Earnings Call: Q3 2015

Nov 12, 2015

Hello, and welcome to today's Rolls Royce Holdings plc update on the operation review and interim management statement. Throughout this, all participants will be in listen only mode And afterwards, there will be a question and answer session. And just to remind you, this is being recorded. And I'm now very happy to pass you over to John Dawson at Rolls Royce. John, please begin. Thank you very much operator and good morning ladies and gentlemen. Welcome to the call. My name is John Dawson, Head of Investor Relations at Rolls Royce and with me today are Warren East, our Chief Executive and David Smith, our Group Finance Director. Warren will be taking the lead on the presentation today. Before I hand you over to him, I would remind you to review our Safe Harbor statement, which is attached to our presentation and is also available on our website. We will have plenty of time for questions at the end of the presentation, which should last around five minutes. So as the operator said, please wait for instructions to register for a question at the end and then we'll be able to take your questions. Without further ado, let me hand you over to Warren. Thanks, John. Good morning, everybody, and thank you very much for joining the call today, and we appreciate this was very short notice. Right now, we have an hour available for the call, but I know that our Investor Relations team will be spending the rest of the day talking to as many people as possible. And if we need to talk more, we will. So as you've seen, we've issued a statement this morning and that contains information in three main areas. Firstly, initial findings from the review of operations that I've been doing. Secondly, an update on the outlook for 2015. And finally, our current best views on 2016 and the headwinds that we're facing there. Now all of this I know includes some very difficult messages and that's why we wanted to hold a conference call to explain more about these issues and importantly what we plan to actually do about them. So let's switch to the first slide. I'd like to reiterate that after I'll just start, I'd like to reiterate after four months of being in the business, everything I've seen has confirmed my view that the company has a strong portfolio of products and services. We certainly have a world class engineering capability and we're well positioned to generate high market shares, strong cash flow and higher returns on capital in the longer term. We're also preparing for an increase in the wide body engine production from approximately 300 approximately 600 engines per year. That is a reflection on the strength of our order book and that is the most significant reason why we have to undertake fairly significant transition in our manufacturing capability. During the year, we've also taken a number of steps to improve our balance sheet and liquidity and that puts us in a strong position. We have however been faced with a number of headwinds and we've talked previously in the year about that and that will continue to impact the twenty fifteen performance and it's going to have some material implications for 2016. And I'll discuss these headwinds in more detail in a moment. But in summary and in common with most industry participants, we are seeing significant changes in some of our end markets. It's primarily lower demand within corporate and regional markets and reduced utilization of older wide body jets. We're also seeing continued and more severe deterioration in the offshore marine part of our business. For the current year, our overall guidance is unchanged although we do expect profit to be at the lower end of the range. Our assessment of the profit headwinds for 2016 totaled some £650,000,000 in total and that equates to a further £350,000,000 of headwinds compared to what we expected in July. In cash flow terms, however, we expect a more consistent year on year performance and I'll explain that in a moment or two. Clearly, the conditions that we're facing are challenging and our expected performance I find disappointing. But as you know, I have been undertaking a review of operations over the past few months and I've been preparing to present the conclusions of that to you later in November on the November 24. But given today's news, I've decided that we absolutely needed to bring forward some of the highlights from that and make sure that today's news is which is obviously unpleasant is balanced with some news about what we're doing about this. So let's have a look at 2015. Turning to guidance on 2015, we've guided to the lower end of profit range that we gave in July, but otherwise this guidance is unchanged on a constant exchange rate basis. And this is a reflection of the growing headwinds that we've seen through this year, but it is offset by some of the mitigating actions that we've already taken. But the impact on 2016 is more severe and we're going to feel the full force of some of the market changes. Some of those changes have come faster than we'd previously anticipated. So let's look at 2016. We've set out in the statement and outlined on the slide the key factors that we see providing the challenges for the coming year. Pounds $650,000,000 headline figure comprises £300,000,000 which we identified in July in particular relating to the impact of the slowdown in the Trent 700 order book. I'd note that we believe our initial estimation of this impact remains absolutely valid today. The next component is £100,000,000 in Corporate and Regional Jets and that's because we're seeing further weakness in the demand for business jet engines in particular for new orders as well as further weakening in demand for aftermarket services for the sort of smaller 50 to 70 seat regional aircraft. Then in our Large Engine business, we have between GBP100 million and GBP150 million of headwinds. We're seeing good growth in installed thrust, but that's being offset by some short term weakness on older wide bodied programs. And this is where our engines are being temporarily parked up as