Earnings Call: H1 2016

Jul 28, 2016

Thank you, everybody. Thank you. Good morning, everybody, and welcome to Rolls Royce's First Half Results for 2016. My name is John Dawson. I'm the Head of Investor Relations of Rolls Royce. And with me here today are Warren East, our Chief Executive and David Smith, our CFO. Our agenda today is as follows: Warren will kick off with some highlights of the first half David will then run through the financials in more detail before Warren then returns to take you through some comments on our transformation agenda and priorities for the second half of the year. The presentation should last around thirty five minutes, and we'll have plenty of time for questions afterwards. We are conscious you need to be away by about 10:00 to go on to your next meeting, so we'll try and make sure that finishes on time. Before I hand you over to Warren, let me just remind you of a few housekeeping matters. We are presenting the webcast today the presentation today as a webcast as well, and we will be able to take questions For those of you joining us on the webcast, please submit your questions online, and we'll make sure they're asked in the room if they haven't been asked already or followed up with afterwards if we do not have time. Please turn off your mobile devices out of courtesy to the speakers. And finally, we will be including forward looking statements in our presentation. Please refer to the slide in your pack about that. Our numbers will be on a constant currency basis unless stated, and that includes our comments on guidance as well. With that, I'll hand you over to Warren. Good. Thank you very much, John. Well, as he says, good morning, everybody, and thank you for coming. And we do understand that it's a very busy day for results today, and you've come along to share some of that time with us. So that's very much appreciated. Thank you. Now those of you who can remember, this is roughly where I left off in February when talking about our full year results for 2015. And we're going to stick with the same framework for talking about our results this morning. The framework here is the priorities that I set for 2016. And I'm going to sort of start off now and, after talking a little bit about the business, talk about restructuring. And then I'll pick up with the other priorities here when I come back in a few moments after David has run us through some numbers. So for the group as a whole, the 2016, I'd say it's been a steady start. Actually, the business is a little bit better than we expected for profit and cash in terms of the absolute numbers as of the June. That is largely due to timing of certain deliveries in our large civil business and a little bit in defense as well. And we're saying this morning that our expectations for the full year remain absolutely as they were, which means we've still got a lot to do in the second half. However, we remain confident in those expectations for the full year. It's driven by the schedule of production and deliveries in our civil business, the timing of a few specific defense contracts and also, fortunately, the benefit of some of the restructuring activities and simplification activities that we're starting to do, some of those benefits starting to come through. And that's all pretty much in line with what I said at the May in at our AGM. So now I'll just have a quick look at the business, some of the highlights from the first half of the year. I'll start off with our activities in Civil Aerospace. Looking to new engine programs, these are engines which are not in service at the moment and which are going to be fueling our growth in future. We hit some important milestones. Here's a picture of our new version of the Trent 1,000 engine. And at Farnborough a couple of weeks ago, we were able to announce that, that had received ESA certification. Also in the new engine sphere, our Trent 97 ks, this is the higher power version of our XWB engine. That's also been achieving its first flight on our flying test bed and things going well there. The big lever for our Civil Aerospace business, however, is achieving the ramp up in volumes that we need to achieve last year, this year, next year and so on. And so in 2015, as a reminder, we supplied just over 300 large engines in total, and the Trent XWB was just starting and part of that. This year, we expect to deliver 400 large civil engines, and we're on track for that, having delivered 164 in the first half. And incidentally, that was just over 100 in the second quarter. We're moving the volume run rates from around about 30 a month to around about 40 a month. That's happening as we speak. And so we anticipate the next couple of quarters significantly over 100 engines per quarter, and that will take us into the realm of just over 400 engines for the full year. Now I'll talk a bit more later about manufacturing lead times and what we've been achieving on improvements in manufacturing lead times, and that is, of course, one of the drivers that's enabling us to ramp up the volume like that. As I look forward at the Civil Aerospace business on a slightly longer term, and the graph here, you can see this slightly longer term view, then obviously, we understand this is a business which grows in the long run. There are short term perturbations caused by external events. But when you look back on those in history, they don't make a huge amount of difference to the long run picture. And we also get small perturbations when we have things like spikes in orders, and that leads to, in the moment, a little bit more capacity in the market than there is demand, and you get perturbations there. As I sit back and look at the slightly longer term, however, I see a strong order book, which continued to grow in the first half of the year. I see us increasing our capacity to service that strong order book, and I see firm commitments from our airline customers and our airframe partners. And that is putting resilience into our revenue growth for the future. Near term, we absolutely hear about high shipments of wide body airplanes, a little bit of softness in passenger kilometers. And that does certainly put out more risk there in terms of risk of deferrals, risk of slowing things down. But interestingly, we're not actually seeing any changes from the airlines, particularly in the routes that they're flying, which is, of course, what really drives engine flying hours. And so from an aftermarket point of view, we are comfortable at the moment. From an OE point of view, if some of these risks start to materialize, then what we can see at the moment at most is a little bit of rephasing actually helping us with some of our delivery plans and easing a little bit of that pressure. And that's what we're seeing versus anything radical, any radical changes. Now obviously, if we see some radical changes, we'll be up and we'll be talking about it, and we'll let you know if we see that change. Right now, probably my if I wanted to talk about a concern here, the concern is simply in terms of our resource and the significant demands that we are currently placing on our engineering teams as they seek to help with this ramp up of volume at the same time as bring some very sophisticated new engines into production. However, things are going pretty well on that front at the moment. So let's move on to defense. That was a steady first half and a very good setup for the full year. Looking forward, there are opportunities for new OE over the next five to ten years. And we are working with keeping our designers, we're keeping our designs fresh and working with the partners on those for as and when the opportunities materialize. But this business, for the time being, is mostly about what happens in the aftermarket, servicing the fleet that's out there and getting that servicing activity more efficient and more profitable from our point of view. So we're doing