today. It will grow with the XWB delivery profile because as I think everybody knows, XWB actually has quite a high proportion of RSPs. I think by the time we get out to the early 2020s, it becomes a relatively significant part of the aftermarket gap. It's quite small at the moment. The basic principle is we're treating it exactly the same, which is we will spread the RSP effects on effectively shop visit input costs as opposed to linking it to flying hours today.
Oh, hi. David, Andrew.
Hello.
David Perry, over here. I've got one technical question and one conceptual question. Just the one number that surprised me, I think your legend's quite clever. These were numbers we knew, these were numbers we could have inferred, and these are things that are totally new. The one that's really surprised me is the numbers we could have inferred, but which have come out a bit different. The one that is surprisingly low to me is the amortization of prior year concessions. Two questions on that. One is just how many years are you amortizing those concessions over? Secondly, I think a lot of us have inferred that number wrongly. I'm just wondering why we couldn't see that or back that out from the TotalCare numbers you were giving us at the end of each year. That's question one, A and B.
Yeah.
I'll come back to question two.
You're talking about the 268?
Yeah, the GBP 268-
Yeah.
I thought that number would be close to GBP 500.
Yeah. I think that included, when we did that Let me just get my little crib sheet. What we had within that was also any retrospective adjustments also. It was getting mixed in with the whole cost reduction and other retrospective adjustments as well, which was the GBP 521, was it? That we gave you. Yeah, GBP 521, I think we gave you.
I guess just making the question simpler, how many years do you amortize these concessions over? I've had my little model. I was assuming 10 years-
Yeah.
maybe it's much more.
it's over the whatever the contract period is or whatever the term of the contract is. it will vary customer by customer.
Yeah, agreed. roughly, what is the average?
on average, between 10 to 12 years.
Yeah. Okay. All right. My other question, maybe a bit more conceptual, is the mantra we keep hearing all through the morning is these accounting changes don't affect cash. We all build cash flow statements that start with a profit number, and almost certainly your profit will be lower than most of us thought in 2018, given what we've learned this morning. Why wouldn't profit expectations that we all have in this room not be lower than we thought prior to today?
I think we are. The chart where we're showing the OE and the aftermarket, if you take those two together, it says that in 2015 we would've been GBP 900 million lower. We don't get to a point where that gap closes until the early 2020s. The point is when you work through all the cash adjustments to cash flow, the bottom line stays the same. It's the movement between profit and cash flow that's changing. No CARS adjustments, no total creditor growth adjustments. All those things are changing. We end up at the same bottom place for cash flow. The starting point is different, and the movements within it are different as well.
Okay. Just last one from me. There was a sell-side dinner, I think a lot of the people in this room were there, just after the H1 numbers. I think someone asked you, could you do GBP 750 million of free cash in 2019? You said you'd hope to do, if anything, a lot better than that.
Yeah.
Do you stand by that?
Somebody asked me this morning, I think, about the GBP 500 million that's effectively in our LTIP. The GBP 500 million for 2018 that's in our LTIP, that still is the plan in terms of what we're trying to get to, consistent with our own internal incentive targets, which would clearly imply further growth in 2019 and 2020 beyond that.
Thank you.
David, sorry, if we could go back to slide 41, which is the cash flow chart. I don't know if you could talk.
Oh, from this morning you mean?
Yeah, from this morning. Is that all right just to touch on that?
I don't know if we can bring that one up.
Is that yours or not? I can leave it to later if that's not allowed.
No, it's fine.
Okay
I don't know if we've got the presentation up at the moment.
It's basically the one that has lots of arrows on it.
Yeah.
I was just wondering if you could just talk through practically what's going on there with CapEx, property, plant, equipment.
Yeah
The directions there, and also working capital. Thank you.
Yeah. In terms of the PPE and other intangibles, the other intangibles is actually the important bit of that. That's the one that's really moving. Effectively what we're going through at the moment is the peak of the 97K and other programs that we're delivering in 2017. We're actually capitalizing now the majority of the spend there. What we're seeing is therefore a peak in capitalization of intangibles, which clearly means when we do the cash movement. That will have improved profits, but when we then have to adjust down to cash flow, it effectively means it's a negative effect. That begins to turn around once we've launched those engines because we stop capitalizing roughly at the point, maybe a little bit after, the aircraft goes into service.