some people in the industry manage a transition to newer and more efficient aircraft. Finally, there's between 75,000,000 100,000,000 of further headwinds in the marine part of our business where the market in offshore in particular continues to weaken both for original equipment sales and for services. So the profit effects are really quite dramatic, but the impact on cash flow is a lot less. And the reason for that is the non cash nature of the Total Care accounting adjustments in both 2015 and 2016. And there's a difference where those adjustments are much more significant in 2015 than they are in 2016. And there's an expected benefit in 2016 of improved working capital as well. So now we'll switch to the restructuring program because I'd like to say a few words about the restructuring program that we've announced today. When David first became CFO this time last year, he said one of the jobs was to improve our management information forecasting and business systems. And that was already in motion when I joined the company at the July. It's a very complex program and it's well underway. But I think the substance behind the news we're announcing today shows that we need to do a lot more there and so further work definitely needs to be done on that. I want to add some significant pace to that. I want to add some simplicity into our processes and make sure that there is greater accountability around the decision making in the business. As the business has shown itself far less able to respond to changes in the market conditions than really we should be able to do. I believe that we're carrying too much fixed cost in certain parts of our business as well and we're just not sufficiently flexible at managing that cost base in response to changing market conditions. Market conditions are going to change anyway and it's something that we have to get used to. This is therefore totally unacceptable for a world class business and particularly where we operate in a very competitive environment. So we need to make very significant changes to make ourselves more resilient and sustainable. And we need to move rapidly with the restructuring because that's in the light of this further weakening that we've seen in some of our key markets. It's too early right now to provide detailed costings of the proposed restructuring, but I do intend that we'll give you some further information on this on November 24 as previously planned and we'll be giving even more detail with our results in February. But in the meantime, the previously announced restructuring and cost cutting that's going on within our Marine and Aerospace business that's going well. And I'm confident that the benefits of today's actions will have a significant impact too by the 2017. So with that, let's open the call up and we'll have some questions. And if you find that question has been answered, before it's your turn to speak, just press 0 and then 2 to cancel. And there'll be a brief pause while questions are being registered. The first question is from the line of Ben Fiddler, Deutsche Bank. Please do go ahead. Your line is open. Yes, good morning. Can you hear me? We can, Ben. Thank you. If possible, I could squeeze in three quick ones. The first of which is just to understand, I suppose, how come the deterioration in a number of your civil aerospace businesses has accelerated so much since July. We're not that far on for businesses where you should have reasonably good visibility around corporate and regional OE deliveries, for example. Just wondered why the pace of that has surprised. The second issue is, I know you haven't provided a view for 2017 and you may be limited about how you want to answer this question. But just to understand some of the effects dragging on 2016, do they continue? You yourself, Warren, used the language of a temporary parking up of some of your older wide body programs. Do you expect things like that to reverse in 2017? And therefore, should we see 2017 as a strong rebound year? Or is it more a progressive recovery from that point onwards? And the third question is just with some of these older programs where you're suffering an excess level of groundings, I suspect it may be 340s, it may be 777s. Does that create any asset write down risk on some of the Total Care assets? Or are you comfortable that that is not a risk? Thank you very much. Right. Let me start with the first two questions there. Thanks, Ben. Why has the pace of change really surprised us? Well, I think this has been a building effect. And certainly when we talked in July, was some of this effect was there. I think we've just been through a process where we've looked at our budgets for 2016 And this is our estimate based on where we are today. The very reason that we're also announcing the restructuring and the program that I'm going to talk about in a bit more detail on the twenty fourth is, because these changes will happen and they do happen fast. And the issue is our ability to respond and our ability to take data from the market and turn that into information and do something with it. And so I think that there's a combination of effects here. It's well the actual issue is documented and has been reported by other companies. And it probably has accelerated. The pace of that has accelerated since the middle of this year. But that combines with the fact that we also need to do a better job of being able to deal with that. So that's really what I'd like to say on the pace. It has been quite quick since July. Now we've given a 2017 view in just in terms of saying that we expect the impact of some of these new changes that we're announcing to impact from 2017. It's too early to talk about the impact of the parked up airplanes on 2017. Some of this, it's very select number of airlines that are involved at the moment. Some of them are basically balancing capacity and demand and there's new more efficient airplanes out there. And those planes have been bought to increase capacity. Meanwhile, wobbled slightly. And so the obvious thing to do is park up the less