things like working more closely with our defense customers, getting some of our activities physically located on-site with some of those customers so that we can get more value out of our aftermarket business and share that value with those customers, actually give them better service as well. And we're investing in future technology to build on this strong position, both for the aftermarket and the OE. We have a strong position today in transport and patrol, and we have opportunities in combat, and our investments are all targeted at that. Looking around the rest of the business. I'll start with Power Systems. Like in 2015, the first half of the year, actually fairly close to breakeven, it reflects lower volumes and product mix, where we've certainly seen higher shipments of the lower margin products. Meanwhile, our R and D focus is on higher volume applications like power gen, where we can leverage our capacity and grow our market share and really capitalize on the high performance differentiation that our products have. And so we're comfortable where we are with that business for the second half of the year. Switching to Marine. I mean it has been a very difficult period, and it's been a difficult period for quite a long time now. We're seeing some good results from the restructuring that we've been doing in marine, and we've been focusing R and D. We've actually increased I mean, it's not hard to increase the R and D as a proportion of the revenue in our marine business. But we have actually stuck with the expenditure in R and D, investing in new technology there. And I'm quite encouraged by the innovation that's happening in the product portfolio. We announced an investment in some new permanent magnet technology to expand that activity a few weeks ago. Meanwhile, as the offshore sector in oil and gas continues to be depressed, we're seeing people get a little bit more creative in terms of seeking opportunities offshore in slightly different applications in fishing and other nonoil and gas applications. So it's really stimulating innovation in marine part of the business. In nuclear, we are investing. We've announced some headcount increases. This is to service better the business that we do with the U. K. Government on submarines. And we've made progress there in terms of improving our project management, our manufacturing and deliveries from there. And we're also exploring opportunities with small modular reactors. Switching now to the one of those key priorities, and I'll talk about this transformation one now before handing over to David. Back in February, I talked about the need to address what I call the organizational hardware, that is the structures and organization, and both and the software, the activities, what people actually do. And we've been proceeding with the left hand side of the chart, hence the green tick, where we've been looking at the structure of the business, simplifying the structure of the business. That's where the initial focus has been. We're seeing costs leaving the business. I'll come up with some numbers in a moment. And we're certainly on track at the top end of expectations there. Moving forward in the second half of the year, the emphasis is switching to the right hand side of the chart, where we attack some of the way we work, the way we share information, the way management decisions get made within the business. And that is certainly harder, and it's a bit less tangible as well. So it's also harder to talk about it. But I'll endeavor to talk about that a bit more later in the year. On the tangible side, we're very much on track to deliver the 150,000,000 to £200,000,000 that we talked about in terms of cost reduction for the 2017 and going forward. So that's what's shown in the cumulative savings here. So by the time we finish with 2017, we're absolutely in the zone for 150,000,000 to £200,000,000 out. The type of progress we're on so far, the initial phase, we've done. So we're actually talking about achieving very close to £50,000,000 for 2016, which is the top end of expectations. And those changes will also have a knock on effect and will actually benefit from an additional £50,000,000 as we move into 2017. For the next steps for the remainder is work in progress. We've identified activities that we can reduce, which we hope will deliver 20,000,000 to £40,000,000 of benefit in 2017, and we have some work to do to find some more in 2017 and moving into the piece which comes from the 2017. But I'm comfortable with where we are at the moment. It's work in progress, a little bit more to do. But six months in, we're in pretty good shape. Just a reminder on how some of that plays out. Then what we tried to do here is show diagrammatically the simplification at the top of the organization, where we've effectively moved from nine businesses to five, and we've connected those five much more closely at the top of the business. That has really sharpened the ability for us to make decisions. It's increased accountability and raised the level of debate at the executive team. We're starting to talk about leadership and accountability. We are starting to see some real simplification here in how we execute the business. And that simplification is, for instance, measured in terms of reduced number of committees that we have to operate the business, reduced frequency, reduced numbers of people that are there at those meetings. And it's very much the start of the simplification piece. There is no shortage of opportunity here to reduce the complexity. The business is engaging well. As far as I'm concerned, I'm very encouraged by the response that we're getting around the business. I stress it's a good start, but it's only a start. So overall, pretty good first six months. There's still a lot to do. I'll talk about the other priorities shortly. Meanwhile, I'll hand over to David. So thank you very much, Warren, and good morning to everyone. It's really good to see you here. Warren has already run through some of the operational highlights. I want to stress, obviously, the results were clearly down as expected versus last year, but we did end up marginally ahead of pre close expectations, and the business clearly responded to the rallying call there. This outperformance was principally down to Civil Aerospace and it included some earlier than planned deliveries and a profit on some spare engines, together with more life cycle cost reduction and obviously a little bit of an FX tailwind. We also had particularly strong end of period cash flows and which was always hard to predict and included some early delivery of second half actions. But again, evidence, I think, of the business responding to the challenges that we've given them. In addition, Marine, while still negative, had a good end to the period. Both of these parts of the business have more to do with the second half phasing and any real upswing in performance or outlook, think, is something that we're still cautious around. So we believe that group underlying performance remains broadly in line with the expectations that we gave you earlier in the year on a constant currency basis. As I go through this presentation, any percentage change, in fact, on sterling value I give will be at constant FX rates and on an underlying basis. So moving on to just dividends quickly. There's no change from what we said at our full year results. We're halving the interim dividend from its twenty fifteen level, and so that will payout at 4.6p. And that implies just over £300,000,000 total cash outflow to shareholder payments in this year in calendar twenty sixteen. And talking about our balance sheet also. So S and P did adjust their ratings in May, and now they're in line with Moody's and Fitch at A minus. But we still do have a very robust balance sheet and with good liquidity that's been helped during the year by the additional £500,000,000 of revolving credit