Rolls Royce Hldgs S/Adr

And welcome, everyone, to our 2023 full year results presentation. I'm Isabel Green, Head of Investor Relations, and I'm joined here today by our CEO, Tufan Ergenbillich, and our CFO, Helen McCabe. Before we begin, I'm required to show you our safe harbour statement on slide two. As always, the full set of results materials can be downloaded from the Investor Relations section of our website. We're going to start today with an update on our performance and strategy from Tufan, and then Helen will present our 2023 results. Tufan will come back at the end to present our 2024 outlook and wrap up. We'll take just over half an hour to present the slides, after which there will be time for questions in the room and from the audience online. In the room, please do use your press-to-talk microphones so that everyone online can hear your questions. So with that, thank you very much. I'll hand over to Tufan.

Thanks, Isabel. Good morning, everyone. Thanks for coming. 23 was a big year for Rolls-Royce. We put in place a transformation program and strategic framework that is unlocking our potential to be a high-performing, competitive, resilient, and growing business. We worked at pace and achieved record results. Our strategic focus and disciplined execution helped to grow our operating profit to 1.6 billion, and we converted this into 1.3 billion of free cash flows. This significant step up in performance was driven by our actions, with record results across the group driven by commercial optimization, cost efficiencies and our strategic initiatives. We are creating momentum and a track record of significant delivery. This time last year, we set guidance ahead of expectations as our actions supported 25% uplift to the plans we started with. Then, at the half-year, we upgraded guidance by around 40% as we delivered better than expected first-half performance. And now today, we delivered record results, double what was in Rolls-Royce's plans less than 18 months ago. In civil airspace, we delivered a four-fold margin increase. In power systems, we talk about the potential of the division if managed well. And now we have the best on record cash and profit in 114 year history. And in defense, our margin of 13.8 is almost at our midterm range of 14 to 16%. This performance is underpinned by our new ways of working and the philosophy I previously shared with you. A winning mindset is key to our success. We have an energized and aligned workforce led by a new executive team. We are managing the group very differently. We improved our capability in commercial optimization and changed the way we manage our costs and capital allocation for the most effective outcomes. To support all these, we significantly improved management information and performance management. We have a lot more to do here, though. In November, at our CMD, we shared our new strategy with clear actions. Everyone in Rolls-Royce is aligned on the strategy. Detailed strategic initiatives are owned by the divisions with clear accountability and performance management to ensure we deliver. We are building on strong foundations. Our achievements in 2023 give confidence in our outlook for this year, where we expect continuous improvement in both profit and cash. This is despite ongoing macroeconomic and supply chain challenges, which we will continue to mitigate with our actions. Our strong progress so far and the plans we have in place give us confidence in our mid-term targets. By the end of 2024, we expect to deliver more than half of the performance improvement in profit and cash we are targeting for the mid-term. We plan to achieve our targets by 2027 timeframe, but if we can get there sooner, we will. Let's look at 2023 in more detail. Operating profit of 1.6 billion was more than 900 million higher than in 2022. Our mid-term target of 2.5 to 2.8 billion implies around 2 billion of profit growth between 2022 and 2027. In 2023 alone, we delivered almost half of that. Our group operating margin of 10.3% in 2023 more than doubled year on year as we focused on commercial optimization and cost efficiencies across the group. Again, this represents a huge step towards our midterm target of 13% to 15% as we close the gap to our competition. Free cash flow also more than doubled from 0.5 to 1.3 billion, a record for Rolls-Royce. This was achieved despite continued supply chain challenges. Our higher operating profit and a net 1.1 billion movement in the LTSA balance drove this improvement. Free cash flow was 400 million higher than in 2019, despite engine flying hours of only 88% compared to 2019. This again demonstrated how much we are expanding the earnings and cash performance of the group. Finally, we delivered a return on capital of 11.3%, the first time that the group has achieved a double-digit return on capital for many years. These results reflect the hard work and focus actions of all our teams. However, we still have a lot more to do. Last year, all of our established divisions contributed to the significant improvement in operating profit and margins, with commercial optimization and cost efficiencies common in all of them. The largest improvement year on year came from civil aerospace, where we delivered a 700 million improvement in operating profit and a 9 percentage points increase in margins to 11.6%. Putting this in context, in 2022, at the Civil Investor Day, Rolls-Royce guided high single margins by 2024 or 2025 based on a return to 100% of 2019 engine flying hours. This shows how much we changed. We are delivering significantly beyond this already as we benefit from our transformation actions. In defense, operating profit grew by 30% with a margin of 13.8%, a 1.9 percentage point improvement year on year. The team has done a great job here. The improvement in margins was mainly due to our strategic actions as opposed to volume growth. Finally, power systems. For the full year, power systems margins improved by 2 percentage points to 10.4% thanks to our actions on value-based pricing and cost efficiencies. The second half of the year was very different to the first, just as we said it would be in February. In early 2023, we took actions to raise prices and deliver cost efficiencies to improve profits and cash to a record level. We have a clear strategy based on four pillars. Portfolio choice, strategic initiatives, efficiency and simplification, and low carbon and digitalization. Let me talk about the progress in our strategic delivery, starting with the first two pillars on this slide. Firstly, portfolio choices. At the CMD, we said we would be investing differently. Focusing on those opportunities where we have a chance to differentiate and where we can lead. In civil aerospace, the Altrafine program was successfully tested at full power in 2023 in trials that also showed the power gearbox handled accelerations and decelerations 20 times faster than we had previously achieved. Last year, we continued to invest in the Pearl family of business jet engines. And our Pearl 700 engine was certified by FAA for Gulfstream's G700 and G800 aircraft. In defense, we saw the award of the AUKUS submarine program and received formal confirmation of the FLORA program in the U.S. Work has commenced on both programs as we invest for our future on these key platforms. In power systems, work has begun on a new engine that will join our portfolio alongside our current series 4000. This will be the first major new engine program for power systems in more than two decades. In SMR, we entered the second phase of the GDA regulatory process. and were shortlisted in the UK government's technology selection process. We took the decision to exit our electrical business, or alternatively, for the right value, reduce our position to minority with an intention to exit fully in the mid-term. We are progressing well on this. We also announced the disposal of our off-highway, low-power range diesel engine business, which is expected to complete this year. Moving on to the second pillar, strategic initiatives. In civil airspace, we are investing £1 billion in time-on-wing improvements. This is a multi-year investment. We are working on the final stages with Boeing and the FAA on certifying the new Trent 1000 blade. This will double the engine's time on wing. We expect it to be approved this year, taking us to a competitive level of durability by next year, while reliability remains very strong. This is the same improvement that we have certified on the Trent 7000 blade, which we have already retrofitted to over 20% of the fleet. And we aim to double the time on wing of the Trent 7000. XWB-97 engine in non-benign environments over the next two to three years with our investment in HPT blade coatings that are more resilient in areas with lots of sand and dust. In benign environments where performance is already good, we see potential for a 50% increase in time on wing. We are also driving down shop visit costs. For example, we achieved 10% reduction in disassembly and repair hours on the Trent XWB84 in 2023, and we have a clear plan for continuous improvement. As part of our program, last year, all key civil aerospace, OEM and major airline contract renegotiations were either concluded or progressed. I was personally involved in agreeing win-win solutions in these negotiations and we have more to do on this in 2024. In power systems, we installed and commissioned a major battery storage system to support renewable power into the public grid in the Netherlands. This 30 megawatt project with 60 megawatt battery storage capacity is one of the largest battery storage systems anywhere in Europe. Now moving to our other two strategic pillars. We are becoming a more efficient business and simplified organization. Our efficiency and simplification initiatives aim to deliver sustainable annualized savings of 400 to 500 million. Around 150 million of this has already been achieved in our 2023 results, and we expect a further 200 million this year. from our organizational design changes, which will remove 2,000 to 2,500 roles by the end of 2025. Earlier this month, we began the consultation on our new proposed organization design, which will remove two layers and improve spans of control, making it more strategically aligned and efficient. We have a number of third-party cost initiatives that aim to deliver 1 billion cumulative savings by the mid-term. Last year, we achieved 130 million of this. We are centralizing the procurement function at the group level. This will generate further savings as we reduce duplication and unlock synergies. We are also introducing zero-based budgeting approach this year, starting with civil aerospace. This will aim to save an additional targeted 10-15% in costs by applying a proven approach. The final strategic pillar is low-carbon and digitally-enabled business. We remain committed to becoming a net-zero company by 2050 and supporting our customers to do the same. In 2023, we met our targets to test our in-production civil engines with 100% SAF, sustainable aviation fuels. We also powered the first 100% SAF transatlantic commercial flight, S-787, with our Trent 1000 engines. In power systems, we proved that our series 2000 and 4000 reciprocating engines can also operate sustainably. with testing and certification last year using sustainable fuels. It is not just SAF that is getting good results. We have successful hydrogen testing programs in civil aerospace and power systems too. We are embracing digital tools. For example, we implemented a new digitally mapped demand forecasting tool for supply chain management in defense, resulting in 75 million estimated cost savings in the next three years. This value should increase as the remaining engine programs are onboarded. All four pillars of our strategy are critical to our success. There is no silver bullet. This is about executing granular plans with clear strategic purpose and performance management. This is how we are delivering. This is why we outperformed in 2023. We look forward to 2024 and the medium term with confidence that we will fully unlock our potential. I will now hand over to Helen to cover 2023 results in more detail.

