Rolls-Royce Holdings plc

John Dawson - Head, IR Warren East - CEO David Smith - CFO

Nick Cunningham - Agency Partners Christian Laughlin - Bernstein Ben Fidler - Deutsche Bank Tristan Sanson - Exane BNP Paribas Gordon Hunting - Fiske Zafar Khan - Societe Generale Celine Fornaro - UBS Securities David Perry - JPMorgan Rami Myerson - Investec

Okay. I think we're ready to kick off.

So, thank you very much and good morning ladies and gentlemen and welcome to the London stock exchange. My name is John Dawson.

I’m the Head of Investor Relations of Rolls-Royce and it my pleasure to welcome you to our 2016 full year results presentation both to those of you joining us here but also joining us online. The agenda for today's presentation is as follows, Warren will kick off and give you some highlights of 2016 and then David will take you through the financials results in a little bit more detail and then Warren will come back with some closing remarks looking into the future.

The presentation should last around 45 minutes, but we've got plenty of time at the end for questions. So, we expect to finish at about 10.15.

We will take questions online as well. So, if you are joining us through the web and you wish to submit a question, please do and a member of the Investor Relations team will read it out if it hasn't already been asked already.

Finally, before we kick off, could I ask only just to turn off their mobile phones or put them on silent, just to make sure they don't disturb the presentation over the next hour and a quarter. Thank you.

And I'll now hand you over to Warren.

Thank you, John. Good morning, everybody and I won't both giving the introduction, let's just -- let's kick off.

Now recent news flow around Rolls-Royce has been dominated by the announcements that we made in conjunction with the Serious Fraud Office a couple of weeks ago and so we wanted to get this out and address this upfront in the discussion. And I think the best way of describing it is actually summarize in these two quotes.

Quote from me talking about the business, what we think was happened and there's another quote from me elsewhere about how Rolls-Royce is a completely different business, but it's all very well for me to say that. I think it's much better to refer to the quote from the judge who actually said that.

So, with that, I am going to talk any more in this presentation about those events which have dominated the news flow over the last few weeks, but I want you all to be under no doubt whatsoever that it is front and center in our minds as a management team and making sure that such things don't happen again is very much a priority. So now a quick snapshot of the results and Dave is going to talk about these in a lot more detail, but basically revenues approximately in line with what we and everybody else expected.

People across the business have worked very hard during 2016. So, the net outcome is that cash and profit is a lot better than expected.

Yes indeed, there are some one-offs behind some of these numbers, but by the way, there are one-offs in both directions. We encountered quite a lot of operational challenges, some of which you read about in the newspapers during the -- and the fact is that underlying all that, there is some sustained improvement, which means that when those one-offs go in both directions then we still come in better than expected and David will go into a bit more depth from that.

Now a reminder of what I said 12 months ago when standing here in terms of setting some goals for 2016, three goals, one about focusing on engineering and operational excellence and making sure that we allow our business model to really work leveraging the installed base. Two, make sure we go off to a really good start with our transformation program and three, understanding that we have a job in hand to rebuild trust and confidence in this business.

So, that was the goals that we set out and now I am going to step through a few scorecards to illustrate how we got on in 2016 addressing those objectives. Referring to the first goal about focusing on engineering excellence, operational excellence and aftermarket.

So, in terms of R&D, record expenditure in R&D in 2016 even though times are tough, we recognize that is an engineering and technology-led business and it's very important that we spend that money because that money is going into new products that we're bringing to market. We are readying during this year now three large engines for our civil business entry into service very, very soon as so it's very important that we bring those products to market for our future.

The results are important. If we're spending that money on engineering that we spend it wisely and we keep getting better at how we spend it and some examples on the right-hand side of the slide there about the impact of some of those efficiency improvements that we're making an yes, as far as that digital product definition example is considered, it will take a few years for the full benefit of this to show through in the results, but the underlying improvements have been initiated and actually a lot of work has taking place.

Switching to operational excellence because it's very well to engineer some great products, but we need to make some money out of delivering them. That also doesn't come for free.

So now our both a third of our CapEx in 2016 spend on your capital equipment to make sure that we can make these things as effectively and competitively as possible. The payback however, about capital investment on the left-hand side of the slide is that we will achieve increased volume in a reduced footprint and we will be able to do more with less and during the year we've communicated a bit and we've highlighted some of improvement and there are some improvements on the right-hand side of the slide and I would like to stress, now it's not just about how we spend the money.

It's about how we actually do the work that leads to significant improvements in things like assembly lead time. And it's also important to say that this isn’t just a civil aerospace activity.

Now yes, we're making some improvements in how we build our large engines for airplanes, but we're also addressing some other really significant opportunities to make a big difference in other parts of our business. The third part of the focus is about leveraging the business model and making the aftermarket work for us and the important thing is that this is a big chunk of our revenues and as we look forward, it's a very significant driver of profit and cash and it's very important that we keep that asset base working out in the field and as we look at our fleet of large engines then we do have a young fleet.

The flipside of being a young fleet is getting older and as it gets older, then the transitions which are natural between the first owner and second owner of these things, become much more normal and because we want to keep those assets operational as much as possible, then it's important that we're able to minimize that transition time and so we have introduced a dedicated transition team. That dedicated transition team has managed twice as many transitions in 2016 as in '15 as we seek to minimize the transition time and there are also numerous other examples of what we're doing to leverage our installed base.

So our second goal was to get off to a really good start on the transformation program and I am pleased that we're announcing this morning that the in-year savings for 2016 were £60 million against our original estimate of £30 million to £50 million and so that's a very good start, but more importantly some of the activities and changes that we undertook during 2016 feed into 2017, which is why we're confident that we can deliver an annualized run rate at the very top end of those £150 million to £200 million expectations for run rates at the end of 2017. And as we go into 2018, there will be a little bit of continued momentum in those activities that we've already done so far.

Now I am putting in a step through what's been going on around the business using some scorecards here, now in civil aerospace, which is 50% of our business there or thereabout we overcame some pretty clear headwinds and these were the headwinds that were identified as early as 18 months ago when I joined the business and they did indeed come to pass and we overcame some of other challenges as well. And so in terms of numbers David will go through the numbers shortly, then results slightly ahead of expectations, but pretty much where we expected them to be and a lot of that is caused by the transition from older engines into newer engines and you can see it's the effect of that is happening both at the OE stage, but also at the aftermarket end as well where we have new engines growing, but actually the aftermarket revenue from those new engines not really coming through and completely dominating they're being held back a little by the older engines with high margin space type activity falling off.