All three of the programs that we're working on at the moment, the 97K, the Trent 1000-TEN, and the 27,000 are all due to go into service next year or towards right at the end of the year. We'll start seeing when we get to 2018 therefore, that that will no longer be a big effect. In fact, it will be going in the other direction by then. It is really the intangibles as opposed to CapEx that's really driving that. Is that helpful? Yeah.
Sorry. Yeah. One of the things that So when we think about working capital, we're talking about really trade stuff. Inventory, trade payables, trade receivables, and importantly, actually, customer deposits as well. We are trying to drive improvements in cash flow clearly from inventory. It's a bit difficult while we're going through this ramp period. Particularly, that's probably been something that we haven't made as much progress as we would've liked this year because we've had to pull back a little bit on XWB, for instance. Certainly, that is quite an important part of our cash plan in 2017, to get quite a big improvement in inventory. Then just the net of deposits, payables, and receivables has been, we think will be a bit positive this year, and a little bit positive next year.
It's really the inventory that's going to primarily improve 2017. Once we get into 2018, although we're still going to be improving inventory turns, just the size of the production increase means that the absolute will still be a negative on cash at that point. Back to David. Is there anybody else? Oh, sorry. It isn't David. Sorry. You're right in the light sorry.
Yes. Thank you. Back to slide 15, which is the XWB margin chart.
Yeah.
The question is, why is there such a lag in the catch-up on the services margin? If we look at the solid blue line.
Yeah
It's quite a long way below.
Yeah
the current method.
Yeah.
Almost 10 years out.
Yeah.
We are saying conceptually that IFRS 15 services line is more profitable.
If we just go back to the installed base slide. This is the really important thing, that actually because we're still delivering a load of XWBs and a growing number, actually, the average age of that fleet isn't increasing very much at all through 2024. You can see it's actually still sort of two to three years. What Andrew said is, when we get to a point where the average fleet age is roughly about the same as where the second service occurs, then you'd expect those two lines to be at the same point, but we're not going to get there until we get out here. Those lines will continue to diverge for a bit, and then they will start to come together once we get to the point where the average fleet age is roughly about the same as where the second service occurs.
Does that make sense?
I'll just add to David's point on the chart. Same problem as Warren. You can see the very light dotted line at the bottom. You can see in 2024, the average age of the fleet is still only two years.
Oh, yeah. Sorry, I didn't realize it was on there.
Yeah. If I go back to this chart here, so you can see versus current accounting, if we think the first shop visit is between years four and six, under today's accounting, we're collecting revenue from day one. If the average age of the fleet is still only in two years, we're not collecting anything apart from the ongoing, this 20% of cost that is outside of the shop visit. That's why there are these certain break points you see in this revenue recognition. Around four to six years in terms of where the average age of the fleet is, and around eight to 12 years where the average age of the fleet is. We see this inflection point under current accounting versus IFRS 15 around where the second shop visit is.
We're correct to think that the slope of the IFRS services line is steeper than the current method because we're not taking profits forward, right? It crosses the line further away than we thought is I guess my point.
Yeah. On XWB in particular, it's particularly acute. On Trent 700, we're virtually there already, it's very temporary, that effect. The reason for that is we're coming towards the peak of shop visits on Trent 700. Over the next five or six years, I think we get about to the peak on shop visits on the Trent 700. All right.
On slide.
There's one over here, Kevin, as well. Afterwards.
On slide 42, it says that on linked under IFRS 15, it must be with the same customer. I'm assuming that's the aftermarket and the OE. I thought that that was all with the same customer and unlinked wasn't. Can you just explain that nuance? Are there contracts that are not with the same customer that are currently being booked as linked? What would that circumstance be?
What this is referring to is the contracts we would have with the airframer, be it Boeing or Airbus, and contracts that we would have with the airline for the aftermarket. We're saying under IFRS 15, we are treating these substantially as separate contracts now. We're no longer linking the OE and the aftermarket together under IFRS 15.
Right. Okay. I may have misunderstood. I thought if they were separate customers, that's what unlinked was.