Thank you, Tufan. Good morning, everyone. record 2023 results. They demonstrate that we are managing the business very differently, that we have a clear focus on delivering high quality and sustainable earnings and cash flow, and that our strategic initiatives and transformation programme are delivering at pace. The key financial highlights include Group revenue grew by 21%, with strong growth across all divisions. Our advantaged businesses are uniquely positioned in end markets. Group operating profit grew by over 140% to £1.6 billion. Operating margin more than doubled to 10.3%, due primarily to commercial optimisation. and cost efficiency actions across the whole of the group. The largest year-on-year performance was in civil aerospace, but margins in defence and power systems also substantially increased. Free cash flow was £1.3 billion, more than double that of 2022, an all-time record for Rolls-Royce. Strong cash flow generation meant that we reduced net debt to £2 billion, a reduction of more than 40% year-on-year, and our return on capital rose from just under 5% in 2022 to over 11% in 2023, driven primarily by improved operating margins, but also by our disciplined capital allocation and working capital management. So let's move to performance by division. Civil aerospace. I'll start with a summary of the highlights, then go into more detail on financials, the impact of industry-wide headwinds, and then cash flow. Civil aerospace delivered the largest year-on-year improvement in profit and operating margins. We delivered operating profit almost six times higher than that of the prior year. It increased to £850 million from £143 million in 2022. We achieved double-digit operating margins of 11.6%. That compares to 2.5% in 2022. We grew revenues by 29% to £7.3 billion. That was driven by large engines and business aviation deliveries, as well as higher shop visits and commercial optimisation. OE engine deliveries. They grew by 29% to 458%. That was achieved despite supply chain challenges. Of these, 262 were wide-body engines, which included 53 spares. That supported increasing number of shop visits, which will be needed as our fleet grows. And total shop visits grew by 18%, to 1,227. Of these, 368 were large engine refurbs, compared to 248 in 2022. Operating profit in more detail. There were three key factors behind that sixfold increase. First, wide body. We delivered higher aftermarket profitability with an increased volume of LTSA shop visits and a higher profitability per shop visit driven by our commercial optimisation actions. In terms of shop visits, there was an increase in Trent 1000, Trent XWB and Trent 700 refurbs in the second half of the year. We also benefited from a materially higher contribution from time and materials, where we increased the pricing of life-limited parts by an average 12% in the year. Second, business aviation. We more than doubled profitability. Again, driven primarily by aftermarket, with increased shop visits and improved commercial optimisation as a result of the team's actions. Business aviation deliveries increased by 19% to 196%, driven by growing demand for apparel engines. And third, cost efficiencies. Air actions supported lower indirect costs with a reduction year on year, despite broader inflationary pressures. But we also faced some headwinds, industry headwinds. Industry supply chain challenges drove higher costs. This impacted catch-ups and the net movement of onerous contract provisions. catch-ups were a charge of £29 million in 2023. That compares to a £319 million benefit in 2022. But if you recall, 2022 benefited from a material positive adjustment associated with inflation that triggered price escalation clauses, which, as we expected, did not repeat in 2023. We also took onerous contract provisions totalling £410 million, again primarily as the result of industry supply chain challenges as we recognised the impact of higher future product costs. This impact was broadly offset by the strong progress we made on contract negotiations. Our actions to progress or close all key contract negotiations in conjunction with time on wing improvements drove a significant release of provisions in the year, £385 million. Cash Civil Aerospace delivered trading cash flows of £626 million, a £400 million improvement on the prior year. This was primarily due to higher operating profit and a continued LTSA balance growth as engine flying hours increased to £16.5 million with large engine flying hours standing at 88% of 2019 levels. and working capital outflows were lower than the prior year, while net investments were higher as we invested in our strategic projects. In summary, a very strong performance from Civil. Defence. The results reflect a material improvement in operating profit and margins as we delivered on our commercial optimisation and cost actions. Operating profit grew to £562 million. a 30% increase. Operating margins for the full year were 13.8%, around a 2 percentage point increase on the previous year, and very close to our mid-term targets, as you've heard from Tufan. We saw strong demand across all of Defence's key end markets, with strong order inflows, with a book-to-bill ratio of 1.3 times, which drove a record order book of £9.2 billion. Revenue growth was double-digit, 12%. This was driven by volume in pricing. There was growth in all key end markets, notably submarines and combat, which grew by 20% and 18% respectively. The year-on-year improvement in operating profit was driven by three key factors. Commercial optimisation. The team did an excellent job renegotiating contracts, ensuring our value-based pricing guide rails were followed as contracts came up for renewal. Cost efficiency actions. We managed costs as revenue grew and indeed reduced indirect costs, reflecting the impact of our strategic choices and increased customer funding within R&D. Then submarines. Volume growth reflecting increased demand. Defence's cash flow increased to £511 million. This was largely driven by higher operating profit, but also reflected strong working capital performance, with inventory reducing in the year, and continued strong customer inflows from deposits. Next, power systems. As you've heard, power systems delivered record results in 2023. Operating profit increased by 44% to £413 million, with an