It's importance that we recognize that we got a big step up to do in 2017. I'll come on to that in a moment, but our new product introductions going quite well and it's important that, that engineering we keep looking at that engineering pipeline and making sure it's in good shape.

Two examples and it's worth letting a little bit on our civil business because that is half of the total. So, the two key drivers of cash over the next 10 years are probably the XWB and the Trent 700 and these are very different stages in their lifecycles and so we'll look at XWB first and then at Trent 700.

So, on XWB, deliveries in 2016 more or less doubled. At the bottom of the slide there on the bottom left, you'll see however we've still got this big step up to do in 2017 and so it's absolutely essential that in 2016 we achieved the essential improvements in things like lead time to make that volume set up in 2017 possible.

We clearly have some more work to do on cost and we will in time benefit from better pricing as we move away from the launch pricing in this engine. Switching to the installed base, obviously from a standing start more or less massive change in the size of the installed base for XWB in 2016, I think the important things to note are the 6X increase in installed base by the time we get to 2020 and if we look at the backlog feature as we've got eight times the current installed base out there in the backlog.

So, this is clearly going to be a very important product for us. Trend 700 is the other big generator.

Now this engine was launched and into service 20 years ago, and so clearly, we are approaching the end as far as getting these engines installed new one to airplanes is concerned. Interesting to note however, that we're still working on improving things like the lead time and how long it takes us to build one of these things.

And in '17 we will actually enjoy a little bit more volume as we move into this installing effectively the tail end of the Trent 700 program, but the big focus looking forward is about how this engine works in the aftermarket actually in use and after 20 years of course the installed base is still growing and the other point to note is that even though this has been a 20-year program, it's been a much slower rate of installation than XWB and so this is still a relatively young fleet with a very, very long way to go. Defense aerospace, generally a solid year.

I think we'll talk a bit more about the fact that it's driving profit, but fundamentally we saw a product mix putting downward pressure on profit and we saw a reduction in part sales, but importantly, what we concentrate our effort on in defense is really getting close to our customers and strengthening the service support because it's very important with essentially a large installed base that we work that as hard as possible. Our power systems business, this outperformed our competitors and I remember being sat here a year ago, listening to or receiving lots of questions about how we were going to perform in this business during a year when our competitors were forecasting massive drops well.

It wasn't broadly flat for the year. The answer is broadly what we gave a year ago.

Revenues flat because volumes in some of the growth areas that we're exposed to are higher than the volume downward pressure in some of these areas particularly, in oil, gas and commodities that our competitors are exposed to and yes, because of that, then there is a product mix effect and because volume came down a little and the mix changed and our profits down a little, but we still outperformed the peer group. I'm very pleased with the excellent start that our new leader in that part of the business has made.

He has really started injecting some pace and energy into the business in the six to eight weeks that he has been with us and I look forward too much more from that business as we go forward. Now Marine, the offshore market we know is very, very weak.

There are laid up vessels everywhere and that has a knock-on effect into the merchant space as well. There is really very, very little demand and lots of the overhauls are being deferred and so it's affecting our service business as well.

We have been however addressing the operation and gross margin has actually improved in percentage terms. In absolute terms, it's down because the size of the business is down, but we have seen improvements in gross margin because cost reduction activities are bearing some fruit and what we're seeking to do if you look at the graph on the right-hand side, is think this is a cyclical business.

It's always been a cyclical business and we have over recent years become a little bit over exposed to offshore and we have become a little bit larger in terms of fixed cost base then we should ideally be. And so, we are resizing the business and positioning it for the trough of the cycle and we are tilting activity towards new technologies and new adjacent applications.

So, we will benefit from the cycle improving and we will continue to win business as indeed we are winning business today in adjacent applications and particularly around new technologies such as all electric, all electric ships and just a measure of the rightsizing is there on the bottom where essentially, we will have reduced the headcount by about a third and rationalized facilities. In our nuclear business, it's been a story of little bit of increased revenue because more submarine work, but the submarines are actually lower margin activity and we have seen the need to invest in operational improvements.

Some of you may remember some pretty nasty headlines from about 12 to 14 months ago, around that program. I think we've addressed a lot of those issues but addressing those issues hasn’t come free and we've had to invest a little to fix things and we're continuing to invest in new designs for new opportunities and things like the small modular reactors represent those opportunities.

So, overall, I would say, it's a year of stabilizing. We've made significant progress in simplifying the structure.

We are investing for the future. We have to have an eye on the future in terms of the technologies and the applications.

We also have to keep addressing the operational issues. I think as we look to 2017, then it's challenging but we're on track.

We're delivering at volume run rates that allow us to achieve the required volumes in 2017 and new big programs we're focused on those new engines for entry into service over the next year or so. Longer term, we're talking about transformation towards a better performing, simpler and more resilient business and so we absolutely need to continue working on that.

So briefly summarizing at this point, I think we've done a good job by addressing the goals set for 2016, both the key goals in terms of strengthening our focus and getting our transformation program off to a good start. I hope alongside that, we're doing a reasonable job at rebuilding confidence and trust in the outside world but focus of the judge, not us.

And with that, I'll hand over to David to take us through the numbers in a bit more detail.

So, thank you, Warren. I'm going to take you now through a review of each business, the group cash flow and balance sheet and provide our outlook for 2017.

Before I do that, let me just summarize the key elements of group performance and remember our percentage change comparisons will be on a constant currency basis unless stated otherwise. So, starting with group revenue and profit, underlying group revenue of £13.8 billion was 2% lower in 2016, reflecting declines in both original equipment revenue and services.

By business, civil and defense aerospace and power systems revenues were steady while marine decreased 24% and nuclear actually increased by 11%. Our underlying profit before financing at £915 million was 45% largely driven by a reduction in civil aerospace profit to £367 million, broadly reflecting the headwinds we've previously communicated and profit in defense aerospace at £384 million was 8% lower and that was mainly due to the TP400 related program support cost.