efficient engines and use the planes with more efficient engines. I think it won't be it's really too early to say, is it a temporary effect that will be over and done with by 2017. In the long term, the demand is certainly there. And so we do expect to see the overall number of airplanes being used continue to increase. And so I suspect that it is temporary and it's going to be a progressive recovery, but it's really a bit too early to say this will all be complete by 2017. As for asset write downs, do want to have a quick one? Yes. And maybe I'll just add to Warren's point. So Ben, you remember when we talked about the $300,000,000 and the Trent $700 effects, did say we thought that that effect would be about the same in 2017. So that view hasn't changed. And what I would say in terms of improvements is really going to be driven by the new installed base on the Trent as opposed to I think any improvement on the legacy programs because they will continue obviously to reduce over time as we would expect. To some extent this may be a pull ahead of that, but we've yet to really to bottom that out. And clearly also the Marine business is really very much on how we will see market developments over the next year. So again, that's really much too early I think to comment on that. In terms of specific your question on specific asset write downs, no, not in general overall. We still have sufficient cushion on those programs. But of course, as you know, we undertake actually a very detailed review and we will look at specific valuation reserves against individual airlines. That's a normal part of our process, but it won't be an overall effect in terms of the need to write down the assets. Okay. Thanks very much. Okay. Our next question is from the line of Jeremy Bragg at Redburn Partners. Please do go ahead. Your line is open. Hello, guys. A couple of questions, please. Firstly, do you think now that this 2016 guidance is fully conservative? Or there are some areas where you think there are still risks? Second question, if it's too soon to talk about 2017, are you still confident that in the longer term, cash flows and margins can improve from now? And third question, which I think I asked last time on the last, similar conference call was, is this an attempt to reset the accounting again for Total Care given that the downgrades to EBIT have been bigger than the downgrades to free cash flow? Thank you. Yes. So why don't I take each of those. In terms of is this a conservative forecast, think we will continue to view it as a balanced forecast based on the market headwinds as we've seen them. We've tried to give a much earlier view. We started that in July. We're updating that now. Clearly, we will update that further in February. I think it's very balanced in terms of how we see the market at the moment, but clearly the market is changing and we will have to continue to react to that. In terms of long term margins, no, I'm still very confident about that. That's driven as I hinted in the last answer about the long term growth in the installed base of the new Trent engines that will generate significant improvements in cash flow and operating margins and return on capital over time. I think we're talking about the transition effects on the legacy programs primarily here. And this is an attempt to reset accounting. No, there's no change in accounting within this guidance. This is really driven by what we're actually seeing physically in the market and trying to do the best we can of forecasting how we see that developing over the next year. Thank you. So can I just follow-up very quickly on the long term margins? Mean I the obvious question is, as your starting point is now lower, is your endpoint also lower in the long term, please? No, I don't believe so because the long term margins will be driven by the new portfolio that's coming in place over the next five years. So that's what's going to drive it. What we're really talking about is the effects of the run out of the legacy portfolio. You. Next question is over to the line of David Perry at JPMorgan. Please do go ahead. Your line is open. Yes. Good morning, Warren and David. I've got also got three questions, please. The first is just when you talk about the need to improve management information systems, I just wondered how much of that is sort of operational issues and how much of it is related to the complexity of Total Care and all the inputs that go into that and whether perhaps, your thinking, Warren, on Total Care accounting has evolved relative to comments you made previously that you were broadly comfortable with the accounting? The second question is, what do you think are the major downside risks from here? I mean, David, I know you said this is a balanced outlook. I think on the last warning in July, you said it was the new guidance was robust. I appreciate there are things out of your control, markets changing, but I just wondered what you thought were the major areas of risk still? And then the third question is, I was just wondering if on November 24, we would expect any medium term earnings or sales and earnings targets, please? Thank you. Okay. Let me start with the first one. And I think the comments on the information systems have nothing really whatsoever to do with the Total Care accounting and the accounting is it's more of a comment on broadly, we have lots of people engaged with customers, engaged with the market, we pick up lots of data, we turn that data into information, we make decisions about it and some of those decisions are what we expect in terms of financial outturn and some of it sort of normal operational planning decisions. The issue is that we take too long and the process by which that data gets turned into information is too complex. And so what we need to do is make the whole process more simple, but also increase the essentially the clock frequency of this so that we are able to respond more quickly within the business to changes in the market, which are going to happen anyway. David, do you want to talk about the