Rolls-Royce Holdings plc (LON:RR)
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Earnings Call: H2 2020
Mar 11, 2021
Welcome everyone to our 2020 full year results presentation. With me today are Warren East, CEO and for his final results with us, Stephen Daintic, CFO. Also with us today is our Deputy CFO, Ben Fidler. We'll start the presentation shortly with an introduction from Warren, followed by a more detailed review of results by Stephen. And lastly, returning to Warren for an update on our outlook and strategy.
In all, this should take about 40 minutes, leaving plenty time at the end for Q and A. Before I hand over to Warren, please take note of the Safe Harbor statement on Slide 2. This results presentation contains forward looking statements that involve An uncertainty that may cause actual results or developments to differ materially. A full set of results materials can be downloaded from our website. Thank you, and over to you, Warren.
Good morning, everyone, and thank you for joining us. Now before we look at our performance in detail, I'm going to reflect for a moment on the Extraordinary and unprecedented year in 2020. And you can see from the images on the top of the slide there about just how devastating it was for our sector. It was also devastating for many people. It was a year where our colleagues made many personal sacrifices.
And despite all the challenges, They still managed to dig deep to find the solutions to help keep our company strong for the future. And I'm very mindful of the fact that around 7,000 of our colleagues, some of whom have worked with Rolls Royce for many years, have left us as we took actions to restructure and protect our business. And I thank all of those colleagues, both past and present, for their contributions, their diligence and their hard work. Looking at the images on this slide, I'm particularly proud of the practical support that our people have given to the communities in which we work, Doing things such as making face shields and volunteering to help those in need. As a company, we also endeavored to give back To our community, we launched the Emergent Alliance, and that's now growing to more than 140 members.
And we've worked together there The community using data analytics to assist economic recovery. Here in the UK, we also joined the ventilator program, And we've been providing home learning and STEM materials to encourage online learning for young engineers and inventors of the future. Finally, of course, I must thank our investors and our lenders who helped us and gave us additional liquidity to weather this crisis. So as we move forward, preparing for the recovery and investing for the future, we're very aware of the responsibility that we now have To honor the support we've received from all of our stakeholders by delivering on commitments that we've made in achieving those goals. So now moving on to group performance.
I'm on Slide 5. When COVID arrived early in 2020, It had an immediate and very material impact on our business. If you remember, we came into 2020 with great positive momentum, And that momentum that we had at the start of the year was overtaken. And in response, we took decisive and effective To protect our people and protect our business, we introduced new ways of working to protect our colleagues And that has enabled us to maintain operations throughout with minimal disruption. We took mitigating actions That saved more than GBP 1,000,000,000 in cash.
We secured more than GBP 7,000,000,000 of additional liquidity To secure the future. And we embarked on a very large restructuring, largest restructuring in our fundamentally changed the economics of our Civil Aerospace business, and that's going to save more than GBP 1,300,000,000 of annual costs on an ongoing basis. We've also committed to rebuild our balance sheet, which is supported by a disposal program We're targeting more than GBP 2,000,000,000 from disposals by 2022. Despite the enormous pressure on cash And the cost reductions, however, we managed to continue to invest in sustainable low carbon solutions for the future. And I'm going to come back And say much more about that later in this presentation.
And now looking at the business highlights for 2020. I mean, The impact of COVID on our business, you can see on the right hand side of the chart, different businesses affected in different ways. The impact of COVID was most acutely felt in our Civil Aerospace business, with engine flying hours reducing sharply in April to less than 20 And as the year progressed, those fly now have gradually recovered. Now while the rollout of Vaccines and testing gives us good reason to look forward to the recovery. The impact on our industry is severe and OE demand is Expected to remain low for several years.
On large engines, on wide body aircraft, that's where we're most exposed The downturn, international and business travel particularly was affected, and that's likely to recover slowly. Regional and narrow body flights have been marginally less impacted with fewer cross border routes. Business Aviation was relatively resilient, And that was helped initially by repatriation flights at the start of lockdowns and, of course, much less exposed customer base. We've made good progress on our fundamental restructuring program in Civil. Around 5,500 Of the roles removed so far from our business are from the Civil Aerospace.
And that will, of course, give us Permanent cost efficiencies and help reshape the economics of our business for the longer term, and I'll talk more about that later in this presentation. Despite the challenges, we've managed to continue to serve our customers. We've managed to design and manufacture solutions and invest in new technology. We've Achieved our target of eliminating aircraft on ground due to the Trent 1,000 durability fixes, and we've now got enough parts and MRO capacity there on Trent 1000, to avoid a recurrence of any customer inconvenience, even if miraculously all travel restrictions were lifted today. In ITP Aero, we've seen, of course, similar market dynamics because civil aviation accounts for about 70 Percent of ITP revenues and defense activities in ITP contributing the rest, that performed relatively resiliently.
Power Systems was less affected than our Civil Aerospace, but still quite affected by what happened. But it has a number of end markets, each with its own dynamics, and that has helped to balance the business performance in Power Systems. Government end markets, for instance, were the most resilient, whereas industrial and marine suffered from the impact of Lower economic activity and lockdown restrictions. Our strategy in Power Systems to grow in China also helped the overall performance of that business with Structural growth and market share gains continuing. And our solutions to support and enable the transition to lower carbon power I've had a good year, driven by investments in batteries, hydrogen fuel cells and hybrid systems.
And moving to the bottom of the slide, Defence had a good year because our government customers remained committed To the programs that we're delivering, and our order book remains strong. And this year has or 2020 Has been a real reminder of why the defense business is an important one for our group, delivering profit growth Even in what turned out to be the most challenging of years across the rest of our business. Now I'll hand over to Stephen to talk more about our financial performance.
Thanks, Warren, and good morning, everybody. So our full year 2020 results were severely impacted by COVID, as Warren has just outlined. In addition to the trading impact, there were a number of large onetime charges in our underlying and reported results. Now they're shown here on this particular slide, Slide 8. These charges were mostly incurred in the first half of the year when the outlook suddenly deteriorated.
Group revenues declined by more than 20%. This reflected the drop in activity in Civil Aerospace, ITP Aero and Power Systems, but also the impact of a GBP 1,100,000,000 negative Catch up charge on our civil aerospace long term service agreements. This related to changes in the outlook on our long term contracts As a result of COVID, which led to the derecognition of some of the revenue that has been booked in prior years. Now we had a gross loss of GBP 512,000,000 in 2020. This included GBP 1,300,000,000 of onetime charges, most notably The impact of the contract catch ups that I've just talked about.
Although the gross profit charge was slightly lower than the revenue impact after taking risk and revenue share partners into account. In addition, we took a GBP 230,000,000 charge related to onerous or loss making contracts. Now we don't have many of these, And they are mostly related to the Trent 900 engines on Airbus A380s. At the largest passenger plane in service, these have been particularly affected By the fall in passenger demand. It's been a very tough year for everyone in our industry.
A number of our customers have had Challenges with their liquidity and financial stability. We responded commercially with relaxations of certain terms and conditions, And we're keeping a close watch on the customer credit risk. Prudence requires that in some cases, we provide for specific customer credit risk, Which is why we have taken an £86,000,000 charge in this respect. The final large charge on our underlying results It's the GBP 1,700,000,000 financing cost charge related to our hedge book. Our U.
S. Dollar hedge book provides cover for transactional currency risk Because our dollar receipts usually exceed our dollar costs, the impact of COVID on our future forecast left us significantly over hedged. And so in 2020 early 2021, we reduced the hedge book at a cost of GBP 1,700,000,000 spread over the next 6 years.
Now you can see
on this slide the business unit performance in more detail. As Warren has already talked about the market drivers of our So I won't need to cover those again. What you can see here is the scale of the impact of the drop in performance in Civil Aerospace has had on the group As well as the impact of COVID related onetime charges, which make up most of the loss. Power Systems, Defense And ITP Aero all contributed positively to operating performance, albeit only defense achieved year on year growth, Up 8% on 2019. Now this next slide details the successful mitigating actions we took this year to help Compared to our plan at the start of the year, the largest savings of around GBP 500,000,000 came from a reduction in pay and benefits.