facility we raised in April. That's now up to 2,000,000,000 We continue to pursue a prudent financial policy. And so while we do have some cash calls, such as the IT purchase consideration coming up over the next twenty four months or so, these are definitely manageable. Turning now to group revenue. At a group level, our OE revenue fell by 5%. That was due fairly equally to civil aerospace headwinds and much larger offshore market declines that we've talked about in marine. Likewise, our services was 5% lower for broadly similar reasons that we've explained before. In fact, throughout these slides, you can see that the first half outcome really does reflect the headwinds we identified during last year and reconfirmed at the full year results presentation in February. We have seen some positive impacts of translational FX. On a revenue basis, that added £183,000,000 I'll talk more about this in a moment as well. Turning now to group profit. The headwinds we've discussed really did lower gross margins. You can see that fairly dramatically on this slide and were the core factors in the decline in group profit before tax. In other parts of the income statement, the differences were relatively small and mainly related to nonrecurrence or repeated costs and benefits from last year. And that included £39,000,000 non repeat of underlying restructuring costs as the 24 Aerospace program is now largely implemented. Maybe I'll just add that the transformation program and the Indianapolis redevelopment program have been booked in the first half as exceptional costs, and we can come back to that. Similarly, the non repeat of a £24,000,000 finance benefit that we saw last year on dividend hedging in 2015 contributed to financing costs being up about £35,000,000 versus last year. We're also in line at the moment with our remuneration targets for the year. So at this point, we are accruing bonus in line with that policy, and that does impact C and A, which is why you see an increase in C and A, and part of that comes through in the gross margin as well. So here is our usual bridge from profit to cash flow. On an absolute basis, the main drivers were a £235,000,000 increase in net working capital. That included a £149,000,000 increase in the total Care net debtor to £2,360,000,000 and together with inventory buildup in preparation for the rise in second half production. We did see some offset just FX related and favorable effects of translation of net foreign receivables and payables. We had just over £300,000,000 of CapEx spend during the quarter, part of which was actually payments for twenty fifteen invoices. And of the £232,000,000 increase in intangibles, you can see here, 90,000,000 came from Cars. The net movement after amortization was £71,000,000 taking the balance in the period to £460,000,000 at period end. And the rest of the intangibles movement primarily related to higher R and D capitalization. So cash flow was clearly better than we'd expected at this point in the year, primarily because of the work on working capital. And it was certainly helped by earlier customer receipts, some earlier delivery, for instance, those spare engines and also some forecast OE concession payments, which slipped into the second half and a pull ahead there for some of our second half cash actions. Thinking about the year over year, which isn't actually on the chart, profit was clearly down, CapEx spend was only up marginally, and the net long term creditor balance increased by about $161,176,000,000 pounds year over year. And we did see, as I said, a strong favorable move in net working capital. So before I turn to the divisional review, I should probably touch a little bit more on foreign exchange. At year end, we had $29,000,000,000 of dollar cover, and the average hedge book rate was about 159,000,000,000 And as I say, that hedges our dollar exposure, which is currently about 5,000,000,000 to $6,000,000,000 It will increase over time as we see volumes increase. This absolute exposure sorry, will increase over time as volumes increase. We have been taking in fact, since the beginning of the year, both before and after the Brexit vote, advantage of the weaker pound in terms of adding to that hedge position. And we've now, at the June, increased about £29,000,000,000 up to £35,000,000,000 That's still well within our normal tram lines. And so over the next five or six years, that equivalent cover that's about five or six years equivalent cover. It's spread over a longer period than that because we hedge progressively. And the most recent transactions were clearly being struck at much better forward rates in the sort of 135,000,000 to 140,000,000 sort of range. And that has brought our average hedge rate down. So the average hedge rate in the hedge book at the end of the quarter ended up at 157,000,000 as opposed to 159,000,000 at the end of last year. All our hedges, as I said, are taken in line with the policy of trying to lower volatility and smoothing our margin over time. So there won't be any FX cliff in the forward rates. And we'll continue to take our longer dated cover up as we use existing deals. So in practice, this means we're only likely to see a gradual decline in the long term effective rate in any one year. And therefore, I would suggest that for those of you who are modeling our long term rates in the out years, I would be cautious about ascribing too much value to these short term spot movements that we're seeing. And of course, we all know that those could come back at some stage in any case. So there are a lot of movements going on through foreign exchange caused by sterling weakness. It's worth running through maybe a couple of others where that impacts on the business, particularly around transactional impacts. And also on translation, there's more detail in the appendices to the press release as the recent significant change has made this much more pronounced. So on revenue now, we'd expect roughly a £600,000,000 translational impact for the year if current spot rates continue at the point they were on June 30, and the profit effect would be about £60,000,000 as opposed to, I think, the £40,000,000 we were talking about previously. We've also adjusted our long term planning rate. So this is the rate at which we both do our sort of long term decision making, but it also gets into the long term contract accounting. And that's reflected, therefore, primarily in Civil Aerospace, and we'll continue to review that. That added, as it says here, about £35,000,000 to Civil profit. And it also changed the order book by about £2,100,000,000 in terms of the valuation of the order book. And then finally, sort of the big number is the noncash mark to market movement just on the hedge book itself, which does hit our reported profits by nearly £2,200,000,000 on our derivative contracts. This has very little real impact on us, and we don't get concerned by this figure and nor should you as it will be fully offset as those contracts mature by the underlying hedges, which are being underlying transactions, which are being hedged. So in conclusion, while we're clearly a net beneficiary of the recent FX movements, our conservative long term hedging strategy and translational exposures make our in year benefits relatively modest. Right. Turning now to the divisional commentary. We provided the same breakdowns as last year in the statement. In the interest of time, given it's such a busy day, we've cut back some of the charts today, but you do have them in the appendices, and I'm just going to focus on the key points for each division. So starting with Civil Aerospace, both the revenue streams were down around 5%. For OE, this was principally due to lower linked Trent 700 sales and to lower corporate sales of the BR710 engine. On aftermarket, we did see a significant increase in our production Trent fleet. It recorded roughly a 15% increase in installed