operating margin of 10.4%, a two percentage point increase compared to 2022. Order intake was £4.3 billion, with a book-to-bill ratio of 1.1 times, with 80% OE order cover for 2024. Demand was strong in our advantaged businesses of power generation, marine and governmental. Revenues grew to £4 billion, a 16% increase, with a 34% growth in power generation, in particular data centres where we have a leading position. Growth in marine was also strong, as you can see from the slide. Increased operating profit was primarily driven by commercial optimisation, air actions to address all sub-segments, cost efficiency, air actions, which resulted in lower indirect costs, again, despite volume growth and inflationary pressure, and PowerGen. In the year, profitability tripled as we addressed the business model, focusing on both pricing and cost improvements. Cash flow. It broadly tripled year on year to £461 million, with an exceptionally high cash conversion ratio of 112% versus 56% in the previous year. Our working capital initiatives were particularly impactful, with a substantial inventory release in the second half of the year, as well as high levels of advanced deposits, some of which we received earlier than expected. Power systems like civil and defence brought home a very strong 2023 performance. Now let's move to funds flow. In 2023, we delivered 1.3 billion pounds of free cash flow, approximately 800 million higher than 2022. The main driver of the year-on-year increase was higher operating profit, which grew by over 900 million pounds. Turning to the other factors, investments. We continue to invest in growth opportunities for the business with a clear focus on investments that are strategically aligned. Attractive projects that generate profitable growth to the mid-term and beyond, such as time and weighing, the new engine and power systems. And as a result, investments were around £200 million higher year on year. LTSA. As expected, the net LTSA balance grew. It was around £300 million higher than the prior year, reflecting engine flying hour growth and a higher normalised engine flying hour rate. It also included some one-off benefits, such as the recovery of the £100 million of debt that we had previously written off. Then, working capital increased. As I said at the CMD, this is a priority and we made good progress. Our working capital outflow was lower than in 2022. We released working capital in the second half of the year, with all three divisions releasing inventory in the second half. Inventory days reduced. And as we focused on overdue and unbilled debt, debtor days also reduced. I'd like to just pause and thank the finance teams and all of the divisions for the work on this in a very difficult macro environment. Everyone did a great job. We are making sustainable progress in working capital and the programme we have in place and I expect that to continue into 2024 and beyond. Next, provisions. They moved by just over £200 million. This includes the payment for the Collins legal judgment and outflows as we traded through our owner's contract provisions. Then, overdue hedging costs. Sorry, then overhead costs. As guided, they were almost £400 million, £60 million higher than in 2022. Net interest costs, these reduced by over £140 million, driven by improved cash delivery and the benefit of higher interest rates. And finally, cash tax costs of £172 million. They were similar to prior year as we had guided. We delivered a record cash delivery for Rolls-Royce in 2023. Cash remains an absolute priority for the whole team. Tufan will talk to the outlook for 2024, but let me give you some data points to help with your cash models. We expect the LTSA balance growth net of RRSP prepayments to be at the low end of the guided range of £0.8 to £1.2 billion. This reflects growth in shop visits and mix impacts, a lower year-on-year growth of engine flying hours and a non-repeat of the one-off impacts, such as the £100 million of debt recovered in 2023. And as we repay debt and continue to strengthen the balance sheet, we expect our net interest costs to reduce modestly in 2024. We expect cash tax costs to be roughly £100 million higher as profit grow, and the cash costs of unwinding the over-hedge position to reduce to £146 million, as we have previously signalled. Now, moving to how we are building resilience. A key priority I set out at CMD was how we are building a more resilient business with an improved balance sheet, a better operating leverage and higher returns. You've heard examples of how we are driving efficiencies across the group. For example, the £150 million of cost efficiencies and the £130 million of reduction in third-party costs. Actions such as these have supported our TCC to GM ratio improving to 0.5 times, significantly better than it was in 2022 and indeed in 2019 pre-Covid. we are making strong progress towards our mid-term target of 0.4 to 0.5 times. As well as making our profit delivery more resilient and expanding the earnings potential of the business, we have also strengthened the balance sheet. Net debt fell from £3.3 billion to £2 billion and our net debt to EBITDA ratio at the end of the year was below one times. Our gross debt of £4 billion was broadly unchanged and it remains our intent to repay the forthcoming €550 million bond from underlying cash as it falls due mid-year. Liquidity remains strong, standing at £7.2 billion at the end of the year and that is after we retired two undrawn facilities of £1 billion each in the year. Our efforts to improve resilience, rebuild the balance sheet and put in place a clear capital frame have also been recognised with upgrades from all three credit rating agencies in 2023. As I previously shared, once we are confident the balance sheet has sufficient, sustainable resilience and that we are comfortably at investment grade profile, we intend to resume shareholder distributions. To conclude, we have delivered strong financial progress in 2023, with strong results across all divisions. This performance has been underpinned by our clear strategy and delivery of our strategic initiatives. We are running the business very differently. We are building a track record and delivering on our commitments, all of which is evident from our financial performance. And with that, let me hand you back to Tufan.