second question, James? Is there else from here or? Yes. Think on your question about downside risk, it's really as I described it earlier that I wouldn't say that any of us is in a position to talk authoritatively about how the oil and gas industry is going to develop. We are trying to give the view on offshore marine that we think is based on the order intake that we've seen, which has been very low. I've described that previously, but continues to be very low. And therefore that's our view through 2016. I think we'll have to take a call on how that moves through 2017, 2018 during next year. But clearly, would be more conservative than I would have been six months ago just given on the experience of the last six months. In terms of the downside risk on the legacy aftermarket portfolios, I mean we've modeled that and looked at that as closely as we can. But there clearly is a big transition going on both in the narrow body and the wide body side of the business. And I think that we are not alone in experiencing this. I've seen comments from several other companies both on the airline side and the supplier side within the industry over the last few weeks. And I think what we're seeing is part of a pattern and that may well that may well change further and we've got to be prepared as Warren said for that and therefore more resilient to those sort of fluctuations. That's really why we're taking the action that we're taking. Okay. And so your third question about talking about medium term guidance on the November 24. No. The November 24, we're going to talk about what I've concluded from reviewing the operations. And right now, I've decided that comprehensive guidance for 2016 is not a good idea, which is why we're talking a bit more directionally about this and we're explaining the factors behind the profit headwinds from 2015 into 2016. And I don't think it makes good sense to reiterate medium term guidance now either. But what we will be talking about is the nature of the businesses, how they work and the sorts of things that we're doing to improve the operational performance of those businesses so people can form a judgment about how quickly we can improve the margins within the business. Okay. And if I may just ask a follow-up please. Thank you for those helpful answers. If the management info isn't in any way related to Total Care accounting, do you still stand by your comments on the first call that you're broadly comfortable with the accounting and that Total Care doesn't need radically revisiting, at least from an accounting perspective? No. I do stand by that. Total Care accounting that we do, I agree it's complex. But part of the complexity in that comes from the necessity to be suitably conservative. The Total Care programs are all about providing appropriate what the customer wants. And it's important that we remember in all this that the accounting will be what the accounting will be. We need to concentrate on delivering value for our customers. And then it's up to us to make the whole process as simple as we can possibly make it, so that we can respond quickly to the changes there. But no, I stand by the total accounting that we have at the moment. Do I would I like it to be simpler? Yes, I would like it to be simpler. And as we've already said earlier this year, the complexity associated with this is partly to do with the fact that some contracts are linked, some are not linked to the OE sales. And that the balance of linked and unlinked is shifting as we move to newer engines over the next several years. So the issue will in time largely disappear. Thank you very much indeed. Thank you. Our next question is from the line of Andrew Gomes at Berenberg. Please do go ahead. Your line is Good morning. Thank you very much for taking my questions. I've got three as well, if I may. First one, quite complex really. I'm just trying to understand more about the changes in assumptions that you're alluding to within the contract accounting. David, if you mentioned in one of the earlier questions, you're confident of the longer term returns and cash flows. Part of the message today is telling us that the legacy fleet is not as profitable right now or you say temporary effects. But I'm just trying to work out whether there is a structural change in your expectations for the profitability of that, let's say, the legacy fleet over the longer term? I mean, we're going through a transition. We're seeing some maybe some short term temporary effects. But does that mean that the life of these contracts not the contracts, the life of these engines are perhaps shorter than you expected and that we are structurally changing our longer term assumptions? Because a lot of us sort of look at that as the profit and cash driver on a five to ten year view is the maturity of all of that fleet. So I'm just trying to understand that a bit better. What are you telling us here? Secondly, a couple of questions on cash. Just a very short term one. The cash flow effects are less, you've mentioned. Can you just give us a feel for the kind of drop through or quantum, if you like, of the profit impacts that you are guiding to next year on that additional €300,000,000 of profit? And then just longer term and I guess linked to the first question, as profits move closer to cash, clearly that's a good thing and something that would have happened over the very long term anyway. Can you give us a sense of maybe some metric like cash conversion free cash conversion profile over the next, say, two or three years through this transition period? And then longer term, it's a kind of metric that a lot of your peers talk about, and it's really quite helpful for us to understand what's going on in the business through these big transitions. Yes. So I'll take the first point. So this is really about as far as we understand and each airline will be in a different situation because it very much depends on their fleet, what they've got on order, how they're managing capacity and operating patterns. So I don't think issue. This is absolutely about