base and flying hours. But this was more than offset by the reduced activity, particularly on time and materials that we've talked about before on the Trent 500, the Trent 800 and also the RB211 and regional jets. Turning to the revenue mix itself. So linked engine revenues were up 3%, and that was helped by deliveries higher deliveries of the Trent 900 and the Trent 1,000 as well, offset by that lower Trent 700 delivery picture. XWB deliveries also helped drive the improvement in unlinked sales. We saw lower business aviation, as I've already referred to, and V2500 module volumes were lower, and that reflects the declining volumes ahead of the airframe transitions away from Rolls Royce engines. When we turn now to the aftermarket revenue mix, declines in the large engines were driven, as I've just said, by lower activity in the legacy fleets, particularly on time and materials. This was mitigated by a 4% growth in thrust and the 15% engine flying hours growth from the in production Trent fleet that I described. While business aviation aftermarket activity was pretty stable actually in the period. The regional aftermarket continued its downward trajectory. And as an offset, we saw higher V2500 aftermarket revenues. So turning to gross margin, starting with the volume and trading margin bars. The significant proportion really came from the Trent 700 headwinds that we talked about last year. These were around 130,000,000 of negative impact along with aftermarket headwinds from the legacy fleets. This is very consistent, as I've said, with the guidance we gave you last year. Turning to long term contract accounting adjustments. You can read a fuller description of this on Page 12 of the statement. In absolute terms, the net of all of this was actually relatively small. It produced a net £23,000,000 reduction compared to a £48,000,000 positive last year, so a £71,000,000 year over year effect. And within that, there are five specific catch up elements. 66% of the year over year was due to a gain that we had last year on the risk policy adjustments that we talked about, and that was, if you remember, pounds 189,000,000 in the full year, but 66,000,000 in the first half. We also saw a £64,000,000 negative effect from higher technical costs, and that was various in service related programs, particularly around the Trent 1,000 and the Trent 700. And we saw life cycle cost reductions of £35,000,000 which was a £10,000,000 improvement from what we've seen in the prior year. And then as I've mentioned earlier, there was a £35,000,000 impact from the change in our long term planning rates of foreign exchange and then £14,000,000 basically of all other, which are primarily a whole series of operational and commercial factors. Turning, therefore, to the full picture. So beyond that large movement in gross margin, there were fairly limited movements. The increase in C and A was actually more than explained by the incentives accruals that I've described. Lower R and D was lower due to increased capitalization for the Trent one thousand-ten engine, and we saw lower underlying restructuring charges. As I said, the management reorganization has been booked as exceptional. So the end result was a profit of £31,000,000 that's down 91% from the prior year sorry, 22,000,000 or £31,000,000 after FX. The overall profit was higher than we had expected for the first half, which had been forecast for modest loss. However, this was largely due to the timing effects that I described right at the beginning. So in the second half, we're going to continue to face some of these legacy headwinds through the second half of the year, but we would expect a stronger performance overall in line with expectations with headwinds mitigated through increased deliveries, including profitable spare engines again and positive results from our dedicated focus on improving life cycle costs in the in service fleet. Turning now to Defense. So this is a simplified slide. Defense revenues were marginally lower with strength in OE revenues, offset by some weakness in spare parts, principally, again, for legacy products. This product mix did have a negative effect on gross margin. And in addition, we've booked a 30,000,031 million pounds charge, which is for both incremental expenditure and expected expenditure around the whole improvement program on the A400M. So this is our efforts to try and help the consortium in getting over some of the technical problems that we've obviously seen on the gearbox and other areas. Restructuring costs were lower as the focus has now switched to the upgrading of the Indianapolis site, which we're treating as exceptional. So net defense profits at £123,000,000 Although they were down £61,000,000 from last year, about half of that was due to the TP-four 100 charge that we took. Looking forwards into the second half, we expect performance will be supported by growing engine deliveries, particularly of the AE2100. And while we have some headwinds from supporting the TP400, as I've said, we're trying to mitigate that in terms of a full year effect. Turning to Power Systems. Power Systems had a solid start to the year. We did see slower oil and gas sales and also a little bit on the Rail and the Naval side, and that impacted OE revenues and particularly also aftermarket in terms of the service side of oil and gas. But segments on such as Construction and Agriculture and Power Generation were actually considerably stronger than a year ago. As I said, service revenues were affected by lower activities, particularly in the energy and commodity sectors. So the adverse mix of all these movements on top of the smallish decline in revenue did mean that we saw lower gross margin, but that was partly offset by slightly lower spend on R and D. And therefore, the profit impact of all of that was relatively modest, a £6,000,000 decline to £11,000,000 profit. In terms of resilience, we won't be immune clearly to the challenging market dynamics. I mean that's very evident, I think, from peers, but our revenue base certainly has strength in the high speed markets, which helps us here. So while some short cycle sectors are hard to gauge at the moment, the order book coverage is over 80% in some of the longer cycle parts of the business and particularly in higher margin sectors. So this is broadly consistent with the prior year and we remain cautious but positive outlook for the full year for Power Systems. But undoubtedly, there's much to do in the second half on both revenue and cost. So I think on Marine, given the market environment, I think actually Marine had a pretty creditable first half and was a little better or perhaps less bad than we had expected. But order weakness was there, included cancellations, particularly being a feature of the offshore market. And OE revenues reflected pretty low volumes, while services were a little more resilient but still at subdued levels. So this isn't really surprising, I think, services do tend to lag the OE market a little bit by nine to twelve months. In contrast, actually, naval and merchant segments actually held up pretty well, and we did okay on order intake on naval as well. So the teams worked pretty hard to try and find opportunities in adjacent markets to offset some of the direct offshore side. And within gross margin, the significant impact was really from volume rather than any decline in trading margin. There was also no reoccurrence of the £30,000,000 contract provision, if you remember, that we took last year. So I think overall, Marine's loss of £14,000,000 which was down £18,000,000 from a small profit last year, was a pretty good result. And while our original guidance may now seem a little over pessimistic as the businesses continue to work hard on rationalization efforts, it does, I think, still reflect caution in the marketplace. There is still risk of further cancellations, I think it is right to continue