Thanks, Ellen. Last year, we delivered strong results despite an uncertain geopolitical environment, high inflation and interest rates, recession risk, and significant supply chain difficulties. We expect the supply chain to remain challenging for another 18 to 24 months. Supply chain issues have resulted in higher product costs in 2023. In fact, Helen mentioned that. Across the industry in aerospace, there are bottlenecks caused by both labor and parts shortages. Higher interest rates and the reduced availability of credit have also impacted some of our suppliers. This is something that we will continue to monitor closely and take proactive action, including introducing digital and AI tools to better manage the supply chain. In 2024, we will actively manage these challenges and continue to transform Rolls-Royce to be a more resilient business by continuing to improve our total cash-to-gross margin ratio and strengthening our balance sheet, as Helen mentioned. In addition to our actions, some trends affecting our business partly insulate us. In civil aerospace, we have a growing market share in white body. We expect to benefit from a continued recovery in global travel and in particular international travel in Asia. In defense, we see more long-term support for defense and governmental spending resulting from geopolitical tensions. Recent order wins such as Flora, AUKUS, and B-52 will drive growth for decades to come. In power systems, we expect to see growth in governmental, driven by rising defense spending, and in power generation, driven by secular data center growth. Turning now to our guidance for this year. We expect progress towards our mid-term targets. We expect to deliver operating profit of 1.7 to 2 billion with margin improvements in all divisions. And free cash flow of 1.7 to 1.9 billion driven primarily by higher operating profit. This guidance assumes large engine flying hours at 100 to 110% of 2019 levels, reflecting continued growth in the wide-body market. We expect to deliver 500 to 550 OE engines, of which around half will be wide-body engines. Spare engine deliveries are expected to be broadly similar to the 2023 number, and we expect 1,300 to 1,400 total shop visits, including 450 to 500 large engine refurbs. Based on what we achieved already in 2023 and our guidance for 2024, by the end of this year, we will be over halfway towards achieving our mid-term targets for operating profit and cash flows. showing the pace of our delivery and impact of our transformation and strategy. Effectively, we are front-end loading performance improvement delivery for our mid-term targets. We have a bold but achievable plan to transform Rolls-Royce into a high-performing, competitive and resilient business with growing sustainable cash flows, a strong balance sheet and growing shareholder returns. We have a clear strategy to achieve this, which is owned across the organization. Our transformation is based on building a sustainably distinctive business. It has four key elements. First, operational excellence. The safety of our people and our products is the very first priority at Rolls-Royce. We put safety and quality control at the heart of everything we do, and it is a responsibility every employee in the company carries. Our strategic initiatives aim to improve operational effectiveness to deliver best-in-class customer service despite the supply chain challenges. Second, our advantage products and technologies are highly competitive. We already have some of the best products and technology in the industry. We are investing further to improve our products significantly. Our highly advantage product portfolio will sustainably drive stronger long-term financial performance. Third, we are becoming more focused, enabling increased investment in the most important programs, while deselecting those that are not aligned to our strategy or they don't meet our investment criteria. Our strategic plan is clear on where we invest, partner, or exit. This focuses and aligns our organization on the most value-creating activities. Fourth, our new mindset and the distinctive performance culture we are building are fundamental to delivering our plans. We have an aligned and energized workforce. Together, we are building one Rolls-Royce that can fully realize its potential. We have ambitious but achievable midterm targets. There is much more for us to do. But we are building a track record of delivery, as you have seen in our results today. And we are confident that we will generate value for all our stakeholders and deliver our Rolls-Royce proposition. Now I'm going to open the floor for questions. You were quick. I'll start here. Then I'll go there.