volume of flying hours utilization of the fleet for those legacy programs. And I guess what we and others in the business are seeing is actually that transition that everybody has seen coming in terms of wide bodies is going to require a bigger degree of change I think on the legacy than we expected. So that's really a change in assumptions which is looking very specifically airline by airline, but overall about how we see the level of flying hours on each of those legacy products developing. To your sort of maybe longer term question about engine life, that's clearly a very sensitive thing that we look at. And as we model each of our new programs such as the XWD or the Trent 1,000, we look at that very carefully based on the evidence that we have. The truth is that that number really hasn't actually changed over the last twenty years. It's still about twenty five years on average. Now that doesn't mean that we are necessarily not more conservative when we do our own modeling because we are. However, the objective evidence actually hasn't changed even though may be getting some short term acceleration of that for some programs on some airlines. But I think that as I said, that is much more to do with the individual capacity and operating situation of those airlines rather than a systemic issue as far as we see it at the moment. In terms of cash flow, this is a very important point and we did point out in July that, as Warren said, many of the profit effects were going to have a much more muted effect on cash flow simply because of the linked accounted nature of the Trent 700, which I think everybody got that. When we think about 2016 compared to 2015, clearly there are a number of things quite negatively affecting working capital in 2015 in the Marine business for instance. We believe that therefore although we're going to see a $650,000,000 profit headwind, we will not see that degree of cash headwind. I'm not brave enough to tell you that cash will be exactly the same in 2015 and 2016 because to be quite honest we always give quite a wide range about cash flow given that it's a year end number. But it won't be anything like as different as the profit impact. We see a much more consistent view on cash flow between the two years. And the primary reason is that the working capital changes in 2016 will be much lower than they are in 2015. In terms of cash conversion profile, therefore mathematically that will improve cash conversion in 2016. We've said previously that we still think that when we go out four or five years looking at cash conversion north of 80% and I've said before in some years that may well be north of 100% is absolutely right because that's really driven by the physical things that are happening in the business as we get up our ramp curve as the aftermarket installed base grows on the XWB and the Trent 1,000 and other products. So that's absolutely right. What I know is more difficult to do is exactly predict how that cash conversion will move between now and then. But I would say that we're going to have a couple of years where it will be better than it was this year because of all the effects we've just been describing. And then we'll progress up to that higher level by the time we get to the end of the decade. So it will be a transition. Okay. Thanks very much indeed. We are now over to the line of Charles Armitage at UBS. Please do go ahead. Your line is open. Good morning. Two questions. I feel of emasculated, I don't have three. First of all, just to be absolutely clear, that €300,000,000 headwind that you're talking about in 2017, that is versus 2015, it's not an incremental worsening from 16,000,000 Yes, that's correct. Excellent. Secondly, the dividend. When are you going to make a decision on that? And can you just talk us through your thinking? It just it seems to me that you're spending $400 $500,000,000 on dividends. A small cut to that really doesn't make an awful lot of change in the whole scheme of Rolls Royce and the transition. So should we be looking for a suspension for a couple of years? Yes. I think we've put these comments about the dividend in the release here, and we talked about the actions that have been taken over the last few months to improve our financial liquidity and strengthen the balance sheet as well. And we put them in there because given that we're talking today about profit headwinds as large as we're talking about for the transition from 2015 into 2016, it's just common sense to tell people that of course we're considering the strength of the balance sheet and we're considering the dividend in the light of changes that will be evident to dividend cover. But I stress the fact that we talked about the balance sheet being strong, liquidity being strong And we also talked about the fact that the Board will be reviewing this. The Board will be reviewing it at the normal time and changes if any will be announced at that time. Okay. Thank you. We're now over to the line of Christian Lachlan at Bernstein. Please go ahead. Your line is open. Yes. Thank you. Good morning, gentlemen. Just a couple of questions for me please. One, there are some positive comments on the strength of the business portfolio in the start of the press release this morning. So that implies, Warren, that you have not changed your view on the value of retaining the existing mix of aerospace and land and sea businesses over the long term. Is this a fair interpretation? That's the first question. And then the second question is, Warren, also if you could just elaborate a bit on what you mean by the inability to respond to changes in market conditions. Is that really referring to production or service offerings or pricing or just generally, you have too many people doing too few activities or an inflexible supply chain? If you could just kind of elaborate a bit on that second point that would be helpful as well. Thanks. Okay. First point on the portfolio. I think we're going to talk a bit more about this on November 24. Don't forget November 4 has always been billed as an update on