to be a bit prudent here. Finally, for Nuclear, we did see the Nuclear businesses actually improve in revenue terms in the first half, and that was led primarily by strong growth in OE activity in the submarines business, which mainly reflected program phasing. We had some delivery challenges to overcome, and these did depress our margins a bit. And so the submarines business is very, very focused on achieving cost effective on time deliveries at the moment for their core customer. Overall, Nuclear profit of £17,000,000 was marginally down on last year. On the Civil Nuclear side, we are seeing quite a lot of good business opportunities at the moment, particularly around instrumentation and controls in China and other markets. So the long term outlook for our Nuclear business actually looks remains pretty positive. We've also, as has been described in the press a bit, started to make some modest investment in development work around small modular ratchets. That clearly depends on government decisions, but we think we're very well positioned there and want to continue to support this what could be a very interesting market opportunity for us. Covering our technical factors, our guidance basically remains the same. We do expect higher net R and D spend to be closer to £900,000,000 now as we support a very full program of delivery milestones, as Warren described, on the new projects. So I'm just going to finish on some comments around the impending arrival of IFRS 15. I say impending, although the implementation is still two years off. It does feel appropriate to introduce this topic at this point given its likely significance to reported results. And I wanted to give you my best view as to the framework which we're likely to apply now in Rolls Royce coming from our own initial and tentative conclusions from some very detailed work we've been doing. We are trying to seek consistency across the aerospace sector on this, although there may well be some detailed differences in interpretation. I think we're getting quite close to that. And overall, recognition is now going to be linked much more to the actual timing of provision of goods and services rather than smooth over the lifetime of service contracts. The one clear and firm constant that I want to really emphasize is it doesn't change the cash flow profile. And therefore, the embedded value of the business, and you'll hear us this again and again, really isn't impacted by this change. Our initial conclusions as to principles of what's likely to change is that we will no longer apply the contractual aftermarket rights or cars concept. So we will no longer essentially capitalize engine losses. We also wouldn't differentiate in future between linked and unlinked contracts. As you know, that's partly happening in any way because of changes in market mix, but we would actually move away from that to treatment. And for both OE and aftermarket, the timing of revenue recognition and offsetting concessions would change to an input basis, in other words, cost, with consequences that will have some different profit and loss effects. So as a result, all of the OE revenues, net of concessions, will be recognized at the time and sale. And therefore, we'd see no longer the pull ahead of profit from some of the linked accounting that we've seen in the past ahead of cash flow. Total Care would be recognized over the contract term with higher margins, therefore, because we're taking the concessions upfront. And catch up adjustments and contingencies are also likely to be smaller, while the impact on time and materials is probably largely unchanged, although we still have to work through that. So I thought it would be helpful to give some overview of the impacts on the balance sheet and the profit and loss. This really is the high level. This is a very detailed set of changes that we're going to need to make here. At the outset, we'll have some balance sheet transition adjustments as we will essentially move to a completely new set of accounting policies. And the Cars and Total Care net debt to balances are, therefore, are going to be eliminated or at least certainly significantly reduced. And going forward, we're likely, therefore, to see a greater focus actually on the Total Care creditor line because, unfortunately, we're not going to get a complete alignment even with this between profits and cash, but we'll get a much closer alignment. A number of consequences are within the profit and loss account. First, the changes to OE profit recognition mean that the full cost of any engine build, as I've said, will be taken in the first year. And this underlines really the importance of our focus on improving our unit cost position for cash purposes, which will significantly reduce these cash losses over time. And then secondly, the removal of the cars balance. Since we're no longer going to be capitalizing losses, we won't have any amortization charge either. The most complex area that we're working through to be able to give a more coherent aggregated view of the results is the removal of linked accounting and the changing of revenue recognition points. This will affect timing and margins and will be quite contract specific. And we'll come back to you with a likely time for an IFRS teaching, which I envisage to be during quarter four when we're able to do that. But in the meanwhile, I hope we've given you some help, some leadership really, I think, in helping you understand these principles and actually how they're probably going to apply to the whole industry. And finally, I'd just like to reiterate once more that this does not affect cash. So just to sum up wrap up, let me summarize our half one performance. Overall, this was in line or ahead of expectations for the first half, but as a whole, it's stronger, but we don't think that this is going to come through in terms of a full year effect. So while the phasing in Civil and Marine brought forward a little of the half two performance, we've made good progress and we've made good progress in mitigating market weaknesses. There's still a lot to do in the second half. We are making good progress on cost. We've put in a strong cash performance. Clearly, FX is now a bit of a tailwind, although we also have some technical offsets technical issues like the TP-four 100 to offset. And finally, I think we've got a reasonable order position. So the focus now is clearly on the second half ability to execute on our orders and our strategy in order to deliver full year expectations. So thank you very much. And now back to Warren. Thanks, David. I'll try to be fairly brief. So you can see a number of slides in the pack, but I promise I'll try and go fairly swiftly over this next view. I hope you appreciated the communication there about IFRS 15 and our desire to get ahead and start engaging and talking about that. And I suppose that's really speaking to the box on the far right hand side of the slide here. And I'm not going to talk anymore about the box on the far right hand side of the slide. That's really for you to judge. I'm going to talk a little bit about what we're doing on priority one, focusing on our three key areas. These three key areas are essentially what we do, engineering excellence how we do it, operational excellence and how we deploy that in our business through our business model. And the biggest lever we have there is using our installed base of engines. So there are many actions in all of these three areas that we could take. And the way these slides build up is that you can imagine in each one of these themes, in each one of these boxes, there are some actions. And they accumulate and they accumulate in terms of benefits to the business. And what I'm going to do is just pick on a few examples in each of these areas. So let's look at engineering excellence to start with. Our engineering excellence is it's the collective of the