Power systems was down 14% year-on-year at £191 million, largely as a result of adverse product mix and the marine loss of £27 million was driven by continuing weakness in offshore markets, but was actually better than we originally expected due to additional cost actions. Nuclear profit was down 37% to £45 million due to margin mix in submarine, but also pretty significant nonrepeat of the R&D credit we had last year.

So, turning now to look at the businesses individually and first starting with civil, it was totally revenue, overall our underlying original equipment revenue for civil aerospace was flat on a constant currency basis. Revenue from linked and other engine was actually up 2% with increased volumes of Trent 900s and a high number of spare Trent XWB engines sold.

Of this sales of spare engines to joint ventures generated a revenue of about £277 million. This was partly offset by lower Trent 700 volume and also the price reductions on these engines ahead of the introduction of the Trent 7000 on the A330neo.

Unlinked revenues increased by 47% and that was largely obviously led by the higher volumes of TrentXWBs. Business aviation engine sales were 25% down reflecting both general market weakness and the transition to newer non-Rolls-Royce powered platforms from our BR710 engines.

Volumes of our newer BR725 engine, which powers the Gulfstream 650s were pretty stable. Finally, the V2500 module revenues did decline by about 10% as production slowed obviously again as Airbus transitions to the A320neo.

And turning to aftermarket, in the aftermarket, the overall result was down 1%. Service revenue from large engines would have actually been up by about 2%, but was down 4% after we adjust for contract accounting affects, which were however significantly lower than the prior.

Within this, we saw double-digit growth in revenue from our in-production engines, but that was more than offset by a reduction from the older engines. This included the expected lower utilization of Trent 500 and Trent 800.

Time and materials revenue also reduced with fewer engine overhauls across the outer production fleet. The business aviation aftermarket was slightly down and regional jets were down 14% as a result of reduced utilization primarily by North American operators.

However, V2500 service revenues were actually 21% higher and that reflected a combination of price escalation built into contracts on flying out payments together with some increased overhaul activity. Turning now to gross margins, overall gross margins for civil aerospace were £1.1 billion or about 16.8% of revenue, which was down £397 million from 2015.

Within that, trading margin was down £248 million with the main revenue and margin headwinds as I've just highlighted being as we forecast at the start of the year. We also saw some additional program charges of around £30 million incurred for engines still in development.

The lower margin was partially offset by releases of accruals related to the termination in prior years of intermediary services, which totaled about £53 million and remember 2015 also benefited from a couple of things. The one-off £65 million release of Trent 1000 CARs impairment right back and provision release.

As you can see from the slide, the in-year net benefit when we look at all of the long-term contract accounting adjustments totaled £90 million. So, that was down from £222 million in 2015, a reduction of £132 million, but remember that last year we had that £189 million benefit from the risk methodology adjustment.

Technical costs for large engines were £74 million higher at an absolute of £98 million and that's included Trent 900 costs and upgrades to the Trent 700 engine management system. This was offset by a £77 million higher contribution from lifecycle cost improvements and absolute of £217 million for the year, compared to £140 million in 2015 and as we discussed at the half year, we also recognized the £35 million benefit from a change to our long-term U.S.

dollar planning rate. So, turning to the rest of the profit was for cost below gross margin were £89 million higher than the previous year.

Underlying C&A costs were £43 million higher and that was primarily due to higher employee incentive costs. Net R&D charges were £34 million higher, reflecting higher spend on key programs particularly the Trent 7000 and also development cost contributions were also lower, but those are partly offset by some increased R&D capitalization on the dash10 Trend 1000.

As a result, overall profit before financing and tax was £326 million and £367 million after positive FX. Turning now to Civil's trading cash flow.

Civil trading cash flow of £43 million positive actually compares to breakeven in 2015. Within that trading cash flow and before working capital movements, the main change year-on-year was obviously the £445 million reduction in underlying profit.

We saw part additions of £208 million, which was up £47 million from the prior year. In addition, there was an incremental £237 million spend on PPE and intangibles, primary certification costs on the XWB 97K and also as I've mentioned the R&D capitalization on the Trent 1000.

Net long-term contract debtor additions were £160 million lower than in the previous year and that reflects in part the lower profits on Trent 700 and the lower net long time accounting adjustments. So, overall trading cash flow also benefited from better-than-expected working capital improvements of £345 million and that was really principally around customer collections and deposits and I would say that that was really the outperformance that you saw both in civil and at group level.

That outperformance on working capital. So, turning now just a little bit into the detail of TCA and CARs, TotalCare net assets actually increased by £230 million to £2.44 billion and this reflects both linked profits and cash process on the new engine sales plus the cash adjustments offset in part by cumulative amortization charge and to preempt any questions that's slightly different from the $230 million you see from the $2.46 billion in the trading cash flow and that's simply an FX different within the total care balance.

New linked engines of £432 million in contract accounting adjustments of £90 million were offset by cash inflows and other net adjustment of £292 million. So, we ended up as I said at £2.44 billion at the end of the year and we still expect this to peak at our previously guided range of between £2.5 billion and £2.7 billion.

The CARs balance increased by £169 million reflecting higher sales of unlinked Trent XWBs. Turning now to defense, so starting again with revenue, underlying revenue of £2.2 billion was slightly up from the prior on a constant currency basis.

OE revenues were helped by higher volumes of both the TP400 and also increased Adour engine deliveries. Service revenues were stable with lower demand for spare parts offset by some increased revenues from Typhoon and C-130J contracts.

In terms of the gross margin, the gross margin actually did fine by £49 million to £530 million and that reflected a combination of some of those volume effects and adverse product mix together with the £26 million additional cost we bought for the TP400. Long-term contract releases of £82 million were down £5 million from the previous year, but actually higher than we had expected earlier in the year and that was principally due to the benefit of locking in some significant cost savings on the U.K.

Typhoon contract, which is now in its last couple of years including our cost-saving incentive award. So outside of gross margin for defense, profit, R&D and restructuring costs were lower than the prior that was mainly due on restructuring due to lower severance costs around the Indianapolis program.

Overall, group profit before financing of £384 million was 8% lower than 2015, driven primarily by the lower gross margin I discussed. So, moving on now to power systems, underlying revenue of £2.7 billion was slightly down excluding FX and I think there was a pretty good result given the market conditions.