a review of the operations of the business. But what I have found is that it's impossible to really do that without taking into account, you know, essentially reviewing the portfolio of product and market activities. However, and so I'll talk about more about that on the November 24. But for the time being then certainly I haven't changed my views. But over the long term this is a business with very strong engineering and technology. We need to focus on what we're really good at which is engineering engines and propulsion systems. And the fact that we deploy that expertise out into a range of different market applications, which all have a little bit of a common theme. And again, I can talk about it in greater detail. Don't want waste too much time on that now, but the view hasn't really changed over the long term. Inability to sort of respond quickly and so on, I think it's a combination of the fact that an observation I take out of the review is we clearly have too much fixed cost in some parts of our business. And we're just simply slow to react to changes in what's going on in the market. I think we've evolved over time a very good ability to deal with our supply chain and make sure that we're not building mounds and mounds of excess finished goods and we're not ordering vastly too many materials and components from our supply chain either. But in the short term, we are generally not fast enough at being able to take all those things and translate that into what impact that has on our financial results and communicate both with ourselves around the business and with the outside world. Okay, great. Thanks. We're now over to the line of Nick Cunningham at Agency Partners. Please do go ahead. Thanks very much. Good morning, gentlemen. Yes, a couple of questions. One, talking about the strong cash conversion indications at the end of the decade, does that include any assumptions about major development programs? In particular, there's been a lot of coverage of A350 stretch, including your UltraFan. And of course, I suspect you'll be bidding on Boeing's middle of the market new narrowbody. That's one question. Second one, looking at the mix impact of accounting changes, obviously, IFRS 15 is now holding into view. Do you have any view yet on that? And in particular, whether it intensifies the impact of the shift from linked to unlinked and whether you can still capitalize OE losses under unlinked? And finally, unlinked question in that just on the biz jets, is that a loss of market share that you're suffering which you're being impacted by? Or is it a weak market overall for Gulfstream and Bombardier? Thank you very much. Let me deal with the first one and then Dave can deal with the IFRS 15 implications. Is that right? So I think one of the things as we go through this restructuring and improving the simplicity of our business based decision making and so on. Then one of the things that we need to take care of is to make sure that we continue to invest in technology and we continue to invest in the product roadmap. And the opportunities that you talked about in the question, the A350 stretch possible seven fifty seven successes and so on, Absolutely these are on our radar and absolutely these taken into account when we talk about our forecasts for the end of the decade. Yes. I mean specifically IFRS 15, which as you know went back a year or at least a year in terms of the implementation timing. There is a lot of fairly intense activity going on to look at that both with our own accountants, but also talking to other industry peers. We would like as an industry to try and get to reasonably aligned views around this. And the changes may be quite fundamental I think in some areas although I'm not sure that we fully understand what that will happen on the portfolio at the moment. I would love it to be simpler. I am not what I'm saying is it probably won't be simpler, it will be different and that may actually have some effects on the portfolio that we're going to have to talk about. But it's too early for us to do that yet. The industry really is still talking and obviously talking with the regulators and just trying to understand how best to model, which are still fundamentally the heart of our business, very strong long term business contracts that we're trying to make sure we find the right way to model from an accounting point of view. And to comment on the unlinked question about corporate jet. We're coming from a position of actually very good market share, particularly at the higher end of the corporate jet market. And it is well known that we have lost some positions on subsequent airplanes that are coming along to replace some of those where we are incumbent today. And so as we look over the next several years, we can see a headwind from that loss of position. But what we're seeing in the short term right now is a softening of the market and that softening of the market manifests itself in reduced demand for these planes generally and people who would otherwise buy a more expensive higher end of the market plane buying a lower end of the market plane where our market share just doesn't exist today. So some of it is a longer term sort of Rolls Royce has over previous years lost lost out on some of the positions at the higher end, but that's because we're coming from a very, very strong position at the high end. And some of it is due to softening in the market and we're absolutely seeing that softening in the market at the moment. It's happening a bit quicker than we expected it to happen. However, I'd also stress that we're still very well positioned to capitalize on the opportunities that are there to get back into some of these higher end planes that are coming along in the next generation. And I'd also stress that our strong market share that we had going into this situation still means that we have an excellent installed base, which is still growing. The aftermarket is largely proportional to the installed base and the installed base is still growing. It's just not growing at quite the rate