experience, knowledge, skills, techniques, know how that's been built up in Rolls Royce over well over fifty years. And actually deploying that is potentially hugely beneficial for our business. But deploying that sort of stuff, which has been built up over quite a long period of time, is quite challenging because a lot of it is just locked up in people's heads. And in particular, quite a lot of it is historically being locked up, if not in people's heads, on pieces of paper. And so here's an example where we are digitizing some of that some of our product definition so that, that knowledge can be transferred. And it can be transferred around different parts of the globe where we're carrying out different activities. It can be carried out it can be carried between different teams to get more efficient and effective reuse of that knowledge. Now we think when we complete this project, then we will be able to reduce the time it takes to develop a new product by the order of about 20%. And we'll have completed that project. It's going to take several years. We'll have completed that project by around about 2020. Now as you can imagine, my first question on this was why can we do it a bit sooner. And I will continue to push on that. And our creative collective brains at Rolls Royce will work on how we can realize this benefit a little sooner. But that's an example of one of the things that we're doing. Now switching to the operational excellence. I mentioned at the start of the presentation one of the tools that we have at our disposal to be able to deliver on this ramp up of volume, doubling of volume run rate of our large civil engines, is to reduce the amount of time it actually takes us to make one of them. And as we've put XWB engines into Derby, so we've moved some of our Trent one thousand production to Singapore. And over a period of several months, we've worked we've had lean workshops with everybody brainstorming on how they can reduce, how they can the cycle time, make that operation more efficient. And after about four months, so far, we've taken about 25%, a little bit under 25% away from the lead time that it takes us to assemble a Trent 1,000 in Singapore. The good news is that we think we can take this quite a bit further, an additional 15% to 20 coming out on that particular engine. And we think we can then take some of those techniques and apply them back on XWB and possibly make a very significant lead time reduction on how long it takes us to build an XWB. And if that materializes, then that's making a huge impact on the available capacity, and you can see why that's quite a powerful tool in enabling us to deal with the volume ramp that we have to deal with. There are opportunities in other parts of the business as well, and I'm not going to go into all of these examples in the interest of time. But applying the same sort of methodology in other parts of our business, this is the sort of improvement in lead time that we're seeing in some of the activity in our Power Systems business. Now again or moving on rather to away from the engineering excellence and thinking about how we effectively utilize the asset that we have out there, which is our installed base. One of the issues which people have been talking about increasingly over the last twelve months has been the maturing of the fleet of engines that we have out there, airplanes being parked and so on. Now it is a normal thing that airplanes start off with one owner, and after some period of years, they move on to another owner. So the secondhand market develops. Now typically, keep their airplanes for eight to twelve years. And so after about eight years, this starts to become a phenomenon. We have a relatively young fleet of Trent engines. We've got an old fleet of RB211s that's coming to the end of its life, but our new Trent engines are relatively young. And you can see that in 2010, we only had about 200 of these that were eight years or older. Today, we've got about 500 that are eight years or older. And in 2020, we'll have about 900 that are eight years or older. And once you get into that eight years or older phase, then there's a propensity to start thinking about transitioning from new to secondhand. They become secondhand, transition to a new owner. That can take about six months just for the aircraft to be refitted. And so six months out of flying, this is a potential downward pressure on our aftermarket revenue. So if we can do something about smoothing that transition, that's a good thing for our aftermarket revenue. And it's going to become increasingly important as we look forward. So we've introduced a dedicated team to work with financiers, to work with lease companies, to work with our airline customers. And the good news is that since introducing this team at the beginning of this year, then we've become much more effective at transitioning airplanes from one owner to another compared with the corresponding period last year. Again, in leveraging the installed base a few weeks ago at Farnborough, We some of you might have seen us announce a partnership with Microsoft. And this is where we are working to take our product knowledge, customers' knowledge, industry knowledge, combine that with data from our engine health monitoring, do some analysis, use some analysis tools, predictive tools and improve the customer's operation, release some value so that we can release some value for our customers and potentially share some of that value in our service business. We've deliberately chosen not to invent all our own here but work with technology partners like Microsoft so that we have an open architecture for our digital activity. And so at Farnborough, we announced that partnership, and we're looking forward to applying that around the industry in civil aerospace, and we're looking at applying it to other fleet operators in sectors like marine and combining some of that with some of our smart ships innovation that we're doing in marine. I'm sorry, I'm running a little bit fast over some of these, but we can talk about them later. Before we close, it's important just to sort of put ITP in context, and that I think the context is largely about leveraging our installed base. We moved closer to ITP. We've been working with them as a risk and revenue sharing partner for many years. We moved a little bit closer last year. And especially as we look forward to XWB and Trent 1,000 volume ramps, they become more significant as our partner. Our joint venture partner chose to exercise put option, absolutely. The timing was their choice, not ours. But directionally, this is quite a desirable thing as we can consolidate more of the high value that is there in both the OE and aftermarket. Now as I look at add up all the Trent engines that ITP have been working with us on and particularly looking to, as I say, Trent 1,000 and XWB, we can see an increase in of more than 10% in the value that we will now consolidate in aftermarket revenues coming in. So a quick reminder before I close. We do have some legacy issues. We're making good progress, I think, at embedding behavioral changes into the organization and best practice in this sort of thing. We've got no significant announcements to make in terms of any inquiries, but just to remind you that, that's still out there. Our second half priorities are to deliver on what we say we're going to deliver, maintain some progress on the transformation that I talked about earlier, hopefully continue with a more open dialogue with the outside world. And back at the ranch, we'll be concentrating on those three strategic priorities to drive value. With that, we'll move on to questions and answers. Well, questions and we'll try to answer. You. Christian Lachlan from Bernstein. Two questions from me please. First one particularly for Warren. In regards to your ongoing review, what have you learned over the last six months incrementally and