OE revenue declined by only 1% and we saw growth in power generation and industrial sales, which partially offset the weaker commodity related markets and some reduced activity in our naval business. Service revenue was 2% lower and that largely reflected again some of the fleet utilization issues we're seeing in the marine medium speed market.

Power Systems' gross margin reduced by 28% in absolute terms to £628 primarily mix effects there adverse mix, but it did include some good progression on cost reduction, which offset some of the volume and mix effects. So, on overall profit, underlying profit declined £27 million, that's 14% and that was led by the reduction in gross margin.

Perhaps to say our PSR starting to get some benefits from product streamlining as well. Turning now to marine, just got a single slide here, underlying revenue of £1.1 billion was 24% with some continued weakness in offshore also seen in a declining order book.

Gross margin was therefore £44 million lower as a result, but actually 170 basis points higher in percentage terms, partly through our cost reduction activities and also some lower warranty in contract charges. The resulting net loss was £27 million.

The December announcement of further organizational changes and headcount reduction led to an additional £5 million restructuring charge with the remainder due to be taken in 2017 and we also took a £200 million impairment charge against goodwill, reflecting the ongoing tough conditions and reshaping of the business. Finally, to nuclear, our underlying revenue for nuclear increased by 11%, largely within the submarine programs.

Volume on key civil programs in both France and Finland were also strong, but our gross margin was lower by 80 basis points and that really reflected a greater waiting in the overall mix towards the lower margin submarine programs. The low gross margin we took some additional costs just for the higher volumes and some improved delivery performance in submarines and we're also investing modestly on the initial design phases for small modular reactors.

We had in the year a £7 million R&D credit, but no repeats of its 2015 cash output we saw and we expect the £7 million credit to declines to near £0 million in 2017. As a result of underlying profit before financing was £45 million not £38m if you exclude the R&D credit.

So, turning back now to the group as a whole again, net finance charges in that underlying results were £102 million and tax was £261 million, reflecting an underlying tax charge of 32% and as a result, underlying earnings were £552 million or 30.1 pence a share. The underlying tax rate rise was higher and it was due to a combination of a decision to de-recognized deferred tax assets and losses in Norway and a greater proportion of our profits coming from higher corporate tax countries.

Turning to look at the reconciliation to our reported results, there are clearly a number of very key differences I would like to highlight this year. Firstly, as I've already mentioned, we had impaired goodwill associated with a number of the acquisitions, but principally that £200 million within marine.

In addition, we recognized the £671 million charge related to the agreements reached recently on the legacy investigations. Exceptional restructuring totaled £129 million for the year up around and a majority of that was for the transformation program.

This included the cost for that program, which delivered the in-year benefits of £60 million that Warren has already mentioned. Also, as we've previously announced in November legal and general acquired the assets and liabilities of the Vickers pension scheme, the largest deal of its kind in 2016.

The significant pension transferred also resulted in us reducing by £300 million on our books plus on pensions as that effectively transferred to LNG. And of course, we had the £4.4 billion cumulative mark-to-market adjustments during the year of our hedge book.

As you heard from me many times before, we've never believed that that mark-to-market valuation adjustment is particularly relevant for the ongoing business given that those underlying hedge cash flows will provide corresponding benefits in the future. Turning then to the profits and cash flow rule.

Our free cash flow of £100 million was £79 million lower than the prior year, but well ahead of our original guided expectations of £100 million to minus £300 million and that overall range reflected the stronger working capital performance in civil and in 2015, which helped to offset the lower profit and higher expenditure on PPE and intangibles. This is our usual bridge slide from profit to cash flow.

On an absolute basis, we saw a £55 million outflow from networking capital including £230 million higher total net assets and higher inventories related to the production ramp, but these were offset by higher payables and deposits We have £570 million of CapEx that included some payments against 2015 invoices and £631 million of intangibles including the £208 million that came from CARs and the rest of that would've been the higher R&D capitalization mainly on the Trent 1000 plus higher certification costs on the XWB-97K. In 2017, despite the increased investment in installed engines as we increase our large engine production to around 500 units, we should be able to keep some of this working capital performance we saw in 2017.

As a result, we're now expecting to be able to deliver another year of slightly better than breakeven free cash flow similar to 2016. So, that is an improvement from what we've been saying over the last year.

As you know we value a very robust balance sheet with a healthy investment grade rating. We believe this is commercially important when offering products and support contracts.

It will be in operation for decades. After the SFO announcement, you'll be aware that Standard & Poor's did update their rating to BBB plus stable from A minus negative outlook.

Although Moody's have maintained their rating at A3 stable as have Fitch. We will continue a very close dialogue with the agency, so that we can best see the progress we're making particular in terms of transformation and our profit and long-term cash generation.

During 2016, the Group's net debt position did increase to £225 million, but leverage remains at a comfortable level although clearly, we do have some additional cash cost during this year with the VPA. We have no significant refinancing however until 2019 and remember that last April, we increased our revolving credit facilities by £500 million to provide additional liquidity.

So, turning now to payments to shareholders, our stated objective in the long-term is to progressively rebuild our payments to shareholders to an appropriate level subject obviously to short term cash needs and this reflects our long-standing confidence in the strong future cash generation of Rolls-Royce. At this stage however, the investment needs of the business remain high, reflected in the low level of free cash flow in 2016 and again in 2017.

In addition, the Board sees the need to retain a degree of balance sheet flexibility. As a result, we've decided to keep the final payment to shareholders at the same level as last year, in other words, 7.1 pence a share.

This means that the cash cost of the payments to shareholders during 2017 will be about £215 million including what we've already paid. Turning now to hedging, as I explained in November, our hedge book is fairly simple purpose.

We're trying to match our future customer and supplier commitments, which are very long-lasting, thereby mitigating risk to our reported margins over time. In any year, we will take advantage of attractive rates in the market if they're available but this isn't the primary consideration.

More importantly, is to be sufficiently flexible to keep the rate relatively stable over time even if our dollar revenue or cost profile change. The 2016 movement in the average achieved rate was worth about $0.025 on net of some translation effects that gave us a great benefit of about £20 million.

Clearly market conditions have enabled us to reduce the rate really quite rapidly whilst expanding the size of the book from $29 billion up to $38 billion at the year end with an average rate on that book of $155. We have delivered there from the core purpose of this program smoothing effective rate and I believe the rate will remain relatively stable over coming couple of years.