Yeah, good morning. It's David Perry at JP Morgan. Congratulations on your successful first year, Tufan. So I've got two questions. One is, obviously, this huge jump in Civil Aero a bit, and it's even better if you look at it without the contract catch-up of last year. It's over a billion, and... Helen, you talked a bit to the reasons, but could you try and sort of just put some weighting on those reasons, cost versus aftermarket versus business jet, et cetera? Secondly, Tufan, I know you don't want to comment any more on engine flight hour pricing per hour, but just maybe you're willing to tell us what the percentage change in the average price was in the year over year, maybe for the second half, and maybe what we might expect for 2024. Thank you.

Thanks, David. Two good questions. I think civil, I agree with you, it was a good year for civil aerospace business, definitely. I think, and Rob is here, I'm sure, at the break. If you want more details, I'm sure he is going to be willing to answer. share that with you. But I think the big factors, I'm not going to repeat because your question was more sort of where the emphasis is. I think here is how you may want to think about this. Aftermarket obviously has driven it, both LTSA and TNM, time and material LLPs. And in both of them, commercial optimization played a role. And then business aviation growth was significant, profitable growth. Costs are interesting because if you actually think about net cost efficiency in direct costs, basically what you are saying is, you more than offset inflation there, because there is inflation in direct cost, more than offset the inflation, i.e. net of inflation, when you have cost savings, that means all your pricing actions... flowing through the bottom line, that's a big leverage impact, right, in any business, not to mention this business. So that is what was going on here. I think in terms of numbers, LTSA and Time and Material were the biggest contributors. Cost contribution was less, but if you think... What it would have been, because normally inflation would have increased our cost, that didn't happen. And you had net benefit. That was important contribution. So you predicted rightly. I'm not going to talk about sort of because... Not because we are hiding it, David, but actually the way we are running this business is very different. And we need to sort of come to a common understanding on that. So we are actually looking every opportunity, either for cost reductions or pricing. So therefore, there are some systematic sort of approach and very disciplined execution. But within that, there is lots of dynamic thinking going on. And as a result of that... some of this sort of if I give you a rule of thumb it is not going to work necessarily but I said it in CMD and I will continue to say it because effectively this year's EFH rate was actually almost identical to our forecast in CMD and our Projection for 2024 is similar to CMD numbers, and it is improving. And that's what you should expect going forward because of our pricing actions. Thanks, David. I'm going to go there and come back here.