how have these insights sort of influenced what your vision is shaping up to be for the future of the company? That's the first one. And then secondly, around the production ramp, in particular with XWB over the next five years, how confident do you feel about the bottom part of the supply chain? And what I mean around forgings and castings, wherein in particular, Rolls Royce as well as GE and Pratt and Whitney are relying on some of the same suppliers to support respective production ramps over the next few years? How is your confidence level about that part of the supply chain being able to keep up? Yes. So your first question, I'm afraid we could go on all morning. But basically, I've continued to learn, and I'm encouraged by the amount of opportunity there is for simplifying and taking activity out. I mean some of those numbers that we put up there on the slide, okay, they're almost anecdotes, but actually some of them are the result of a lot of hard work for a lot of people over a period of time. But they are fantastic improvements. If we are able to really realize that lead time transfer, which we've proven on Trent 1,000 and transfer that to XWB, that's sort of equivalent to almost doubling our capacity with no incremental operational costs since it's just materials. So I've been hugely encouraged by that over the last six months. So I suppose it's been more of a quantification of the opportunity that I felt that was there in the first place. As I say, we could go on all morning. There's lots of that. In terms of the supply chain, then we are talking about a significant increase in volume for us and for the industry as a whole. But compared with the other activities that some of these companies do, it's not actually that significant an increase in volume. We work closely with these companies. There are always challenges in terms of actual deliveries, but we have teams embedded in these suppliers that work with them on a day to day basis and solve the problems as and when they arise. I'm not pretending that there are no issues, but I'm comfortable with the way in which we interact with those suppliers at an engineering level. Yes. It's Ben Fiddler from Deutsche. A couple of questions, please. Are you able to share with us how many spare engines you delivered in the first half and what that was year over year? You mentioned that was quite a significant driver of the growth. That will be helpful. Secondly, I see you've increased the Total Care net debt to guidance by about 100,000,000 to £200,000,000 over the next twelve months. Does that mean we should be thinking that civil profits will be 100,000,000 to £200,000,000 higher than we were previously expecting over the next twelve months? And the third question, I know on the accounting stuff, and thank you very much for the early heads up on that. I think it's been a fascinating part of the release this morning. The profit effect, my head is not big enough to understand that for some time, but just sticking with the easier part, which is the revenue effect, are you able to give us any indication of how much in Civil Aero this could see a revenue impact from both the OE as you no longer have that future pull forward? And secondly, on the shop visits, which you won't be booking or the revenues you won't be booking until shop visit with a lot of the fleet still being relatively young as you demonstrated in your Slide 49, presumably anything less than five years on that chart isn't going to actually be going through the revenue line under IFRS 15 on shop visits. Just any sort of steer on that will be very helpful, at least to understand some revenue scaling effects in Civil. Okay. Why don't I try that in reverse order while I try and find the spare engine number? Yes, in terms of IFRS 15, I don't want to get into numbers. It is complex, Ben, and I think we're all going to be challenged by this. The combination of the fact that we have some engines already clearly in service like Trent 700, the effects will be different from new engines like XWB means that we have to go back and look at this actually on a contract by contract basis and work our way all the way through that, including the RRSP tails and all that sort of thing. Your main point that there's going to be a timing difference, I completely agree with. And that's one of the things that we need to understand better in terms of for new projects, in particular, the later booking of revenue. So I'm not able to quantify that at the moment. That is what we're working through. In terms of the TCF, so part of this is what we've already actually seen, which is the long term planning rate did have an effect. So that does come through the TCA net debt. We also expect probably some higher overall impact on lifetime cost improvements in the second half. And that's offsetting within Civil other issues that we have, particularly on the engineering spend that you've seen increase. So yes, there is going to be a change in the mix of Civil profit, but not a net improvement when we take all that into account. And that's why we've adjusted the TCA range a little bit because, as you've obviously figured, some of those effects come through in the TCA net debtor. Helen, can you help me? I know it's in here, but It's a small number, Ben. There are a few more. I think it was it was a reflection of XWB's new engine. Airlines are taking this engine for the first time. We need to put more spare engines around so that we can satisfy that. We will see more in the second half. So the second half effect is quite a bit bigger because in the first half, I think we sold three XWB spare engines, something like that. We're going to see a lot more than that in the second half. So we have a question from the webcast, if I may, from David Perry. It's a question for Warren. There have been recurring press reports that Rolls Royce could achieve significantly higher cost savings than the formal plan currently in place. Could you comment on these reports, please? Yes. Obviously, I've seen those reports and talked about them with journalists. This is a performance gap between ourselves and, if you like, people seen as the market leaders. First point, the number one difference between our Civil Aerospace profitability and that of our number one competitor is driven by the difference in maturity of our fleets. We have a young fleet. The proportion of aftermarket, which is relatively profitable compared with OE, which is relatively less profitable, is skewed, in our case, more to the OE than it is in the case of our number one competitor. So when you put the two pieces together, they are going to be significantly more profitable than we are. So some of it is a business model maturity factor. The rest of it is indeed a performance gap, and that's a performance gap that I see no reason why we can't close, and what our transformation program is about. In terms of quantifying it, we've quantified the savings that we expect to be able to make for the 2017. We're reporting this morning. We're very pleased with the progress over six months, at the top end of our expectations in terms of that trajectory. And as and when we communicate, we'll probably end up we probably will, as David said, IFRS teach in. We probably need to do an update as we get towards the back end of this year as to how we're doing on the transformation program then, and maybe we'll talk about rolling the targets a little bit further out. But for now, I'd like to concentrate on actually delivering what we've said we're going to deliver. And as and when we can talk about fresh targets, we will. But I don't think the performance gap is an unreasonable performance gap to think about closing. Gordon Hunting of Fisk. On something quite specific, on the TP400, why aren't the blames put to GE, Fiat Avio? Why do you have to pay? And secondly, Pratts have also got a problem on planetary gearboxes, whereas you have