The basic principle is we're not going to be linking. The standard, I think technically, Will, maybe help me here, but would allow you to do some sort of form, but you have to make various tests. We've basically taken the decision not to link anything in any case.
Under current accounting, IFRS, or IAS 18, it allows you to look at the substance. You can say that this sale to the airframer and onward sale to the end customer is a substance that treats it as a single customer at the end, whereas IFRS 15.
IFRS 15 is much more specific. You have to look at the individual contracts that you have, therefore, if they're actually legally with different parties, the opportunity to link goes away.
Yeah. It would only be if we were selling to Airbus and they were operating the aircraft, which may happen in a few belugas, I don't know, but where that would occur. Yeah.
Then you also mentioned that you were deferring over the average life under the linked, the 10-12 years. Under unlinked, was it the same duration?
The retreads balance, I think we deferred 15.
15.
Yes. Yeah.
What accounts for the difference?
The 15 is in a way, a sort of conservative view on the lifetime of that engine. Clearly, we know the average is 25 years, but it was a slightly conservative view on that.
Just to clarify on page 12, the overhauls take place at four to six years and at 10 to 12 years is your assumption. Is that correct?
Yeah. Eight to 12. Yeah.
Eight to 12.
One of the slightly perverse effects, unfortunately, of the accounting is the further we push our overhauls by improving time on wing or the more we can take out of cost, actually, the less revenue and profit we book or it happens further out. That's something we just have to accommodate, but it's still the right thing to do from our point of view.
Two more.
Okay. Yeah.
Okay. There's two questions here. On the OE part, you sort of said that the average losses are GBP 1 million-GBP 2 million.
Yeah.
You've talked about where you think they'll go for the XWB.
Yeah.
Can you just talk about where you think the average OE cash losses will trend for the overall portfolio?
Well, I think by the time that we've eliminated the XWB losses, which will include the 97K within a year or two, I think, of the 84K. Really, it's only going to be the 21,000 of any significance, I think, and probably 27,000.
Yes
That will have losses. For the overall portfolio, I don't know. Do you know?
I don't. No.
Yeah.
No.
It ought to be positive when we take spare engines into account, I would have thought.
On the aftermarket. Obviously, the cash is leading the profit recognition under IFRS 15. Can you just sort of talk about what that gap is.
Yeah
How and when it closes?
Effectively, when we look at the balance sheet slide, the GBP 0.9 is the creditor that we're effectively going to create through that. That will grow over time, and it will only start closing at the point where we reach this nirvana of the average portfolio being about the same as the average or where the second service is. We're going to have a long period where to everybody's delight, we'll have a growing TotalCare net creditor as opposed to having a growing TotalCare net debtor. If you model that's what we would expect to see. That creditor will increase over time.
You have obviously been very helpful guiding on peak net debtor. Could you offer any guidance on peak creditor?
I'm saying, I think it won't be until that aftermarket catches up that we'll actually for the whole portfolio. That's I think it must be in the 2030s, but I'm not sure that we've actually modeled it. By intuition, that's going to be in the 2030s.
One question.
Yes, good morning. I have two question. First of all, have you gone through each and every contract to get to those numbers, or is it a statistical way of approaching the issue? That's my first question. My second question is on slide 50. If the graph is rightly measured, we can estimate that in 2018, you are getting half the losses of 2015 on OE, possibly GBP 300 million instead of GBP 700+. Is it right? Does it imply that the XWB engine will be break even on OE at that time? Thank you.
Remember the numbers will also include spare engines. That helps, if you like, in terms of the overall cash loss of it. As we've said before, Trent XWB should We are planning on that breaking even by the end of the decade on just the OE non-spare engine bit. The first part of the question.
Yeah, in terms of we model contract.
Yeah.
We've tried to give you some general guiding principles. Clearly, there are always exceptions to rules. If you think around where we've had, say on the 21,000, where we've had some earlier shop visits than expected, then that profile will behave slightly different to what we've shown here. We've tried to give you a picture of this is how it generally behaves, and how we see it modeling going forward. We have looked at that on a contract-by-contract basis. There are exceptions-
Yeah
as always.