Now this was a result Three key things. Number 1, a pay cut for senior managers during the 9 months between April December. Secondly, support from government furlough schemes. And thirdly, savings starting to come through from the reduction in roles in the second half of the year. Furthermore, we reduced our capital expenditure by around £300,000,000 we stopped all nonessential spend and rephased some of our projects.
About twothree of our savings were in Civil Aerospace, Where earlier plans to increase capacity were shelved, as we now expect to meet the forecast load within our existing facilities. We've reduced the pace of investment in spare engines, and we've also challenged capital plans across the group. Engineering spend was also reduced Industry wide delays have allowed us to slow down our R and D spend without jeopardizing our commercial objectives. We've also saved on third party costs And travel and absorbed the additional investment needed to make our workspaces COVID secure. Now most of our mitigations were onetime or temporary, however.
Some of the savings are expected to roll into our fundamental restructuring program, helping to deliver the GBP 1,300,000,000 of annualized savings by the end of 2022. Achieving more than GBP 1,000,000,000 of savings so swiftly is testament to the collaboration, Dedication and focus from everyone in the business. Not only have personal sacrifices been made, but we have pulled Together to find savings, no matter how small, to contribute to the group wide effort to protect our business. I'd like to thank everyone at Rolls Royce for the part that they have played Delivering this extraordinary response to the COVID crisis. Now on this next slide, We had a GBP 4,200,000,000 group free cash outflow in 2020 compared to a GBP 900,000,000 inflow In 2019, this GBP 5,100,000,000 year on year movement can be divided into 3 broad categories.
Firstly, compared to 2019, there was a £3,000,000,000 impact from operational factors. This is mostly due to the lower engine flying hour receipts from the long term service agreements, but also includes lower time and material receipts And the impact of under recovery of fixed costs, particularly on civil OE original equipment volumes. Although Power Systems and ITP Aero contributed positively to group cash, they were down year on year, which was only partly offset by growth in defense. Secondly, we had a £2,100,000,000 swing in working capital, moving from £400,000,000 inflow In 2019, to a GBP 1,700,000,000 outflow in 2020. And this was mostly due to our decision to stop invoice factoring, Which resulted in a £1,100,000,000 adverse one off timing impact to cash.
The rest was a reflection of the underlying reduction in working As our activity levels diminished significantly in 2020. This
compared to
the previous trend of cash inflow from working capital as we grew the business. Now finally, there were a range of other smaller factors moving in both directions, which largely net each other out. Included within these are the cost Closing out the hedges in 2020 as well as the positive swing of around GBP 400,000,000 from the lower capital spending due to our cash mitigations. This next slide shows how these three movements show up in our summary funds flow in more detail. The Civil Aerospace net LTSA balance grew by GBP479,000,000 in 2020, which may feel a little counterintuitive given the significant fall in flying hours.
Now this is the result though of the GBP 1,100,000,000 contract catch up to revenues that I outlined a little while ago. Typically, we expect to see an increase in the LTSA balance as we grow the fleet. However, this year, if we adjusted out the catch up effect, We had a reduction in the LTSA balance as revenues, which as you know, were driven by shop visits, were larger And the flying hour receipts. The GBP 138,000,000 movement in provisions is the net result of new provisions for onerous contracts Offset by the reduction in provisions related to the Trent 1,000 in service costs. You can also see here the GBP 202,000,000 cash impacts Closing out unutilized hedges.
Although the cash headwinds from the hedge book and Trent 1,000 fixes are substantial and multiyear, They are not permanent elements of our cash flow. In 2020, the cash impact of these combined was around GBP 700,000,000 Moving on to 2021 and 2022, they are expected to be around £800,000,000 £500,000,000 respectively. But beyond 2023, importantly, the headwind from Trent 1,000 is expected to be de minimis. The last of the hedge costs will be in 2026. Now further details of these are included in the appendix slides.
Moving on to the next slide. We strengthened our liquidity in 2020 to cope with the uncertain outlook and near term cash impact of the COVID crisis. At the start of 2020, we had £6,900,000,000 of liquidity and a net funds position of £1,400,000,000 Our GBP 3,100,000,000 of debt included €750,000,000 of bonds maturing in 2020 And $500,000,000 maturing in 2021. Now we had expected to cover these maturities with the cash generated by the business. With the arrival of COVID, we took the precaution of drawing down on our GBP 2,500,000,000 revolving credit facility, which had a duration out to 2024.
As the extent of the pandemic became apparent, we took the necessary actions to ensure We would have enough liquidity and sufficiently long maturity profile to manage even in a severe but plausible Downside scenario. We agreed new loan facilities, GBP 1,000,000,000 with a 2 year term and GBP 2,000,000,000 with a 5 year term, And we lengthened the GBP 2,500,000,000 revolving credit facility to 2025. We were supported by the UK Credit Export Agency With an 8% guarantee on the 5 year term loan. In the 4th quarter, we added to this with a £2,000,000,000 bond issue And a GBP 2,000,000,000 rights issue, which were both well supported by our investors. This leaves us all in a strong liquidity position With around GBP 9,000,000,000 at the start of 2021, and most of our debt does not mature until at least 2025.
This gives us the strength to weather the near term cash outflows, and we expect to return to generating cash from operations in 2022. Today, we have £5,500,000,000 of undrawn facilities. And additionally, we have just agreed a £1,000,000,000 extension To the 5 year term loan with the UK Export Finance and our syndicate of banks. We do not expect to draw on this extension even in a downside scenario, But it provides an important safety net. Moving on to the next slide.
Our strong liquidity will therefore see us through this crisis, But afterwards, we will need to rebuild our balance sheet. We do not intend to remain in a net debt position. We're in a cyclical industry and need a strong balance sheet to be able to weather the storms without jeopardizing our commercial position or our through cycle investments. The first step on the road to financial recovery came from the support of our shareholders with the GBP 2,000,000,000 proceeds from the rights issued in 2020. We expect to at least match this with proceeds from disposals, which I'll say more about in a moment.
The remainder of the bridge comes from cash generated organically from operations. The actions we are taking to restructure the business and the expected recovery in engine flying hours Should enable us to get back to a healthy cash generation by 2022. This underpins our ambition to reach a net cash position in the medium term Consistent with an investment grade credit rating. Now on this next slide and before I hand So Warren, I promise to say a bit more on our plans for asset sales. We've got off to a good start with 2 disposals already agreed and due to complete later this year.
Firstly, we agreed the sale of our civil nuclear instrumentation and control business to Framatome. Secondly, we agreed to sell Bergen engines to TMH International. Now this transaction has been temporarily paused at the request of the Norwegian government to be further reviewed by them. It is not for us to on the outcome of the government's review. However, it should be noted that the sale of Bergen is only one part of our disposal program.
Although both of these are good businesses, neither of them were central to our future strategy, and they did not generate any material profit or cash flows. Between them, they generated about GBP 300,000,000 in annual revenues. The largest of our planned asset sales is ITP Aero. We've started the disposal process with the proposed transfer of our Huttnell facility and some of the work from Barnardswick into ITP. We're holding talks with a number of interested buyers.
No one has been ruled out, and we're working closely with all the key stakeholders to find the right path forward. We've got a number of other assets under consideration too, not just in Civil Aerospace, but across the group. We're not in a position to name these yet as they are At a relatively still in their early stages, but we expect to see further progress by the end of 2021 on all processes. Now I'll now pass back to Warren to discuss our outlook and our strategy.
Thank you, Stephen. Okay. Let's move on. Now as I said before, this has been an unprecedented time. We I've faced up to the challenges with decisive and effective actions to take control of the things we can control and Manage the things that we can't control.
And within that framework, we have 3 clear priorities as we look forward. First of all, restoring our financial performance and thinking about how we maximize value from our existing capabilities For the medium term and looking further forward, how we deliver the science led innovation in sustainable power that's going to take us forward into the longer term. And I'm going to take each one of these in turn. So let's start with our financial performance And how that changes.