Thank you. Morning, everyone. Ross from Morgan Stanley. So first one on the engine fire assumptions for this year, 110% of 2019. What's assumed in that in terms of installed fleet size? Is that going to continue to grow? Secondly, on... time and material pricing helen you mentioned you achieved 12 in 23. i'm interested in your thoughts for for 24 there and then lastly just on the the provision in civil of 410 million you've said that's obviously supply chain led maybe a bit more detail about what types of supplier or what types of product drove this thank you okay i'm gonna ask helen to to pick up the product cause that one but

I think on EFH, effectively 100%, 110%. Yes, short answer to your question, yes, our installed engine base is growing, and you should expect that to grow because our market share is growing. And 100%, 110% is no longer, you shouldn't think, and it is even more true going forward, You shouldn't think market recovering from COVID. If I give you a percentage, half of it market recovery, half of it actually installed engine growth, roughly, sort of this year. But going forward... you won't have much recovery. You will see more normal market growth, but over and above that, our growth. So we actually said in CMD, white-body market growth, we expect between 5% to 7%, but we said our growth will be more 7% to 9%. So same dynamics, I think, playing out here definitely. On TNM, yes, we made similar price increase this year as well. That will be my short answer.

Fantastic. So, hi, Ross. Thank you for the question. So supply chain. So the 410 is civil. I think civil between all of the divisions is the one that's been most impacted by supply chain challenges. If you look at the macroeconomic environment, high inflation, high interest rates, lack of credit in some of the markets, particularly when volume is growing, has put many of the supplier bases under pressure. What does that do? That causes impacts to operations, product costs, parts availability. That everyone has seen coming through. The team under Rob's leadership, Dunk, under Rob's leadership has done an excellent job leaning into that. Very proactive, you heard how across the group and the majority of it sitting in civil, we've actually taken actions which have given us £130 million benefit. But very practical things underpin that. Where needed, and if we've got key suppliers which are in distress, Rob and the team actually sent in a task force to provide support. One of them we sent in 40 of our people to provide additional support. We're looking at what's our make-buy strategy, what's our component strategy. Where should we be moving to dual sourcing? So, yes, macro environment is challenging. We expect it to remain challenged, I think, as most of the industry does for the next 18 to 24 months. But we are very proactively leaning in to address and to mitigate that as much as possible.

Thanks, Ellen. I'll go there.

Thanks. Nick Cunningham, Agency Partners. I just wanted to apologize in advance for a very simplistic, typical analyst question. But if I add up the cost savings that you talked about that are still to go, they're more than the delta in profits to 2027 that you're aiming for. And, of course, you'll have volume growth and so on in that period as well. So presumably there are some offsets. I'm guessing inflation is one of them. But are there others, like some sort of givebacks in terms of investments in R&D, for example, that we should be thinking about in terms of how you get to that sort of net delta?

So let's get the math right, because I don't... get there with that mad but i think we effectively said 400 to 500 indirect calls right net savings so 150 we delivered obviously so the rest that means around 250 we will deliver so that will contribute our to our midterm targets but it doesn't achieve itself mid-term targets. I'm sure you appreciate that. So there is lots of commercial optimization going on. And you heard the product cost increase. Frankly, in CMD, we knew product cost increase. Rob talked about it, I talked about it. one of the six levers we have product cost reduction project we were actually using the baseline we knew then because it was November we knew the product costs were higher so from that baseline we are effectively reducing the product costs so that is how you should actually think about the components here

Can I add? And I was going to say, I think, of course we've allowed for inflation in our models, Nick, absolutely, and growth costs, which we look at very closely, to make sure that we've got the right support to support our strategic initiatives going forward. So that's all built into the models.

I now see you. Thanks for sitting there. That's our inside joke. The last time I couldn't see him, he was hiding somewhere else.

I'm glad to be famous for something. Thank you. It's Ian Douglas at UBS. First on supply cost inflation that you're seeing. Helen, how do you think about this in terms of working capital reduction, especially around inventory? Do you need more safety stocks? than perhaps you thought you did previously? And secondly, when do you think you would feel that you are sustainably investment-grade credit profile and therefore you could start returning capital to shareholders?

Shall I take that? Yeah, sure. So, supply chain and inventory. As I said, you know, 2023 was a difficult environment for everyone. Since we launched our programme, the teams have really leaned in. Every division in the second half of 2023 released inventory. And I think that, combined with a reduction in inventory days... while we're growing the business, talks to sustainable improvement. Do we need to build inventory? One of the things that we're doing, and we're doing multiple things, is we're being very deliberate around where we're holding inventory and what we need to hold it for. If you look, and it's across civil, defence and power systems, We have got work plans in place to be much tighter on our sales and operating planning. And we have identified pockets, even in a difficult environment in 2023, where we can release inventory because we had elements of inefficiency across the chain. Power systems, a great example of where they had orders which were cancelled or changed, how they managed their inventory flows so that that didn't sit as working progress for excessive amount of time. So do I expect to build inventory? In absolute terms, no, because we'll be very deliberate as to how we manage the end-to-end chain. I expect continued progress on our working capital programme going forward. In relation to investment grade profile, As we've shared before, our priority is to strengthen the balance sheet and get it to where it needs to be to support us in delivery for mid-term targets. After a number of difficult years for Rolls-Royce, we are absolutely determined that we will do that and deliver on our promises for all of our stakeholders. We are making progress. So once that balance sheet is sufficiently strengthened and once we are comfortably and sustainably at investment-grade profile, we are committed to resuming shareholder distributions. And at that point, we'll come back and update you further.