So, off a big increase in 2016 and the size of the book, we might be growing about much over and will look to utilize the hedges in a way which keeps the achieved rate relatively steady. Even actually at current rates, replacement hedges won't achieve rapid reduction in the average rate of the hedge book unless the swap rate sustains at this level for quite a long time.

So, turning now to outlook, business by business, our outlook is mixed. The civil aerospace on a constant currency basis, we should see some modest growth in revenue and profit in 2017.

Within this our large engine business, we'll continue our OE production ramp, which will consume cash, although this will be partially offset by growth in engine flying hours on the new trends. We'll also capitalize more R&D and continue to take care of costs.

Business aviation OE demand is expected to weaken further and will demand -- and as will demand in the regional aircraft aftermarket and as I said, we need to continue to work both on cost and also on inventory with further improvements. So overall, we'd expect cash flow to be marginally ahead as well despite a strong performance at the close of 2016.

Our abated five-year review outlook for civil actually has only changed in one respect in the near term. We now see a bit more positive business aviation aftermarket for 2017, so the area there is now flat rather than down previous.

Switching now to cash flow, turning to the outlook, nothing has changed again directionally and we expect 2017 to be broadly the same as 2016. We've also just added a column for 2021 now that we finished 2016.

Looking out further clearly the important thing is the rollout of the new engines with an exclusive position on the A330neo for the Trend 7000 and on the A350 for the XWB and that will significantly grow our install base and as we previously said, the resulting install base is a thing that will deliver strong aftermarket revenues and cash flows for decades to come. Turning now to defense outlook, while revenues should remain relatively steady, we are still expecting margins to come under some pressure.

We saw about a two-point decline last year and we're continuing to make investment particularly in Indianapolis as well as the lower contract performance in terms incentives that are available to us on key programs this year. As a result, margins and profits are expected to soften a bit further from recent levels.

For power systems, the outlook for power systems remains steady to positive as we continue the transmission of that business. The business finished last year with a strong order book for several of its key markets and although some commodity related markets remain difficult, we expect the business to deliver some modest growth in revenue and profit in 2017.

For marine overall the outlook has to remain very cautious with revenue down further in 2017 and losses at a similar level. We expect that the market will continue to feel the impact of low oil prices for some time and the general overcapacity in several segments will take time to reach equilibrium.

So, we're continuing to sustain our cost reduction programs focused on manufacturing supply chain and overhead cost in order to deliver a more competitive business. Finally, for nuclear, the long-term outlook remains positive, supported by the confirmation from the U.K.

Government of its ongoing investment in the dreadnought class submarines. With renewed activities in the civil market, particularly in the U.K.

and in China, there were also some encouraging growth opportunities. However, shorter term, our impact -- our results will be impacted by a couple of factors.

The absence of R&D credits and also some lower margins on our submarine business and further increases in our investment in SMR technology and other initiatives. So as a result, we believe our profit is likely to be around half that achieved in 2016 reflecting these investments.

Turning now to group technical guidance as a whole, I'll just focus on a couple of points here. Firstly, changes to the FX environment over the last 12 months, clearly have continued to have a benefit to our reported underlying results in 2017.

Should rates remain unchanged from where they were at year-end, it would provide us some further translation related improvement obviously as we translate foreign profits and revenues of about £400 million on revenue and about £50 million on profit before tax comparing to £725 million and £80 last year. Secondly, net R&D spend is expected to be at a similar level in 2016, although the charged profits will come down because we'll have some higher capitalization by about £60 million to £100 million close to £800 million in total.

As I said that really reflects higher R&D capitalizations with the new engine programs. Finally, free cash flow for 2017 at group level is expected to be at a similar level and this result will clearly by clearly any review is vulnerable to relatively small maintenance on what are extremely large balances at yearend.

So, in conclusion, we have had a good year, end to the year and delivered on expectations, but there is clearly plenty of work to do with a significant operational execution challenge. The outlook is positive across the five businesses and we'll still be very focused on our transformation program, delivering cost efficiencies and improving cash flow.

Finally, as this is my last results announcement for Rolls-Royce, I did want to thank you for your patience and support. When I started as the CFO in November 2014, we faced a pretty challenging and difficult situation and clearly, we also had to significantly recalibrate expectations about the performance of the business during 2015 and take some difficult decisions around the balance sheet and shareholder payments.

But after delivering a good set of results this year and also actually last year, we outperformed expectations as well. I hope that we're also developing some track record and consistency and it's good to have such a track record and obviously, Warren and the team's commitment is to see further performance improvement in 2017.

So, I'm hoping that's going to give you continued confidence of your view about Rolls-Royce's long-term future. Thank you.

And I would like to hand back to Warren.

Thanks David. Thank you right, briefly I am going to conclude the presentation section with a little bit of a look forward.

So just over a year ago, I talked about building a new leadership team and I talked about roughly a third of new people coming on to the team from inside the business with knowledge of the business, a third continuity candidates and we would get in some people from outside to get some fresh external perspective. Last November I said we were a little bit behind in terms of how I had hoped to get that done and the time I hope to get it done, but now the team is pretty much there and in place and starting to deliver.

So, as I said before, David came up and now we can do a little bit of focusing on looking forward and in November I put this slide up saying, now looking forward, we need to take into account the four areas of analysis; long-term outlook, how we're positioned competitively and how we can go to a -- continue to improve our operational performance. And importantly now what are our resources available and how do we allocate capital and another new team is in place.

We are doing that alongside as David just said, we've got a lot of work to do on delivering in the meantime and improving the operational performance. So, having got a big reveal for you this morning we will talk about how we take the business forward as we got later into the year, but just by way of emerging framework here, how we're starting to think about that.

It's fundamentally an engineering and technology led business and we have some great leadership technologies and so that's where we started, it's up in the slide. Then we need to go about engineering and think perhaps a little more broadly about the ecosystem in which we operate and so hence the term dynamic engineering where we think about acquiring technology, we think about developing technology, we think about manufacturing, actually securing the best value way of doing that from our ecosystem including our own supply chain and the activities in the outside world, leveraging our university relationships would be one example.

But continuing to take very careful account for how we manage our intellectual property and how we met our intellectual property looking forward. Then with that great technology and optimal engineering of course, we need to continue to work very closely with our customers and our partners to make sure that we translate that into a really compelling offering that provide solutions for our customers and that's often great.