We'll step back
for a moment and look at the global economy. The impact of COVID on the The global economy has been greater than any other event in recent history. You can see it from the chart on the top right here. Nonetheless, there is cause to be optimistic about a V shaped recovery, and that's underpinned by the efficacy The decline of infections in locations where vaccinations and testing have been rolled out. The Initial data is very encouraging.
The pace and timing for opening up borders, however, remains uncertain today, but it's clear from our that there is significant pent up demand from consumers for flights just as soon as they're able to resume. And this could be accelerated by vaccine passports, air bridges or other risk based approaches Between countries with low levels of infection. Now in Civil Aerospace, there is, as you know, Strict correlation between GDP and flying, with growth in passenger miles increasing at around 1.5x the pace of economic growth. And there's also a strong link between the development of a country's economy and the penetration of flights per person. And as a result, fast growing economies with low levels of air travel fueled the long term expected growth trends for our industry in the coming decades.
And this makes it hugely important that we develop the right low carbon solutions that will support these economies to develop cleanly and sustainably. And I'm going to elaborate more on that in future. Now Power Systems is also a GDP plus business. But unlike aerospace, it doesn't have particular issues around opening up of travel corridors and government to government agreement. And so we expect the V shaped recovery in GDP to result in a faster recovery of revenues and profits.
Defence, as I said earlier, has been less impacted by the crisis. It's also less impacted on an ongoing basis By fluctuations in GDP because government allocations are driven more by the need for investment based on geopolitical risk. And actually, we don't see that geopolitical risk changing anytime in the near future. But of course, There will be pressure or likely to be pressure at any rate on total government budgets in coming years as they seek To repair the economic and social damage that has been caused by COVID. So moving on to Slide 19, talking about Defense And Power Systems, I'll start there with a little more detail.
Power Systems and Defense have been the bedrock of support for us this year, They contributed over half our revenues and generated both profit and cash for the group. Power systems provide the power for industrial and agricultural growth as well as travel and infrastructure. And reliable power is critical for continuity of services. And our microgrids and backup power solutions can provide that. And as we see economies reopen and get back to business, So we expect our customers' capital expenditure cycle to accelerate, and that will drive a sharp recovery in demand for our OE And for Aftermarket Services.
And so we see our Power Systems business returning to 2019 revenue levels by 2022, Along with the margin recovery back to double digit levels. And that is helped by structural growth in China, as I've mentioned before, And increased pace of development of low carbon solutions as well as the general recovery from COVID. In defense, we have a stable outlook. We have a strong order book. We're working continuously in that business to Set inflation and pricing pressure with savings and operational efficiencies.
And we think that we're in a good position To benefit from future program opportunities as they emerge. So now let's look at Civil Aerospace On Slide 20. Clearly, the pace and timing of recovery in engine flying hours remains uncertain, But the progress on vaccines and testing is encouraging. At the start of the year, in January, we updated our patience for 2021 to reflect the challenges that the world is seeing from new virus variants and new national lockdowns. And our view of a recovery in 2021, we modified and this is Particularly about the Rolls Royce fleet, by the way, that we modified to an average of around 55% at 2019 levels.
And that remains unchanged as we sit here today. Today, activity is actually below that level. But based on third party Projections and conversations with our airline customers, we expect the recovery to pick up in the second half of the year, As flights fill up and airlines open more routes. And this recovery is likely, of course, to be led by Short haul leisure demand, and that will be followed by business trips and long haul journeys. Now turning to our expectations for engine flying hours 2022, we're now expecting around 80% average flying hours in 2022 compared to 2019, and that's Different from the 90% we talked about previously.
The impact of this Dan Wigro vision on our GBP 750,000,000 cash target has been mitigated by Additional management actions and our latest view on certain cash movements. We've also refreshed our plausible and severe downside To make sure we're well prepared should the recovery take a little longer. Full details of our scenarios are included in the press release. But in summary, we see a reasonable worst case of around 45% of 2019 levels in 2021. That's Flat on 2020, but it's a bit higher than the levels we're seeing today and approximately 70% of 2019 in 2022.
So we continue to see a disparity between the different engine programs, The chart on the top right hand side of the slide. And you can see that shows that the newer, more efficient aircraft and engines are the ones that are recovering Faster than the more mature ones. And that's, of course, driven by the economics for airlines as they look to minimize their operating costs. And it's also driven as well by The geographic mix and customer concentrations of our fleet. You can see our Trent XWB engines have been the fastest to recover.
They've already reached Around 60% of prior year flying hours by the end of 2020, and that's followed closely by the fleet of Trent 1,000. One of the bright spots for the whole industry last year was the winning combination of our Trent WB engine on the Airbus A350. This is the most fuel efficient wide body aircraft in the world, and it has versatility to serve both long haul and short Now we're already exclusive on the A350-1000 variant of the aircraft, and we are Spending our position, our exclusive position on the A350-nine hundred variant, and that accounts for the bulk of the A350 fleet, And that extension is agreed with Airbus out to 2,030. Now that's in line with the development timeline for our next generation UltraFan engine program. Just to remind you, by the way, that we're also the exclusive engine provider for the A330neo with the Trent 7000.
So Slide 21. I talked so far about recovery factors that we can't control, engine flying hours, behavior of airlines and the like. Now I'm going to talk about things that we can control. We were quick to recognize the need for self help actions to control our cost base Position our business for the future last year. And in May, we announced the fundamental restructuring program, the largest we've ever undertaken.
The impact on our people of a change program of this scale cannot be underestimated, and we didn't certainly did not take this decision lightly. We're consulting with colleagues on the proposed actions. We're working with unions and employee representatives to try to limit the number of compulsory redundancies And protect as many livelihoods as we can. We've increased support for mental health and well-being, We're helping those that are affected by redundancy to find alternative roles, sometimes elsewhere in Rolls Royce, sometimes outside of the But the outcome we're targeting is clear. We need to restructure our cost base and eliminate the under recoveries And set up the framework that will enable us to recover strongly when activity levels return.
So we've set a target to achieve annualized Pretax savings of more than GBP 1,300,000,000 by the end of 2022. Now our plan for this includes The removal of more than 9,000 roles, and most of those are in our Civil Aerospace business. It includes consolidation of our operational footprint And cost discipline right across the business. And we're also looking to keep our capital expenditure low, and we're aiming to be at the better end of our peer group range Of 3% to 4% of revenues in that respect. Now we made a strong start in 2020.
In 2020, around 7,000 roles We're removed across the business, mostly through our voluntary severance programs, but also as a result of hiring freezes, fewer contractors, Some compulsory redundancies. We also began consultations to consolidate the major Civil Aerospace operating sites, Consolidating 11 sites down to 5, with activities being moved to the most productive, cost effective hubs And a reduction in the duplication of work in multiple locations. We're engaging with all the stakeholders to make sure that our actions are both fair And effective. Now let's have a look at the economics. The changes are fundamentally altering the economics of our Civil Aerospace business, And that's shown here on Slide 22.
The majority of our cost savings are targeting fixed costs in our Civil Aerospace business. We're reducing headcount by approximately onethree, and we're looking to lock in substantial savings from those site consolidations and efficiency improvements.
And on
top of that, most of the planned group capital expenditure savings are also in Civil Aerospace. And there, we have more than 50% versus the 2019 levels. And that's, of course, helped by the growing maturity Of our newest engine program. So some of that CapEx was going to reduce anyway. At the same time, we're seeing our variable costs Reduce with load, but we're also pushing those variable costs even further.
We're challenging ourselves to achieve better pricing and engineer greater efficiency To reduce per unit costs and waste. It really is a fundamental transformation of the civil aerospace cost base. It's a program that's helped, helped, and that will enable us to create a stronger business with more sustainable cash generation And permanently lower fixed cost base regardless of whatever the pace of recovery happens to be. And as the next slide shows, it sets Well to benefit from huge operating leverage as the market recovers. So let's look and see what that means for our future cash flows.