that it was growing. Thank you very much for that. Could I just make a plea on the IFRS 15 process? Could it be possible to involve the other stakeholders in the industry, including the investors and the analysts over the next couple of years? Thank you. Okay. The next question is from the line of Zafar Khan of Societe Generale. Please go ahead. Your line is open. Thank you very much. Good morning, everybody. I've got two business related questions, please, and two general ones, if I may. The first one is just on the 2016 outlook. Power Systems, interestingly, there isn't really very much mention on that beyond saying Q3 has been fine. Cummins offshore sorry, off highway hasn't been particularly good. I think standby power probably in some of the areas is difficult and there's 20% exposure to energy for for the power systems. And I'm surprised that there is no kind of real mention on that. So I'm interested to know the view on that visibility. Also on defense, United Technologies, GE, PCP, they've all warned on the aftermarket for military transport aircraft. I know for yourselves in defense, that's a pretty big exposure. Think it's more than half of the defense business. So I just want to know on those two businesses, how much due diligence has been done and how firm your kind of outlook is on those? That's the first one. The second one is you mentioned, Warren, the high cost base. You haven't said very much on the potential for cash liberation from the business. And I know in the past, there's been an admission that the inventory levels, etcetera, are too high because you were building a lot of factories and needed buffer stocks. So those are the two specific ones. Just a couple of general ones, if I may, please. First one is on the review that you're undertaking have undertaken. Has it been purely internal? Or have you sought help from some external consultants on this one, just somebody to hold your hand? Because I would imagine having worked in a high growth business with a very different business model, I just wonder how much experience you would have had of actually looking at something which is more mature and needs huge amounts of cost reduction. And then the fourth one is, again, Warren, you're in a unique position of having been a non exec on the Board of this grand company and for the last five months as a CEO. So you sat there as a non exec. What were your expectations in April when you took on the job from the non exec position? And are the challenges far greater than you envisaged at the time when you took on this position? Okay. Quite a lot of questions there. I start with the Power Systems? David, Chris of Power Systems. David, can talk about Defense as well. So in terms of Power Systems, yes, we haven't talked about Power Systems specifically. If you recall when we talked about the half year results, Power Systems have actually reached a record order book of $2,200,000,000 They progressed well in terms of that order book through the subsequent months. So our view at the moment is actually reasonably balanced on Power Systems. You're absolutely right. There are areas that are linked into global commodity markets for instance like mining or oil that are weak, but they were weak anyway and they have just continued to be weak. So that's not really a change from our perspective. On the other hand, we do have some positive developments. I think we continue to do well in governmental areas and things like the electric locomotive. Overall, we still think that that's a reasonably balanced view for Power Systems for the balance of this year and going into next year. On defense, we have done a very detailed review. I'd say defense is probably going to be more impacted over the next eighteen months by just the scheduling of OE deliveries as opposed to aftermarket. We're pretty confident in that and we are not seeing significant change in aftermarket for defense. That continues a strong part of the business. And clearly there's actually more activity around the world unfortunately at the moment. So that if anything might actually be some upside for us. I think the defense picture as well for power systems, yes, there'll be some ups and downs, but it's a pretty balanced picture, I think. Yes. And if I might add one thing, David, to that. Obviously, Transport and Patrol, we are largely now an aftermarket business. We have a very mature portfolio. Much more interesting for us is making sure that the technology investments address the need to have viable technology to tackle the next round of development of the transport and control market for our applications. And but we're doing fine as regards life extensions and providing support for in service transport and control activities, is the core area at the moment. So it's less sensitive to the OE side. Absolutely. Right. I'll pick up on the last three questions then. Cash liberation from the business and what's been talked about before. Yes, absolutely everything that's been talked about before is ongoing and continues. And I've said the transition that we're going through is an important transition and that needs to be driven through to conclusion and the performance improvement programs that have already been announced prior to today are absolutely on track and they're on track for delivering year on year cost savings in the parts of the business that they apply to at the moment and also to improve inventory turns and reduce working capital. So that's happening. What we're talking about today and what I've identified in the review is the need to do other things to do additional things. And one of those is about reducing the fixed costs, not about reducing the working capital. That's happening anyway. External consultants, no, we haven't used external consultants. I have thought one of the things I need to do coming into this business new is absolutely get under the skin of the business myself. And so simply delegating that to some external consultants didn't seem like a very good idea. With regards to your third question, I'm pointing out that I had