The crucial piece is how we link that to financial performance in the business and that's what we're calling the value bridge, converting these compelling custom offerings based on leadership technology and sound engineering into money and that's what our transformation program is all about, driving competitive levels of performance so that we can get sensible returns, so that we can generate cash, so that we can make the business sustainable, we can invest in building competitive barriers around our business and so that we can continue to invest and acquire new technology. So, that's the framework that we're using.

If I translate that into the priorities for the leadership team in 2017 and I'm afraid it's a little bit boring. The left-hand side of this slide is pretty similar to what you saw in 2016.

We have to really focus on getting our engineering and operational performance right so we can leverage the amazingly powerful business model that we have. We must keep doing that to keep a simpler or to develop a simpler and more resilient business.

But at the same time, on the right-hand side of the slide, we do need to start to tilt a little bit to the future look ahead to think about new disruptive technologies and ways in which we can improve the competitiveness of our business from a strategic point of view to disrupt and to win. So, that’s a little glimpse of the future.

My summary 2016 Europe stabilization meeting expectations, I look at 2017 is very clear for me -- what we have to do in 2017 in terms of operational focus and run up and translate into some very clear priorities for me and for the team. But we do that in an environment where actually we’re pretty well positioned with growing market share in growing market in providing we can concentrate on growing the profitability and the competitiveness of the business then that's a pretty good outlook for the future.

So, with that, I’ll handover and we’ll take your questions.

All right. Let’s go.

Microphones are coming around. We’ll start there and the next one is going to be over here.

Thank you very much. Its Nick Cunningham from Agency Partners.

Hope it’s not inappropriate to say thank you to David actually for having held the analyst say much and actually for us it's been rather a complicated time and then perhaps going to ask him some more help. The particular point -- the question I was to raise was around naturally I am afraid, IFRS 15, a rough idea of perhaps what the Delta might've been in 2016 maybe '17 relative to your guidance and how that tapers if you like as we go forward over the next say five years or so?

Thank you.

Nick, it’s a fair question. We really want to be more precise for '16 because it will be comparative year and we did take the time over '15.

So, Steven is going to do that little bit later in the year. If you remember I had a chart with some sort of cartoon, sort of lines up in November and I think you can take from that, that we don't see that 2016 number being significantly less than the £900 million that we ended up in '15.

I think it might be a bit lower but I would rather that we did that work just go through that, but it's going to be in that kind of ballpark I think and then we'll progressively improve, but I don’t expect it to be significantly different from the £900 million or so.

And in terms of some vague indication if you like of how the difference diminishes as we go forward?

Well I think that line -- sorry I don't have that in front of me but clearly there is a different timing on aftermarket and OE effect and we try to lay it out on that line and the cost-saving point is somewhere between 2020 and 2025 on that line. I think that's still our best estimate but we are doing a lot of further work on this.

It may not sound like a difficult problem, but it is an intensely hard on the accounting work, that's going on around this at the moment and it’s not worth giving you numbers that we're going to change later. We would rather get the numbers right and so Steven I know is committed to come back as soon as we can really to give you an update on it.

Thank you very much.

Okay.

I got some over this side of the ring. One two and then the rows back.

Great. Thank you, Christian Laughlin from Bernstein.

Just a few questions on civil aerospace if I may Warren. Basically, starting from the backend of 2016 and looking into how things are trending and setting up for 2017, how our unit cost progressing for the XWB-84 and as a corollary to that, how do you feel about schedule in terms of meetings the schedule requirements from Airbus still under a lot of pressure or better than it was say each one last year etcetera?

Some sort of qualitative characterization would be helpful. And then secondly, just kind of thinking about your development portfolio, if you could just update where we are on your expectation for meeting the schedule for the Trent 1000-TEN, the XWB-97 and the Trent 7000 in terms of performance and cost expectations and then of course schedule.

Yeah. Okay, so how we feel about cost on XWB?

I think we are in reasonable shape, it is going to take a few years to achieve where we want to get to on cost. But we are absolutely just on track with that.

In terms of the cash loss per engine and also draw your attention to the fact that particularly as we come into the back half of 2017 and then into 2018 then we lose the deliveries that are attached to launch pricing and so we go up a couple of notches in terms of achieved pricing. So, we're actually attacking the cash loss from both ends, from the cost reduction which is 7% in 2016 and that will be more to come 2017 we are on track.

But also, we get a little bit of assistance from improved pricing. How do I feel about that from a delivery point of view compared with say 12 month ago, and meeting the Airbus schedules?

Well on 12 months ago we weren’t in as good a position as we are today. We are in good shape today, but most of the volume run Phoenix WB was delivered from us in the second half of the year.

That was fortunate, because start very quick and soon because Airbus had some other issues with and so had no stage that we are actually being the pacing items in terms of delivery of the airplane and we don’t intend to be a pacing item as we look forward. We already delivered in the first six weeks of this year and we are absolutely sort of on track with Airbus and they’re plans and they’ll talk about their volumes I’m sure when they do the results next week.

As for the new the three large new ones, then the Trent 1000-TEN is flying. We have 787 flying with two Trent TEN engines and so they are going through the flight testing extended flight testing ahead of certification now and we are on schedule for that to go into service in the second half of the year.

Similarly, similar position on the A350-1000 with the 97K engine, where the -- they have three airplanes now and extended flight testing and that's the scheduled service entry in the second half of the year. And on the new A330 with the 7000 engine that is about six months behind but on a similar trajectory and that airplane will fly with his new engine for the first time over the coming months...

Yeah. Great.

Thank you.

Yes. Morning's its Ben Fidler from Deutsche.

I had three questions, please. First one just on FX just to make sure I understood the messaging on your Slide 42 which you show to us David.

So, am I right it now seems that the currency sensitivity because of the balance sheet movements within civil aerospace is kind of not my mistake, kind of half to a third of what I previously had assumed is your FX sensitivity, once you take into account the balance sheet effects is that right?

I think the transactional side of it is exactly as you'd expect. Because we did also get some movements on the revaluation of foreign currencies for our payable -- receivables whatever, that diluted that a little bit.

That's really get -- what it is that it could be the other way depending on exactly balance sheet to balance sheet rate changes. So, it happen to be a slightly diluted effect this time -- calculations is still going to be about right.