On Slide 23. We can't control the pace and timing of recovery, Which in turn is the main driver of recovery in both the aftermarket and the OE receipts part of our business. So those are the blocks above the axis. What we can control are the blocks below the axis, which I've just talked about on the previous slide. But here, you can see spread out in time.
We can influence the rate of cash burn during the downturn and also consequently the operational leverage that we enjoy As the flying hours improve. In 2020, large engine flying hours were 43% of 2019 levels, And we delivered around half as many of new large engines. Business jets and regional did show more resilience, but still The fall in receipts was quite significant. And you can see our response in the reduction of the turquoise bars Below the line, representing the operating cost and capital spend. And that begins in 2020 With the cash mitigation that I talked about, but it continues in 2021 2022 as the restructuring program makes those savings Permanent and expands them even further.
However, due to supplier lead times and working capital movements, in 2020, it Simply wasn't possible to reduce our total costs at the same pace that we saw in the fall in receipts. And that's what drove the Civil Aerospace trading cash outflow of GBP 4,600,000,000 In 2021, this does begin to improve because The purchasing reduces with lower volumes and as we're able to turn off those taps, we still have a working capital headwind to contend with. And that is driven primarily by the OE concession payments that we talked about shortly before Christmas, as a backlog of 787 aircraft Delivered by Boeing, and that triggers payments from us to airlines. The timing of this is completely outside of our control. And while we expect significant concession outflow in the first half of twenty twenty one, it may slip a little bit to the right.
Nevertheless, you can see that cash flow as a whole begins to improve in 2021. Once the market recovers more fully, You can see Civil Aerospace returning to positive cash flow. And assuming flying hours reach approximately 80% of 2019 levels on average In 2022, we will see the Civil Aerospace business delivering cash flows that support our group ambition At least GBP 750,000,000 of free cash flow.
Looking longer term, the actions
that we've taken To change our cost base and position for the recovery, I mean, we're confident we'll be able to keep those costs low As volumes increase, and that will deliver better cash margins in the future than we have achieved in the past. So that brings me back now to the group outlook for the near term on Slide 24. We're expecting free cash outflow of around about GBP 2,000,000,000 in 2021. The first half will see the worst of the outflows, mostly due The shape of expected flying hour recovery and the timing of those concession payments. In the second half, there should be benefit as vaccine and testing allows more routes To reopen and working capital pressure begins to ease on those concession payments, both halves are expected to see Cash outflow overall, but at some point during the second half of the year, we expect net cash outflow to become net cash inflow, Marking the inflection point in our recovery.
Now as we move into 2022, We expect those improvements to continue and drive sustainable positive cash inflow, and that could total as much as £750,000,000 in the year as a whole in 2022. And that's not adjusted for any disposals that may have completed by then, But it does remain contingent on the recovery in flying hours to at least about 80% of 2019 levels. Now despite the uncertainties of the exact timing of that, we're confident that over a 12 month period starting at some point in 2022, we're going to achieve that target. Looking further ahead, our ambition to get back to at least £750,000,000 as early as 2022 includes Up to £500,000,000 of temporary headwinds from the Trent 1,000 fixes and the closure of our over hedged positions. So our projected future cash flows will benefit as these diminish in the years going forward.
So Slide 25. Now that we've that's effectively covered how we are restoring Financial performance. I'm going to move on to how we're positioning ourselves for the recovery and creating a sustainable future. And that's Two things. First, by maximizing the value from our existing capabilities in civil, in power systems and defense.
And secondly, through the science led innovation in sustainable power that we talk about quite a bit. And that includes exploring opportunities With things like sustainable aviation fuels, exploring opportunities around hydrogen, and I'll come on to talk about that in a moment. So on Slide 26, maximizing the value from our existing capabilities. It's all about what we can do in each of our business units To really capitalize on our position, we've invested heavily in Civil Aerospace over recent years, But that major investment cycle is now largely complete. And our fleets are amongst the youngest in their respective markets.
So the focus now is on extracting aftermarket value from that installed base with more than 5,000 large engines And 7,000 business jet engines. And we can do that by improving time on wing and continuing to reduce the cost of Components. Similarly, in Power Systems, we've got an installed base, more than 150,000 large engines, Which gives us a great foundation to build upon. We're also exploring how we can really grow our strategic position in China, which is a fast growing market for power systems As well as commercialize our electrical, hybrid and hydrogen solutions. In defense, there are 2 particularly notable engine programs, And we're awaiting decisions on those in the next 2 years or so.
These are the B-fifty two reengine program and the future vertical lift program. And together, they have an estimated lifetime value of more than £7,000,000,000 And we're also continuing to work on Through life upgrades to engines in service. Slide 27 shows What this means for our capital allocation. On the left hand side of the slide, You can see how we're pivoting our midterm investments away from civil towards Power Systems and Defense because As mentioned, the major investment cycle in Civil is now largely complete. And in 2019 2020, we spent more than 70% On Civil Aerospace and ITP Aero.
But looking into the medium term, we're going to see that decline, and it will be more like 50%. If we look at the chart on the right, we can look at that capital allocation through a different lens. This is the lens where We are accelerating our focus on carbon on low carbon technologies and sort of self funded And disciplined R and D. And as we move towards the midterm, the proportion of our investments in low carbon next generation engines We'll really be the lion's share. The current investment in current technology falls from around 2 thirds in 2019 To around a quarter in several years' time.
And that rapid shift in investment spend reflects Our net zero ambitions. If we're to become a carbon neutral business by 2,050, and that Enabling the markets that we serve to be net 0 by 2,050, then it's vitally important that we take the steps now That will enable us to create more sustainable power in the future. Slide 28, I'm going to take each of these In turn, and start with low carbon. Firstly, UltraFan, our next generation aero engine. As many of you will know, This new engine architecture is forming an exciting part of our sustainability journey.
The status is 25% more fuel efficient than the first Generation of Trent family engines, it's also 100% SAF compatible, sustainable aviation fuel compatible. Now that efficiency is very important As SAPP will inevitably be more expensive than fossil fuel to begin with. I mentioned SAPP a moment ago, And there's a lot of interest in this area recently. So just touching on that for a moment. For journeys over 1,000 nautical miles, alternatives Like electric solutions and hydrogen solutions become very challenging or even impossible.
So for Rolls Royce, We see the use of SAPS or sustainable aviation fuel as being vital, and they require little change to our Existing engine architecture and what we're working on with partners in the industry are fasts that can be simply dropped into the engine. They also have higher energy density and fewer impurities. And additionally, they can be created synthetically Using captured carbon, using a 0 carbon energy source, and that's what gives us our net zero. You may have read the announcements we've made recently about successful tests on our wide body business jet engines. We've also been testing SAFs in our defense engines, And all the results have been extremely promising.
However, it's not just aviation that can benefit from more sustainable fuels. Our Power Systems business also has a separate unit called PowerLab, and that's dedicated to our sustainable future. And there, we're exploring the use of synthetic fuels in our Power And we're embracing hybrid solutions in many different areas across the group. You've seen pictures of hybrid trains before from Power Systems. In Power Systems here, On the bottom of the slide, we have a picture of a hybrid electric engine based on the Series 2,000 engine, that's ideally suited for yachts and provides increased power and lower noise pollution.
Now let's turn to Slide 29 and talk about enabling net 0. Now remember, an ultra fan engine running 100% Synthetic aviation fuel generated from net zero electricity is indeed net zero, But we're doing more. As with SAPS, there's been a lot of interest and excitement in the aviation sector around the use of hydrogen. Just like others in the industry, of course, we're exploring the fundamentals of hydrogen in aviation. It's a very exciting area and one that really pushes the boundaries And our and pushes the boundaries, uses our existing engine technology.