Thanks, Ellen.

Next question.

Victor Allard, Goldman Sachs. Thank you for taking my question. I wanted to follow up on TNM. I've seen a very strong increase in 2023. We talked about pricing in your view for this year. I guess it's partly the result also of your strategy in terms of unbundling some content that you've talked about in the past and at the CMD. Could you please share some color in terms of how do you see volume growing this year? Should we think about it as growing in line with a large referral, but probably even outpacing that figure? Thank you.

Thank you. I think, yes, we are unbundling in the new deals, definitely. And I think I mentioned last time that Our current portfolio, if you look at it, 50% unbundled, 50% bundled, sort of roughly, roughly talking. But going forward, we are unbundling. It gives us more flexibility. Frankly, we want to make whole system more flexible because then your actions have bigger impact. So that's the drive. So if you actually think about this is not only for TNM, but for everything we do, because... We are taking actions, proactive actions, and the more space and more influence they can create in a flexible system, that's what they will do. So our mindset is definitely there. So, yes, normally you should expect that to go up with the shop visits, but there is a caution there that it depends on the mix. Because some shop visits, obviously, that is well captured in EFH rate. Therefore, I advise not to take a linear approach to that because that's not how this is going to work. Yes.

Is this working? Okay. I'm Stephanie Vincent from Bank of America. Just asking from the credit side about investment grade profile and obviously net debt's a big part of that, but also just wondering what ideally your split between gross debt and cash would be. And then a next question is just a lot of industrial businesses, there's been a lot more focus on factoring and reverse factoring programs and any indication of where you're taking that going forward?

I will answer the second question straight. We won't factor. We don't factor. This is about sustainable cash flow growth of the company rather than doing some kind of engineering, if you like. With that, over to you.

That was a good set-up. Thank you. So how you should hold gross debt, net debt. So we've got a strong liquidity position. You heard me say £7.2 billion. We will always ensure that we have sufficient levels of cash and access to undrawn facilities to ensure that we have... the operational and financial flexibility we need to deliver on our strategy. We look at that very, very closely. And as I also shared, we have a clear plan for our debt that falls due. Back in Capital Markets Day, I actually shared some detail in 24 and 25. Our intent is for the bonds that fall due in 2024 and 2025 to repay those from cash, but it's something that we look at very closely. It is tied to that balance sheet resilience. Thank you.

So, Isabel, you are hinting me that there are some digital questions. Okay, let's go there.

microphones on or do i need to yeah it is grant otherwise i would need to use the seat microphone as well i've got three three different areas of questions online um the first one um in terms of uh from actually from film brother at berenberg who sadly can't be in the room today he's asked uh labor shortages were cited uh as part of the reasons the provision So are we taking employees out of our own organisation? And has our view evolved in any way with regard to holding on to more of our own staff, given what we're seeing?

OK, let me... Yeah, thanks for the question. Let's be very clear. what we are doing. By the way, I wasn't referring to our labor shortages. I was referring to industry labor shortages. In our case, we didn't have that issue. Normally, smaller suppliers really have that issue for everybody's benefit. But one part may mean that you are not actually producing the engine. So just think that way in terms of... In terms of our plans, we are very clear. We have been actually increasing direct labor, but we look at productivity improvements. So we actually improve the productivity... And while you are increasing direct labor, you are increasing production. Direct labor supports that. We drive productivity improvements. Our 2000-2500 is mostly what we call sort of indirect production. Therefore, it is not volume-related. And yes, our plans there, as I mentioned, we are in consultation right now. And as I mentioned in my script, by the end of next year, we should have broadly finished that program in terms of exits and so on.

Thank you. If I could follow up, I've got three analysts with... Three questions on the same theme, so I'll read all of them out and cover them in the answer. So Emerick Poulin from Kepler Chevro asks, what is the current time on wing for Trent 1000 and Trent XWB, and how does that compare with the Trent 700? Chloe Lemarie asks, could we talk about the Trent 1000 fix? As of today, is the HPT blade on the TEN the last one to be certified, and how long do we think the retrofit campaign will take? across both the Trent 7,000 and the Trent 1,000 fleets. And again, Ben Healan of Bank of America also asks, could we discuss time on wing, Trent 1,000, and where we are on certification of the final fix? So thank you, all three of them. Thank you for your answer.