And then related to that is also slide -- your comments again to check I haven't misinterpreted it, you are saying you don't expect any average effective rate change in 2017 or would you also mention donating for the next couple of years, so is that the message?

So, the message is I don’t think we're going to be net increasing that $38 billion. So, it’s more likely we’ll stay at a similar level.

So, we will replace some hedges as they roll-off clearly with new ones, but that's over the whole of the hedge book. So, what we will continue to try and do is try and keep the average rate year by year fairly flat.

So, I don’t -- we make it some, but I don’t think you can. I wouldn't bet on a lot of additional benefits in the new term from just that the roll out.

The reason that we've got the bigger benefit over the last year, so actually because we've increased the size of the hedge book as well, so it's I look to the average one, does that make sense?

Yes, that does. Thank you.

My next question was just on the IE earn out, whether you're able to just let us known given the indication of what the IE earn out was that you received in calendar 2016 embedded in these numbers?

So, as you know those are the three areas that we get the modules revenue obviously come down a little bit and it's disappearing. But actually, the license income is about the same and we saw a bit of an increase in aftermarket revenue both from pricing and from volume.

So, overall, I think we probably saw that at the same level of total IE, which I think is about 250 something like that. So, it's about the same number and is changed radically year to year.

Thank you. And third question is just as I'm trying to understand more that modelling of Civil Aerospace cash flows.

How many shop visits did you did you do in 2016 and the direction of how that compared with 2015?

Yes, and it's quite -- it's a -- unfortunately something that you have to go little bit deeper because there are clearly different levels of shop visit from a major overhaul to smaller intervention. I think in absolute numbers actually the numbers weren’t that different in 2016 and 2015.

And I don’t think we expected to be that different in 2017, maybe a modest increase in 2017. But we're clearly seeing less activity on the some of the legacy programs, so that's really why some of the legacy aftermarket particularly time and materials has come down a bit.

So, in absolute terms none of them haven't changed very much that what we already seeing is a mix change continuing to go on between aftermarket, sort of legacy programs on both engine flying and T&M and then a pickup on and stronger double-digit pickup on the engine flying hours on the new stuff.

Okay. Thank you very much.

I think we need to just go up there first and take this slightly in order. There is one sort of middle to this side and then we'll come down to the front.

And I'm looking to see if there is some on that side towards a back.

Thank you very much. It's Tristan Sanson from Exane BNP Paribas.

I have two questions. The first one is on large engine after markets in 2016, so organic the large engine aftermarket was down 4%.

Can you give us bit of color on what was a trend between erosion of time and materials on RB211? What is evolution on the normal Trent engine, the TotalCare agreement and what is the impact of the engine transition that you may have felt impacting, I don't remember of Trent in service and as a consequence, reflected in that 4% nothing precise number, but to understand the various movements and how these three factors are expected to develop in 2017?

That is first question. And the second one I'm a bit confused by the fact that Civil Aerospace you're releasing profits days on the revaluation of life cycle cost on your engine under long-term maintenance agreements.

And at the same time in 2016 you have £98 million of technical cost that you say are related to a need for increased shop visits in short term for Trent 900 and the upgrade of engine management system for Trent 700. So, it's a fickle question about how predictable do you think of the cost of your engine under a long-term maintenance agreements and so how do you bakes into an assumptions?

It's a very detailed question and we don’t want to take the whole of morning on this, I have to say. The aftermarket trends are pretty clear.

Our older engines time and materials is RB211 engines are being retired, and that's was contributing that the downward pressure. Those time and materials contracts are high margin and that's being offset by newer engines and newer engines tend to be long-term service agreement.

And that exerts its upward pressure and then net is the net. We can look at the numbers.

You asked how the trend is set over the next year or so and we are going to see a continuation of that. With some of our mid age transitions then we are seeing little bit of demand, maybe there will be a little bit of turning something which have been under a long-term service agreement into one of the new models of TotalCare Flex and those types of models which will have slightly different implications.

But listening to your question on Ben's question earlier I think we could probably do with a slide that summarizes it without going into every single detail, but little bit more than the big plus and minus. Do you want to on the last phase?

So, the last phase is actually just a factor of the way that we do the accounting. So, eventually those costs will end up in the contract margin, but we built them in the first instance through this technical provision as we then update the contract pacts later on, we'll probably move that money from that provision into the contract pacts, it's a bit of holding place.

But you're right that overall in terms of the absolute level of lifecycle cost improvements on civil, which I said was $217 million that was better than last year or 148, but the 98 of absolute booking into technical things will eventually get into long-term contract margins as well. So, there is a plus and minus there.

I know there will always be pluses and minuses because we have an ongoing basis an effort to reduce the cost of servicing these things in the long term. And then we take individual issues as they come.

So, we're always going to see some effect like that. Thank you.

I think we have microphone down here, we've got one, two and then I think we need to do that, so one, two, three.

Gordon Hunting from Fiske. Two quick conceptual questions, the trouble that Toshiba and Westinghouse are having is this a benefit or a negative?

Secondly, have you got to make a big provision for the type 45 destroyers conking out regularly?

Yes, the conceptual question about the nuclear reactors. I mean clearly Toshiba is a potential partner, potential customer for our several business in nuclear.

And if they are not active they are pulling out of that then we'll have to see if that project goes ahead perhaps with some of the else opportunity we'll still be there. I think if you back off a little bit and say, actually these really big nuclear projects are quite challenging and they are quite challenging to finance and this is one of the reasons why we are keen to promote these small modular alternatives.

Yes, this is the technology piece which is a little bit different. But the consequence of that from a commercial point of view, because we can make these things by definition in the factory instead of on site is that they've eventually become more cost-effective and in particular more bite-sized chunks, so you don't get this big volatility around the big decisions.

And so conceptually it's an opportunity for us, because we can play a larger role there than we can with just our instrumentation and control and waste management systems around big reactors. As per the type 45 now I'm afraid that's a specific contract, specific issues and we cannot really comment on it other than to say that we're supporting that the navy with their efforts and we'll continue to support the navy to make sure that thing is reliable.

One there and then we have to go to that side towards the back.

Thank you. Good morning Zafar Khan from Soc Gen.