Our existing engine technologies could be adapted relatively easily to utilize hydrogen. There are large challenges for the industry that are industry more broadly, however, to overcome. But it's exciting to see the effort building around hydrogen. I'm confident that we have the technical capability to support our aviation customers If that is indeed the direction in which the industry moves. Aside from the use of hydrogen in aviation, there are also many opportunities for for hydrogen in our Power Systems business.
We're cooperating, for instance, with Daimler Truck on stationary hydrogen powered fuel cell generators, And that would act as a CO2 neutral emergency power generator for critical facilities like data centers. And we're also working on ways to make energy storage more carbon neutral. We recently made a majority stake in the acquisition of Kinos, Which is central to our microgrid solutions, enabling renewable power and energy storage. I'd also like to talk about SMRs or Small Modular Reactors. You've heard us talk about that before.
Rolls Royce has unique Expertise in high density nuclear technology from decades of experience in defense. SMRs are Small nuclear power stations, which are factory built, which have the ability to deliver electricity in a net zero way. In turn, this electricity could further contribute towards our net zero ambition as, of course, it could be used To power the synthetic production of SAPS or indeed of hydrogen. And we have UK government support for SMRs, And we're targeting the 1st power by 2,030. They have much lower CapEx requirements, much smaller Footprint per gigawatt.
Now turning to Slide 30, I'm going to come back to Aviation and The progress we're making in electric aviation, it's particularly important for small and medium distance journeys And it's an area where we're seeing a huge amount of interest in growth. You may have noticed on Tuesday that we announced our first Commercial deal in the urban air mobility market. It's a very significant step towards commercializing our technology. The deal with Vertical Base uses a Rolls Royce electrical power system, which will be integrated into the piloted eVTOL vehicle. It's also particularly exciting It has the potential to transform the way that people and freight move from city to city.
In the Commuter and regional space, we've got a partnership with Italian airframeotecnam to jointly develop the P Volt, That's an 11 seater aircraft in an all electric battery and fuel cell configuration. And today, I'm announcing that we are expanding the successful research program between Rolls Royce and Viderot to cover all elements of developing and delivering The 0 Ambitions, P VOLT commuter aircraft that could be used in the Norwegian market from 2026. And in the small propeller space, you might have read our announcement earlier this month that the Spirit of Innovation aircraft, part of the XL program, Achieved another major milestone. It's on track to be the world's fastest electric airplane. It successfully did its taxiing trial propelled by its 50 horsepower or 400 kilowatt electric powertrain, and we are hoping to see the first flight of our aircraft in the spring.
So let me summarize. Before we end our presentation today, just a reminder of what we've been talking about. The decisive and effective actions we've taken to address the challenging market conditions we faced in 2020. We made in your cash savings of more than GBP 1,000,000,000 from one off mitigating actions. With the support of our stakeholders, we've strengthened Our liquidity position to increase the resilience and support our long term strategy.
We've also made Strong progress on our fundamental restructuring program, and we've commenced our disposals program to raise over £2,000,000,000 in proceeds. If we look forward, ahead to the recovery, then we're confident that those Restructuring actions that we've taken in 2020 will enable us to have permanent cost efficiencies. We remain committed to supporting the decarbonization of our end markets by pivoting our R and D and CapEx towards lower carbon solutions. And I'm confident we'll be able to offer continue to offer growing low carbon technology For a more sustainable future. Before I hand back to the operator now for Q and A, as I mentioned In fact, as Isobel mentioned at the start of this call, this is Stephen's final full year results with us.
And I'd obviously like to thank Stephen for all his hard work and support, particularly during the recapitalization efforts of the last year. I want to thank him for his friendship over the last 4 years as well and help with Putting this business back where it belongs. So thank you, Stephen. I think Ocado is very lucky to have you. And now as the rest of you know, Ben Fiddler, Who's here with us today is stepping up to the role of interim CFO for a few months until our new CFO, Panos Kokoulis joins us in May.
And with that, I'd like to thank you all for listening and hand over to the moderator for Q and A.
Thank We have the first question coming from the line of Andrew Humphrey from Morgan Stanley. Please ask your question.
Hi, thanks very much. Couple, if I may. One is on flying hours. I mean, I think on over January February, Rolls Royce flying hours, as far as we can tell, were around 36% of 2019 levels. Assuming they stay at a similar level over the rest of the first half, are we effectively saying Yes.
We need to be at 75% of 2019 levels in the second half to meet the cash guidance for this year. And My second question is sort of a bit longer term around XWB. You've obviously secured the exclusive position on the 900 until 2030. I was curious about the reason for specifying that variant. Mean, I assume that the 801,000 would not be sufficiently large volume opportunities in themselves For a competitor to make significant inroads in there, I'd be interested in your view on that.
And also, does the kind Sort of 2,030 as an end date for that exclusivity mean effectively that could be dual source from 1st January, 2001. Thank you.
Right. Thanks very much, Andrew. Well, let me take both of those. I mean, The engine flying hours, undoubtedly, we can see what's happened in the 1st couple of months. And There is a huge amount of uncertainty still in the timing of the recovery.
And yes, our base case does expect recovery to Resume in the summer. Things like vaccine rollouts and the efficacy of vaccines are important to that, But also airport testing or health passports or whatever the solution is going to be will also require government to government Interactions and lastly, public confidence, people have to actually get on the airplanes. So yes, there's a lot of uncertainty. And yes, The arithmetic that you suggest about overall percentage of engine flying hours is there. Of course, don't forget engine flying hours.
There isn't a literal connection of engine flying hours to our cash performance this year. But there's definitely a directional relationship, and our base case does depend On that recovery. So we'll just have to wait and see, and we're going to concentrate and continue to concentrate on the things that we can control And manage the things that we can't control like timing and pace of recovery. On XWB900, you'll recall 12 months or so ago, there was a huge amount of speculation about Our competitive position on A350 and GE having conversations with Airbus and so on, a huge amount of speculation and uncertainty in the community. And so we're delighted to put that speculation to bed for the remainder of this decade.
And you're right, the 900 variant is the volume variant. It's a hugely successful airplane. And technically, yes, when a period of exclusivity finishes At the end of 2030, then it could be dual sourced at the end of 2,031. But as I pointed out in the presentation a moment ago, The 2030 date does coincide pretty much with the timing of likely UltraFan and Next Generation Aircrafts and those sorts of things. It's a useful round date as well to say Inclusivity to the middle of March 2,031 or something like that doesn't seem like a very it seems spuriously accurate date.
So We'll see. But for now, we're delighted with confirming the exclusive position across all the variants of the A350.
Great. Thank you.
We have the next question coming from the line of Celine Fornaro from UBS. Please ask your question.
Yes. Good morning, gentlemen. Good morning, Gabel. If I may, I would have two questions, please. The first one is regarding your EUR 750,000,000 free cash Guidance for 2022.
So if we try and work it backwards a little bit in terms of the businesses, we know that roughly The non aerospace part of the business would generate approximately EUR 700,000,000 Of cash, and then you would have EUR 600,000,000 of headwinds coming from the tax interest and the hedge book. So that would imply that Aerospace basically needs to generate roughly EUR 600,000,000 In 2022 with a scenario of 80% flying hours. I just So this is way above the 2019 level, which was in the high 400s. Maybe you could just explain to us the path Towards that and if this logic seems accurate based on the headwinds on aftermarket and the rebased Volume offset somewhat by restructuring. And then my second question would be, I've just seen this morning an appointment, a new appointment within effect on the Board by Mr.
Paul Adams. So maybe you could share a few words On his background and what he would bring to the business, given his operational focus, you are midway through A restructuring and a potential portfolio sale of some assets. Thank you.
Okay. Hi, Celine. It's Stephen here. So let me start with the bridge to the GBP 750,000,000 free cash flow as early as 2022 That you referenced. And you're absolutely right, the key driver here will be the recovery and turnaround in Civil Aerospace.