So I think, frankly, let me take it up in that order. But so... Engine technology changed in civil aerospace because civil aerospace went for fuel efficiency. And with that, frankly, because there is one question here, can you compare it with Trent 700? That's why I'm saying it. And this applies to all of the players. It is not Royce Royce specific issue. This industry, as you know, I'm not an insider, but I came from outside. My reflection of it... somehow industry moved there expecting different results. Frankly, automotive industry went through this journey before aviation industry because of the emission standards in automotive industry, and I was a big part of that. So you shouldn't be surprised when you want more efficiency, it comes with higher temperature and so on, and therefore cycle time is... is lower so no i think no engine we will produce or competition will produce will have the trend 700 cycle time but what we are doing with our engines taking them to a very competitive level okay in any environment that's what we are doing XWB84 is the best engine right now, durability, reliability, and fuel efficiency in wide-body market, without any doubt. You can ask any customer. Therefore, we are actually saying, now all of other engines we have, we want to take it. I talk about £1 billion investment in time on wing. It is a very structured program Not to mention Rob. I actually reviewed it. It is an important project. We put our best engineers on it. Trend 1000, we already doubled the time on it. Last year, by the end of last year, it was going to be certified. Unfortunately, it didn't. It got delayed. And this year, we are working with both Boeing and FAA. Frankly, I was there. I met meetings a month ago with both Dave Caldwell and the new head of FAA. And... We want to actually work with them and accelerate and certify this year. Then shop visits, how long it is going to take? We said 7,000. Frankly, we did it in 22, if you remember. We already retrofitted 20% of it. So it will take some years because you wait for the shop visits, for the engines to come to shop visits to retrofit. But importantly, we are making... Another 30% improvement on trend 1000. Therefore, I said in my script that by the end of next year, it will be absolutely fully competitive engine on durability. As good as the competition and reliability is already very good. By the way, reliability of all our engines are very, very good. On 97, I think in sort of in benign environments, it's actually good engine. And we, like, I'll give you some numbers, and it sells really well. Last year's orders, 135 aircraft. We only expect that to grow on 97. So it is a good-performing engine in what is called non-dusty, non-sandy environments, i.e. sort of something like Middle East and so on. But our... So time on wing program, which will take, like Trent 1000, I said by the end of next year we will be there. I think this will take a couple of years, two, three years for us to take it to the market. What it is going to do, it's going to double the time on wing to a level that I actually met with Tim Clark last week. He's very happy where this is going to go. He cannot wait for that to come to the market, I can assure you. So you can ask him yourself, because I was there Friday meeting him. So pretty up to date, I would say. But so I think. Frankly, that will double time on wing in non-benign environments. And already good performance in benign environments, we will increase it 50%. So once we do all that, think about the impact. It is going to have all our shop visits and or lack of them, I should say. So and the EFH rate and so on. So that's why I sometimes say all the things we are doing. obviously helping midterm delivery but it is going to create even much bigger value in the future take this 97 it will be actually the highest trust best aircraft probably four years three years from now so is that going to help our midterm results maybe a little bit is it going to help Is it going to create enormous value beyond that because you don't anymore invest $1 billion, but you got all the benefits of it? Yes. And Trent 1000, the same. So I think that's a long answer, but it is an important program for us. It is one of the six levers that Rob drives very hard.

Thank you, Divan. Before I go on, I've got time for one last question, which I'll read out from online. But just to say thank you for everyone online for the number of questions we've received. There are a lot of them. Clearly not time to do it all today, but my team and I will get back to you individually. So thank you and apologies if you didn't make the cut. The final one that I'll read out today is from Bob Stallard from Vertical Research, who has said Airbus noted last week that the pricing on current wide body competition is challenging. How does this reconcile with Rolls-Royce's ambition of getting much better pricing on new trend engines?

So I think we are very aligned with Airbus, first of all, I should say. And incidentally, I had Saturday dinner with Guillaume as well, by the way. So we have very good alignment between the two companies. Definitely, that's how you should think about it. And our pricing, one correction on that question, it's not an ambition. We are actually... We have been implementing it. So it is an implementation for a good 12 months. There is no new ambition out there. We will continuously implement that pricing framework that Airbus is well aware and well aligned and... And obviously we have similar situation with Boeing. So it's not an ambition. It is well in execution with very good results because last year, in the last 15 years, we... record orders for Rolls-Royce. We got 700 engines. Our order book is longer than it has ever been. I think it is in your supplement that 1,600... I'm rounding the numbers a little bit. 1,600 engines in order. So you can do the math how many years engine order that is. So I think... I think our pricing position is all about remunerating the value we create and creating win-win solutions as a result of that. Isabel, any more questions?

That's all we have time for online today, so back to you to wrap up, Tifa.

Any pressing question in the room? I always ask sort of... OK, very good. Thanks for coming. And thanks for all the questions digitally as well. Thanks for all the questions. And frankly, we think we are making great progress with our program. you can see it is not one division it is all the divisions delivering and you can see the same themes coming through why is that because it is one risk royce royce actually implementing similar actions where the market opportunities and therefore you hear commercial optimization, efficiency, working capital improvements, and so on across the board. And we are on that agenda. One thing I'm going to say, think about cumulative growth. I've been in this journey before. Don't look at every discrete year. We have midterm targets. The way we are really running this business is no longer teams are... targeting a number they want we want to make strategic progress at pace some years that will mean you over deliver some other years may offset that a little bit most important thing on cumulative basis are we actually on track and i would say if you look at our profit and cash numbers i would say we almost when we deliver 2024 Midpoint, if I take, it is going to be almost 60% delivery on the performance improvement, both on profit and cash, in two years. So this is the opposite of hockey stick. I hope you appreciate that and demonstrates our progress. With that, thank you very much. Have a great day.