actually seen this business certainly before I got involved in process of joining the executive. I've seen this business from the non executive side of the table for some nine months or so. Have my expectations changed? Well, I've only been in the business just over four months. And so actually things haven't changed that much. What happened is, I would say the challenges are the same sorts of challenges that I had identified from the outside. But it has been important to get under the skin, and I now have a much greater understanding of what lies behind some of those challenges and the things that we need to do to address them. And you can only really get that visibility from being inside the business rather than outside. It's quite hard to actually see that from the Board. All you see is the symptom and you don't really understand the causes to the same extent. So I'm actually quite pleased to be inside to be getting my head around what's really causing some of these issues so that we can get on with fixing them. Our next question is over to the line of Alexey Yanis at PIMCO. Please do go ahead. Your line is open. Good morning. Thank you for taking my question. So what is your commitment to your current credit rating? What measures would you be willing to take in addition to revisiting the dividend to maintain it? Would you reduce CapEx? What else would you do? And should we now consider it the same possibility that there could be a rating downgrade? Thank you. Yes. I mean, we view that maintaining the credit rating at the kind of level that we're at, at the moment is an important part of our financial policy. Clearly, will have as we have over the last year further discussions with the rating agencies that they will have to take their view on that. But it is an important part of our financial strategy. I don't believe that it would be just to your sort of specific question on CapEx. So we've given previously sort of guidance that CapEx and R and D over time may come down as a percentage of revenue. However, I don't think they're going to change that much in absolute terms. We will continue to invest as we think we need to do in terms of new product. That's a very important part of delivering the long term cash flow for the business and therefore that's absolutely important. The kind of actions that Warren is describing that we want to take in terms of improving breakeven, I think are the more significant ones where we're trying to take investment spend. Okay. Is there a sense that your current ratings could potentially be downgraded, your A3A ratings? Well, as I said, we'll have discussions with the rating agency. We've obviously already contacted them. We have planned discussions already with them. We'll need to go through that process. All right. Thank you. Okay. The next question is from the line of Rami Mahasin at Investec. Please do go ahead. Your line is open. Good morning, gentlemen. Good morning, Rami. A few questions for me. On the restructuring, just to understand the you still haven't decided whether or not the charges will be made above or below the line. And I assume we'll have an update on the twenty fourth. And just to clarify, you expect the €150,000,000 to €200,000,000 as a run rate exiting 2017? Or is it from 2017? And have you started discussions with the various U. K. Unions on the restructuring plans? And the second question on aftermarket and cash flows. If I understand correctly, the a lot of the downgrades today are actually cash items rather than total care, the old engine aftermarkets, etcetera. So could you explain why the is there an offset from working capital? Or is it actually more Total Care than tile materials? You. Let me deal with the first two of those questions to start with. So the restructuring in GBP 150,000,000 to GBP 200,000,000 per annum that we expect in terms of cost savings from this during 2017. The word is during 2017 as in I expect the impact of this to be felt during 2017, it to be progressive and the full per annum benefit will be from 2017 onwards. So by the end of 2017, we expect to be at about that level. In terms of how it's going to be charged, right now we will give some further details on the November 24 and we'll give some further details when we report again in February, because I don't think we'll have all the answers on the November 24 in terms of exactly how much these things are going to cost and exactly when we're going to have to get those costs when we're going to have to spend that money and exactly when we're going to see the benefits. There's a lot of people issues involved. And so we need to consider that as well. However, I would stress that a lot of this is not just about people, it's about processes and what the people are actually doing. And so in terms of consultations, that's something that we have ahead of us rather than stuff that's already been done. But this program is incremental to the programs that have already been announced. And so there will have to be some additional consultations as we go forward. Just on your cash flow question. So I think it was really as I explained earlier, which is the you're absolutely right. Some of these profit headwinds as opposed to the linked accounted ones we talked about in July will have cash impacts. However, we also as we talked about on inventory and other areas of working capital are improving performance in those areas. We believe the drag that we've seen on what I would describe as sort of normal trade related working capital will not be anywhere near as significant in 2016 as it has been in 2015. Thank you. Excellent. Operator, I think we said we'd take an hour and we're just coming up to the end of that. So I suggest we use that as a chance to finish the call. For those who are in the queue, we'll give you a ring just make sure your questions are answered by the team over the next couple of hours. But if I can just say thank you very much for taking part and hand you back to the operator. This now concludes today's call. Thank you all very much for attending. You may now