And if I just take you through, If I just work, let's say, from the outflow of GBP 4,200,000,000 that we saw in 2020 and take you through to 2022 and what are the key drivers of that Material improvement in free cash flow over those 2 years. So first of all, the single biggest driver is, of course, the improvement in the engine flying hours that we see. Close to GBP 1,200,000,000 of cash flow improvement, and that's essentially driven by engine flying hours rising from the 43% of 2019 levels That we saw in 2020, particularly in the final 9 months of 2020, improving to the guidance that we're giving today of Our expectation of around 80% of 2019 levels in 2021 Sorry, in 2022. And every 1% as a rough rule of thumb equals £30,000,000 So that's your first key item really in that bridge. We're then also expecting to see about GBP 900,000,000 of improvement in Civil Aerospace just in market impacts.
And this will be around The regional engines, the V2500 and just generally wide body time and material improvement, That's going to be a big driver of that. We're also going to see higher spare engine volumes in 2022 than we saw in 2020, which was a pretty subdued Yes, full spare engine demand, as you might expect. And finally, a key thing that we shouldn't forget about in Civil Aerospace is we're See around £300,000,000 lower Trent 1,000 costs that were about £520,000,000 this year that will reduce to around £200,000,000 or so in 2022. So that's another key driver. When we look at Power Systems and ITP, put those two businesses together, we're probably going to see around GBP 200,000,000 Improved cash flow out of those two businesses in 2022.
Another key item that we're working through, and in fact, this is an item that we've made good progress on during 2020 is our group restructuring program. We're expecting a GBP 500,000,000 contribution from that Compared to our 2020 numbers, there's reductions in operating costs and capital expenditure. And just as a reminder on that, the cash mitigations Of the GBP 1,000,000,000 of savings that we've delivered in 2020 were against our pre COVID budget, whereas the GBP 1,300,000,000 of restructuring savings That we first indicated on the May 20, when we announced the 9000 headcount reduction, they're measured against our 2019 cost base. So in short, this difference means that despite the 2020 mitigations, there's still GBP 500,000,000 of benefit to come across 2021 2022 And not just the headline, £300,000,000 Another key point here is to bear in mind that we actually see a reduction in the 2020 temporary headwinds Well, that we saw and these are 2 key areas really. Number 1 is in the fixed cost Under recoveries, particularly in several aerospace to the drop sharp drop in volumes that we saw in 2020 as COVID really kicked And then we've talked about the OE volumes just now.
And then we've also got a one off FX impact in 2020 as well as our U. S. Dollar costs Exceeded our revenues. And in that scenario then, we translate rather the achieved rate at the prevailing spot rates At the time, closer to GBP 130,000,000 or so rather than GBP 150,000,000 or so in the hedge book. And given that our costs exceeded our revenues in 2020, That has a material around GBP 400,000,000 FX headwind to 2020 that won't be repeated in 2022 As our revenues and costs get closer aligned in U.
S. Dollars. Finally, we had a GBP 200,000,000 increase In pension interest and tax pension cost swings in 2020 due to a deferral Of the 2020 cash costs into 2021. So that's another item in that respect as well. So that gets you to the GBP 750,000,000 As early as 2022.
And I would put some qualification around that very much dependent On the 80% of engine flying hours that we've highlighted today and also very much dependent on the pace of our restructuring program and the delivery of the savings well, I think we've made very good progress during 2020. There's still much to do, particularly as we get into the discussions around potential site Implications in Civil Aerospace, but we're pleased with the progress that we're making and feeling confident about delivering those full savings from our restructuring program. That's it really on the 750. Warren? Great.
Thanks, Stephen. And
on Paul Adams, well, We're very pleased to welcome Paul Adams to the Board. I'd point out that we also Highlight that 3 of our directors are leaving the Board, they're timing out. And so this is part of the normal Succession process. Now Paul was Head of Engineering at Pratt and Whitney for some years, and so he clearly has very relevant Industrial experience. And that compensates for some of the industrial experience that we are Losing with the timing out of those 3 directors, but it's also very relevant Industry experience.
And I think his technical background is going to be particularly useful as we go through the next decade with Next generation engines to bring on and transition to new technologies.
We have the next questions coming from the line of Chloe Le Maury from Exane BNP Paribas. Please ask your question.
Yes, good morning, everyone. Thanks for taking my question. I have 2 as well. The first one would actually be building On 2022 free cash flow, if we keep all things equal and at that time, we're missing 20 percent light hours to go back to 2019 level. I would assume you could deliver about GBP 1,000,000,000 on civil even possibly 1.5 once the Hedgehog and Trent 1000 headwinds have gone.
So could you say whether this Broadly your ambition for the division or would there be elements that would cap that performance going forward? And the second is on your R and D and technology roadmap. Would you see the need to return to past R and D peak by, let's say, the middle of the decade to help fund that innovation To move towards the decarbonization goals or are these technologies actually less R and D intensive than prior programs having quite a lot of commonality with your existing portfolio. Thank you.
Thank you. I'll do The first question, Warren, and I guess you can do the second. Yes. That's fine. So yes, it's a good prompt actually.
The £750,000,000 As early as 2022. That actually includes Trent 1,000 costs. We're guiding those costs in that year between £100,000,000 to £200,000,000 in Trent 1,000 cost. And that's pretty much the final year of material Trent 1,000 cash costs. And then we've also got within that number the Cash cost of closing out those FX forward contracts in respect to 2022 as well, and that's around GBP 300,000,000 So you put those two numbers together, neither of which will be permanent.
The Trent 1,000 costs will stop earlier than the FX Cash costs, and you'll see in the appendix the timing for those total cash costs. And just as a reminder, on Profit basis, we took all of the profit impact, that GBP 1,700,000,000 in underlying costs as part of our financing costs In 2020. So the P and L impact of that has already rippled through, but the cash profile rippled through across from 2020 through to 20 GBP 27,000,000. So your interpretation is correct that one could see a route to free cash flows greater than GBP 1,000,000,000 In the absence of those two headwinds. Warren?
Yes.
And the question on R and D. Well, I mean, clearly, we are talking about Having an organization that is a science led innovation, and so we could spend almost anything on R and T. But our challenge is to make sure that we can do this in a profitable and effective way. And We've made if you push COVID to one side for a moment, we've made lots of investments over recent years to enhance the productivity And efficiency of our engineering efforts. And so yes, we remain absolutely confident That we can maintain R and D within the sort of envelope that we've now established, which is Significantly less than it has been over the last several years.
But don't forget, two factors driving that, the improvement in efficiency and productivity, but also fact that we're coming to the end of the investment, the big investment cycle in new engines in our Civil Aerospace business. And that's why we're able to make a massive change, like I showed on the slide a moment ago, in terms of how much we're spending on Civil Aerospace, Tilting the investments that we are making into the other divisions and also Into the newer technologies. So you'll see the absolute level of R and D remain roughly flat. You'll see the shape change significantly.
Thank you very much.
We have the next question coming from the line of Chris Hallum from Goldman Sachs. Please ask your question.
Yes. Good morning, everybody. So three quick questions. First, on Slide 14, are you able to put any time frame around the EUR 2,000,000,000 Of cumulative organic free cash flow that you've highlighted after 2022, and should we assume that that's net of a 2.5x dividend cover ratio, I. E.
That you're paying out 40% of free cash flow and dividends over that period. 2nd, back in February 2019, you withdrew from the NMA due to the tight schedules associated with Program, if it comes, it seems like the EIS date for that program has been pushed out to 2027 or so. And obviously, you've continued to make progress on UltraFan in the past 2 years. So is there a chance that you're interested in that program once again? And then finally, if the UK were to significantly reduce the number of 35 that plans to operate, would that have a meaningful impact on your defense business or should we think about that being driven more by the global fleet number than by the UK fleet number?
So we're really talking in the mid term, sort of 3, 4 years is the time frame that we're referencing there. I mean, clearly, a lot of uncertainty ahead still, a lot of restructuring to do and a lot of engine flying hour recovery to happen. But that's sort of a rough guide on the timing. And sorry, Chris, I missed the second part of the question. I was writing down the first part of the question.
So what was the second part of the question again?