fantastic expertise on the J35 and the F35B. Why can't you profitably help those other two manufacturers to sort out their problems? Yes. So on the specific of the TP-four 100, it's not a question of us paying for any inadequacies caused by other people. It's a question of us as part of the consortium helping our customer to solve a problem. I mean, for instance, one of the things that our team has done over the last several months is vastly reduced the cycle time to take one of these engines and service it, mainly by removing the need to take the engine off the wing and to actually create some operators which enables us to service it on the wing. That has reduced the cycle time from about three weeks to about two days. And that's great as far as the customer is concerned. It's actually great as far as we're concerned as well, But it does cost. And so it's the cost of developing some of that sort of stuff that we've booked today. We have not taken the cost of somebody else's problem. We're going to have a here it comes. That was good exercise for Georgina. A very mundane question. When did we last change our planning rate? It was actually about a decade ago. And we review it every year. And I felt given our actual experience on rates over the last twenty years, I couldn't justify leaving it where it was, and that was something we discussed with our auditors as well. So I think that was the right decision to make. Because if I remember correctly, the last adjustment probably came when the hedge book was at about 183,000,000 or something. Sorry, I wasn't around. Can't remember, Sandy. But when we looked at the data, it was fairly clear that we needed to make a change. We are not necessarily even responding to these short term spot movements. It was much more just the progression of what we've seen over the last few years. Thank you. And then I mean, know we're in a hurry, but I'm fascinated by this Trent 1,000 thing. But one, I'm fascinated by the technical costs that go on and on. I mean, things happen. But I'm really fascinated by the Singapore thing because I can understand how you get a lead time change in Singapore because we kind of, I thought, made our life more difficult by putting it in Singapore. That for that to be able to bring XWB down 50% would be astonishing. And as I said in terms of how I presented this, if we map across what the changes that we've made to the processes and procedures, then that's what we can achieve. It's unproven at the moment because we haven't mapped them across. And it's also a bit of a round number. I think what is definitely in there, however, is that the improvement is very significant or the potential improvement is very significant. It's just fascinating. And then without going into numbers on IFRS 15, but Total Care, I can't imagine it's going to change things where we make or assemble. I don't believe these people can work to Total Care. But in terms of our commercial approach, is that going to change, do you think, the business for the better in terms of focus on cash or focus on profit or whatever? Well, I think it completely underlines the focus on cash that we've been trying to actually change over the last couple of years in the business anyway. And I made the point that the way to mitigate the cars effects is to get the cash losses out as quickly as we possibly can. But equally, managing the whole cash cycle is going to be very important here. I think it will help internally because it's removing some of the barriers, I think, internally in terms of just understanding the numbers. I think it will help externally because we're getting a closer alignment of profit and cash over time. But absolutely, running the business and trying to improve cash conversion is a clear imperative, whether we have the accounting change or not, to be quite honest, but that gives added impetus to it. So we've got one from the webcast. We'll take one more question from the webcast in the time we've available. Apologies, we do need to finish at ten to give you a chance to get on to other meetings. So this is a question from Chris Hallum. On the new accounting basis, will you still disclose all the various elements that you're currently intending to disclose around engine flying out payments and engine losses, etcetera, that you set out back in February? Well, I certainly don't see us moving away from the enhanced disclosure. It may be as we look at the standard further, there's some other things we want to disclose as well. So clearly, one of the things that we will all have to think about is how to model the shop visit side of things. So I think it's a bit early to get into that yet, but there will be implications like that we need to think about, yes. We've got another I think we've probably got time for another couple from the floor. It's Harry Breach from Raymond James. Three quick ones. Firstly, can you help us think a little bit about where we are with the Park Trent 800 situation, where in terms of how many of those moved during the first half and broadly where the sort of Park fleet is at? Secondly, just looking at Civil Aerospace, now I'm very slow on the uptake at the best of times, but aftermarket change at constant FX, negative 5% in the first half. And I think, David, you called out T and M down on the 500, 800 RB211 RJs. Given that T and M, I think last time I recall seeing a comp was about 27 of overall aftermarket at Civil and presumably the TCA side grew in line with flying hours on the Trent fleet, does that imply T and M was down really quite hard, like 20% year on year? T and M was down a lot, I think, in roughly revenue terms. It was around £100,000,000 something like that. And then final one was just about marine. I appreciate the oil price has moved up a little bit. It's not long since it bottomed. Just wondering if you're seeing any early signs of sort of behavioral changes from your offshore customers, any signs of bottoming there? Okay. Well, I'll answer that one and then go back to the Trent 800. The answer on marine is that it does appear that we are moving along the bottom rather than getting worse. So I think the change in behavior is that we're not seeing further declines. But if you think about it from a service point of view, people have still got plenty of spare boats out there to go and remove components from to service the ones that they actually want to use. On the Trent 800, then we are making good progress. I think I put on the slide the effectiveness of the team there in terms of getting airplanes back into service. And I believe the numbers that we're talking about, around about 13 airplanes have been placed in the first half, and we have a further 28 where owners have been identified. And that's a big improvement compared with where we were a year ago. Is there a number of the parts of Biguan? It's overall, it's a bit shy of 10%, I believe. Rami Myerson from Investec. Two questions. On working capital, there's been a lot of discussion in this in the last few weeks about deterioration in terms of payment to suppliers. And I'm just curious if some of the improvement in working capital was due to delayed payments to some of your suppliers and if you are planning on changing terms? No, that was an effect. Actually, there were some FX effects, as I think, as I mentioned, on payables, but not from terms. We've actually or we may have done already, I can't remember exactly the timing, we're issuing a new policy, and we're absolutely coming on board with the new voluntary the new version of the voluntary code that the government has encouraged, particularly around earlier payments to smaller suppliers as well. Right. With that, I'm afraid we've reached 10:00. And so we're going to call a halt to the general Q and A there, so those who want to rush off can rush off and probably do one or two questions in the margins as we're leaving as well. Thank you very much, everybody.