Yes, sorry. So pre crisis, you used to operate on a 2.5 times dividend cover ratio, right? So you used to pay out 40% of your free cash flow in dividends. So as you try and get to net cash, are you assuming within that net cash position that you would have paid out around 40% of free cash flow and dividends?
No, that is not Part of the of that modeling right now, I mean, it is something that we clearly will be considering as we get into sort of 2023, I would imagine, will be the earliest that we'll start considering the dividend coming back. I mean, we clearly want to be in a world whereby we've come out of COVID the other side. We're confident in our cash Flow profile. We are very keen to get back to a that net cash position that you just described. And we can see a route there, as I said, over the next sort of 3, 4 years or so.
And at that point, I think we'll be ready to have the debate about dividends. But right now, We're laser focused on our disposals program, generating the at least GBP 2,000,000,000 from that program and very focused on the restructuring program and Getting this business back to the sort of economics that makes sense for Rolls Royce, that GBP 750,000,000 as early as 2022, that's the first gating point and then taking it beyond there, The Trent one thousand FX headwinds disappear as well. But I think it's going to be around at the earliest, 2023, 2024 debate Around the dividend pick up again.
Okay. And so your second question, Chris, was around UltraFan and NMA, I suppose. And yes, you're right. We were Very explicit about the reason why we withdrew from that proposed program a couple of years ago, and that was around the timing of our UltraFan program. Our UltraFan development has gone well since then, and we're sort of gearing up for demonstration early next Yes.
So then it will depend whether we go ahead with it at that stage or whether we pause at that It will depend on the timing of new aircraft programs. And the product is or The product will be scalable. It will go across single aisle and dual It will be applicable for new aircraft compatible with 100% SAP and so on. So yes, it's quite applicable. But We'll have to see if programs actually materialize and when they do.
On the F-thirty five's and the UK government's Cancellation. Then actually, obviously, we're more geared to the whole sort of global 35 program than just the UK program. But I would also note that The UK is talking about channeling that investment into the Tempest program, where we're obviously playing a crucial role.
We have the next question coming from the line of Andrew Gollan from Berenberg. Please ask your question.
Hi. Good morning, everyone. So two questions for me, please. 1 on new engine volumes and 1 on shop visits. So on the new engine volumes, You've lowered the outlook slightly to, I think, CHF 200,000,000 to CHF 250,000,000 which is understandable, I suppose.
So firstly, can you give us an update on the engine unit losses in 2020? And with that kind of lower for longer volume outlook, What's the trajectory you're expecting now for reducing that number going forward? I guess I'm referring here to the pre COVID Target of €400,000,000 per engine. And then second question on shop visits. Can you break out The volumes in 2020, as you have done before, so in terms of major refits and check and repair, and what is assumed within the cash guidance Over the next couple of years in particular, please.
Righto. Yes. Let me start on the OE volumes. I mean, of course, on OE volumes, We are completely dependent on the airframe build rates. And I think in 2020, we demonstrated a certain amount of Flexibility, being able to respond to that and manage our supply chain accordingly.
So we will just respond to those build rates. As far as the losses are concerned, in 2020, Whilst we can respond to the build rate changes, in 2020, the change was rapid. And so actually, OE losses, As we came into the year at full throttle, we had no chance whatsoever Of being able to respond and scale down our operation quite as fast as the volume disappeared. So Lots of under recovery in 2020. And so in a way, the 2020 number was Pretty meaningless as far as our forward looking ambitions are concerned.
Now to those forward looking ambitions, however, where That is precisely why we are resizing our business with this restructuring. That is to deal with the anticipated OE volumes and also the anticipated volumes of spare parts for the aftermarket. And so I think we'll be back With more news about OE loss ambitions, but hopefully, we're resizing our operation Accordingly to meet those lower volumes.
Okay. So shop visit volumes. We actually have quite a bit of this detail already on Page 12 in the first half of the release, but I'll go through it in any event. In 2020, we had 2 78 sorry, 272 Large engine, major shop visits, as you described in those major refurbs. In 2021, That number is going to be closer to EUR 240,000,000, so a slightly lower level.
But this is going to start So it rises then quite sharply as we're talking around 2022 to around 400 in 2022. So that's the broad trajectory Of major shop visits over the course of the next couple of years compared to our 2020 levels.
Okay. That's helpful. Thanks very much. And all the best, Stephen, in your next challenge.
Thank you very much.
We have the next question from the line of Ben Hillen from Bank of America. Please ask your question.
Yes, good morning. Thanks for taking my question. One on retirement because we haven't really touched on that in great detail. You do still have A relatively large exposure to 4 engine aircraft and retirements should be picking up as we go through 2021. So How do you think about the impact of retirements of 380s, 340s, 747s on that flight hour recovery?
Thank you. Yes. Well, we're not guiding specifically on retirements today. But when we look at our engine flying hour forecast, Switch to what the guidance is or what's really the driver for aftermarket revenue, Then we're effectively taking into account that retirement risk. I mean, we know that airlines Preferring the newer aircraft, we showed that in the presentation.
And we do have Exposure to some of these older aircraft. And undoubtedly, airlines are going to retire The less efficient aircraft more quickly and in preference to the others. So yes, we're taking that into account. And in fact, in the data appendices to the presentation, then we've got the data about those older aircraft. And what happened In 2020, and that's probably an indicator of what airlines are doing.
Okay, great. Thank you.
We have the next questions coming from the line of Robert Stallard from Vertical Research. Sean?
Thanks so much. Good morning. I have a similar question to Ben, actually. Looking in the back in the appendices, Roughly a quarter of your civil revenues in 2020 came from time and material and other, and that actually held in pretty well Compared to long term service agreements. So I was wondering if you could explain what was going on there.
And also looking forward into 2021 and beyond, How do you expect T and M to track from here?
Yes. Well, no, basically, we expect T and M to track With activity, the long term service agreement Actual numbers were hit by the catch ups. And so if you want to look at sort of activity, then Look at shop visits and how those are developing. And time and materials is more of a reflection of Tivity, whereas long term service agreements are wrapped up in accounting as well as what's actually going on in the field. So that's the difference.
And we would expect time and materials for those engines where we have time and material contracts. That will just reflect flying activity As we go forward and therefore, the recovery.
Can I just follow-up on that? Because Down 9% year on year. We've seen very good performance given the prevailing activity we saw in 2020. So I was wondering if there was any offsets in that number.
Yes. Well, I think 2020, we have to regard as an unusual year, and that's the way I'd sort of look at it. I mean, don't forget, We came into the year with a bit of a backlog Of airplanes needing shop visits, we did take the opportunity Of 2020, to burn down those queues, and that also meant burning down some of the diamond materials demand as well.
Okay. That makes sense. Thank you very much.
The next question comes from the line of Jeremy Bragg from Redburn. Please ask your question.
Good morning, guys. I wanted to ask please again on the 750 guide for 2022. So you're achieving it despite low engine flight hours. So I wondered if you could elaborate please on what the mitigating factors were And whether the cost cutting is just happening a bit sooner or whether there's a potential for it to actually wind up being bigger than the 1 point 3. That was the first question, please.
And then the second question was on the IAE royalties, Which, I wonder if you could quantify them for 2020 and give a kind of view of what's baked into the 2022 guidance because that's, Again, rather likely FX, something which doesn't last forever. Thank you.
Okay. So thank you for that. I'll start out with the GBP 750,000,000. Yes, you're quite right. Back in October with the rights issue, We highlighted a EUR 750,000,000 number as early as 2022, but based on engine flying as being at 90% Our 2019 levels.
And we're now reconfirming that GBP 750,000,000 but obviously with a lower 80% of 2019 levels. I think the key driver of this is we actually made really good progress in 2020 in our restructuring program. We got further than we thought we would, and which means that we're delivering those savings earlier than we thought. And in 2022, the GBP 1,300,000,000 of savings that we've quoted is the exit run rate at the end of 2022. So clearly, we're getting that earlier.
We're going to get it earlier in 2022 as well, and that's one of the key drivers. I think another aspect here is that There have been some benefits from COVID. We now have a 13 week rolling cash Growth forecast by business that's given us more granularity than we've ever had, I think, into the operations of our individual We've been working hard on our budget for 2021 2022 since October with the rights issue. And that's identified, I think, some further opportunities for improvement, particularly around our capital allocation and operating costs To help us reconfirm that GBP 750,000,000 that we've got a pretty robust plan, I think, for the next couple of years now. There are Some timing items that have impacted 2021, that GBP 2,000,000,000 cash outflow in 2021 that may Benefit 2022.
So there's an item there just to bear in mind as well. I think as it stands though, we are Pretty comfortable with the GBP 750,000,000 as early as GBP 2022, but very much dependent on that 80% flying our level in 2022 compared to 2019 levels. And again, that in itself is very much dependent on the recovery in the second half of the year, as Warren talked about, once the vaccination programs globally kick in. I mean, it's become apparent Talking to other countries and our customers in the aerospace sector generally, The rollout of the vaccination program will be a really key gating item. And I think most countries are looking for a majority of their population to have been vaccinated before Global travel restrictions start to get lifted in a meaningful way.
So that is probably the one key indicator for us to watch out for.
That's it. I'll pick up the second half
of the question.
Just as I start on that, I'd also point out that The UK government is hosting the G7 this year. And this getting flying going It's a sort of multi government thing that has to happen. And so our government relations team are very much spending Time and effort lobbying the UK government to play a leading role in getting this risk based approach to opening up flying again. Now IAE Royalties. IAE Royalties, simply pretty good reflection of the flying hours For that V2500 engine.
And so in 2020, very roughly 50% down. We expect to be recovered quite a bit in 2022. Don't forget that this is effectively a single aisle. It's a short haul aircraft. Short haul recovers before long haul.
And so we would expect that to come back a bit more substantially than Most of our activity, which is wide body long haul by 2022. But also don't forget that this Royalty Stream is going to disappear in 2020 and in 2027 anyway. So it's once a note, but it's not really the major driving factor of our business.
Thank you. A follow on, please. What were the timing items that might benefit 2022 2020 sorry, what were the timing items that might benefit 2022, please? You mentioned that, but I wasn't really The only
item here, and we've talked Credit notes that we've issued in respect to the Trent 1,000 customer disruption. I think in the main, that's one of the items that we no surprise, Our airlines using their credit notes earlier, and we're working actually pretty well with our airlines to help them through their cash Precious to the extent that is appropriate for us to do so and not damage ourselves. But the I think it's the early use of credit notes the one thing that I would point to that they're in the 2021 numbers and therefore benefit 2022.
Got you. Okay. Thank you and good luck, Stephen.
Thanks very much. Bye.
We have the next questions coming from the line of Jon Stewart from JPMorgan. Please ask your question.
Hi, good morning, and thank you for taking my questions. I have 4, please. Firstly, and similar to Ben's question, your base case is for engine flying hours to be 80 2019 levels in 2022. What is your assumption on the size of the fleet in 2022 versus 2019? And then secondly, your guidance on free cash flow is greater than $750,000,000 as early as 2022, which essentially Has a lot of flexibility as far as guidance goes.
Are you able to provide us with the minimum guide on free cash flow actually in 2022 on the current perimeter? And thirdly, Warren, you provided some comments on your near term margin expectations for your Power Systems business. Given EBITA in Civilero is somewhat tied to shoplift activity and engine deliveries, two things that you have guided on and are perhaps not as volatile as the outlook for engine flying hours in the near term. Please can you provide us with your margin expectations in the Civil Aero business in 2021 2022. And then finally, you've injected some assets into ITP to make it us more attractive to a potential buyer.
Are you able to please quantify what the sales and EBITA what sales and EBITA have been injected into that business, please? Thanks a lot.
Yes. Right. There's quite a lot there, and I have to say, I didn't hear all of it Completely accurately, but let's have a go at some of them. So size of the fleet in 2022. Look, we're guiding Always, we're not guiding.
We're making assumptions about the engine flying hours that we expect in 2022. And that's the That's a reflection of activity. It's a reflection of airline schedules and their current plans combined with Top down forecast. Now in those current plans, we're not taking particular it's about airline schedules and their expectations. Exactly how many airplanes they're going to have servicing those routes is not something that is of particular relevance to us.
And so yes, we're taking retirements into account, things like A340s retiring and Four engine aircraft generally retiring more than the ones that are currently
We have the last questions coming from the line of Parry Breach. Please ask your question.
Yes. Thank you very much. And can
you hear me, Warren, Stephen? Okay. Can you hear
Please bear with us one moment, please.
So we're not giving Sorry, I'm just getting told here the line is I'll carry on with my answer. We're not giving minimum 2022 free cash flow guidance. But to help you, what I would say, all things being equal, engine flying out is the key thing to watch out for here. So 1% equals around £30,000,000 and £7 £50,000,000 we've said 8%. So variation around that 80% number of 2019 levels, 1% £30,000,000 That's probably as best as I can give you in terms of a minimum number for 2022.
On your other questions, we're not guiding on civil profit. We haven't done previously and nor do we intend to. It's a level of detail that we're not going to go into. I think even Now is less likely more than ever given the general uncertainty generally as we're still in the thick of COVID and we have all the recovery ahead of to go through and the restructuring program to go through as well. So I think that's probably going to be something to save up for this time next year.
Thanks.
Thank you.
I think there's been a small interruption on the line there. If anybody did miss part of Stephen's answer and wants to come back to Investor Relations later, we can through that again. Apologies. I think some of you may have lost sound for a short period. Back to you, operator.
Sorry, I think is there any more questions online? If not, I've got Just one on the webcast, I'm going to actually sorry, 2 on the webcast I'm going to turn to. Firstly, Nick Cunningham here from Agency Partners, Wanting to know more about the longer term pattern for the major overhauls and wanting to know the impact that has as those visits start to ramp up In the later years, so if you've got any further commentary on the cash go skyline of the overall scenarios, that would be welcomed by Nick. Yes.
I mean, hi, Nick. The shop visit volumes will start to increase. I mean, you will have seen that from the big orders that So our plans, they will grow, but so at the same time do engine flying us. At the same time, we see the non appearance of the Ex costs that I talked about earlier, and we also would have seen the back of the Trent 1,000 cost by then as well. So despite that Growing shop visits volume and therefore the cost headwind that goes with it, there are some very significant tailwinds as well ahead for us.
So that's how we compensate that.
Just ask me one last question in, and apologies for anybody who didn't get their question answered. Obviously, we will come back to you individually if you weren't able get a response online. But a question here about SMRs for Warren. Just saying you were confident in sort of a 2,030 target for SMRs given the pressures On R and D spend and how we're making those priorities. So if you have any comments you'd like
to make on the SML outlook, that would be appreciated.
Yes.
And so the answer is we're confident in the program at the moment. I mean, this is very early stages at the moment, just how the government go ahead. And We'll be fleshing out the detail on that, I think, over the next 18 months to 2 years. But suffice to say, we think it's a very exciting program. Rolls Royce has absolutely unique expertise in this area, And we see it as an essential piece of net 0 for the UK, but also exciting As I pointed out in the presentation for other applications like SAF and hydrogen.
So we'll flesh that out over the next couple of years.
Okay. Thank you. I'm afraid that's all we've got time for on the webcast questions. We have run out of time. Just to say for anyone who missed that period of answers, we will make sure there is content in there in transcript, which will be
out later today or if not, maybe tomorrow on our website. So sorry if anyone missed that.
The answer will be published.
Great. Well, thank you very much, everybody. The message is that we need you to take away that The worst is behind us as far as COVID is concerned. I'm very pleased with the progress we're making on the fundamental restructuring, Particularly of our Civil business to reset the economics of our Civil business and give us great operational leverage As the recovery happens and that's going to mean that we can tilt the balance of our capital allocations going forward, So we're well positioned for this future recovery and a net zero world in the future. Thanks very much.