I have gotcouple of questions please, one on cash flow and one is on costs. If I can take the cost one first and I'm looking at slide 13 in this supplementary slide that you've kindly provided.

You’ve been talking about transformation, how you are taking out the costs and making good progress in that, but if I look at slide 13, I note that the commission and admin costs in 2016 have gone up from 1004 well actually I should 1 billion and four to 1163. So, it’s a major reversal there, is there some one-off cost in that line, or what is actually happened there, could you help understand that, please?

So, one of the biggest things is that we are paying a bonus this year. So, that was my bonus in the 2015 numbers so that will come through C&A.

So, that’s one of the biggest charges -- other effects.

David its $163 million increase?

It is on adjusted basis of that you take a currency effects.

So, I should be thinking FX and no warrants, bonus?

No there is an element of bonus, some of the group bonus goes to C&A obviously some more go through gross margin and all of through engineering. But…

Take 30 by the way of 13?

13?

Yeah, go ahead.

We’ll help but that’s the biggest performance related issue the rest will be around economics.

Okay. And then if I just go to the earlier slide just one before Slide 12 and you’ve kindly given quite good historical data there.

I remember and this reinforces that the free cash flow the record I think the group has ever achieved that 781 do you see it in 2013. Now we've got problems on the earnings front, because IFRS comes in is pretty difficult to understand what happens is, so I guess many of us are looking at the promise of cash flow are -- and I wonder if in your idle time, you kind of do slice these things and when do you think we might get to that kind 781 again as they are going to be in my working life do you think?

I certainly hope it will be in my tenure. So, let’s put it like that.

Actually, no change to what we said from what we said in November, when we talked about IFRS and we talked about the cash as well because it was important to do so. This year obviously, we had a slightly better than expected outcome last year and so rather than talking about an improvement this year, we are talking about roughly flat performance.

You have to understand the very small relatively small number. Cash at the year-end is a little bit volatile and so we are quite in a range.

But notwithstanding the better performance in 2016, 2017 is exactly what we thought it was going to be. And on we talked about getting towards £1 billion plus towards the end of the decade is a reasonably sort of journey from here to there.

So, it’s little bit more backend loaded then and but if you sketch that and I think you can expect it in the next few years. And that is no change to what we have said before.

Is billion the aspiration or?

No goodness me, of course we can go beyond that based on the size of the opportunity we have. But let just think about the journey to translate the current business that we have into that cash generating world and you know it in that time line.

Okay. And just a supplementary of the A380 Airbus without a statement suggesting that some of the deliveries on the A380 cameras were going to be deferred and it was to do with your agreement with them on the engine.

Can you just tell us was actually happened there, what was going on assuming that there is an issue in terms of overhead recovery?

I don’t think -- I think there has been enough negotiating in the media around this issue and I don’t want to perpetuate that negotiation in the outside world. Suffice to say that we did reach an agreement with Emirates at the end of last year and you know that is around the service life of high-pressure turbine blades in our Trent 900 engine.

We are pleased with that agreement. They're pleased with that agreement.

Airbus’s pleased with that agreement. We have a way of looking forward separately.

Emirates have their own issues around how many planes they want to buy and when they want to receive them from Airbus and that's a matter for Emirates and Airbus between them and so I am afraid you have to take that one either to Emirates or to Airbus. Now I think we have a couple of questions towards the back there and got some from online.

So, let’s have the questions at the back and then move to the online.

Hi good morning. Celine Fornaro from UBS.

My first question would be on the group cash and how -- when I think about your long-term incentive plan for 2016, 2017 and 2018 which was about 350 million cash cumulatively how does it look like after the better cash flow in 2016 and the guidance you given in 2017 because basically this implies very small improvement for 2018 as well, so how should we think about that? And my two other questions will be on the on the civil divisions.

The first one is if you could give us a little bit of color of the in-service behavior of the Trent XWB and the fleet that is out there after two years and how the engines are performing, how are -- shop visits or any changes that you have to make to those engines if any? And secondly if I think about the lead time transfer improvement that you’ve made on the Trent 1000 which really good, shall I think for Trent XWB that this only happens when production flattens or actually this is something you can also start doing earlier?

And on the Trent 1000 does the lead times change when we start introducing the Trent 1010 or we actually keep them? Thank you.

Okay. As for the cash and the cash in the long-term incentive program.

I just drew attention towards at the moment to go on the general trajectory and that's exactly the same, but during that period don’t forget we have the lower of relatively small numbers and year-end volatility. So, by no means in terms of absolute numbers and absolute years there is this variability that we see of plus and minus £100 million to £250 million pounds or so and so that’s going to be there.

When we get into the realm of £781 million and £1 billion then that volatility becomes much less -- much less significant and so would affect a long-term incentive one like that a lot less. XWB in service behavior well it is early and in the life of XWB as a complete fleet and obviously, the fleets grown a lot in the last 12 months in relative terms.

But, however the first engine has been in service for over two years now. And the early signs from XWB are very good.

Yes, we have had a few maintenance issues that sort of perfectly normal, but we haven't had any serious issues and we have been pulling these engines in for inspection as a sort of early -- because its early in his life cycle we have been pulling them in a little bit more regularly than we will be doing when they're in a normal service and so if there was anything and to what I am sure we would be spotting it. Lead time improvements on Trent 1000, when we switch over to TEN I'm sure they’re in practice there will be some degradation in lead time for a short period of time but we don't anticipate a big material change.

And as for whether those we have to wait on XWB for those lead time improvements happened -- we don’t and they are happening and when we first started on XWB and supplied if few in 2015 then the assembly lead time was quite long of the order of 40 days and we are targeting getting the thing down to closer to 20 days and the production engineering team are very highly motivated to get there. So, I think was another question towards back there.

No, in that case can we go to the online now and then we'll come back -- online questions?

Thank you, Warren. Warren just now actually on FX, I am not going to pick that one up, but obviously, I’d ask some should we expect CapEx and R&D spending to ease in 2018 and if so, by what sort of amount?

So, building on the guidance for 2017 what’s the trends into 2018 and beyond and what would be the expected -- expected delta?

The short answer on that is that we need to continue to invest in R&D. We are going through a little bit of a peek at the moment.

But I think you will see in the 2017, 2018 period a significant investment in the Advance and UltraFan engines and that I said civil is essentially the lion's share of R&D expenditures. So, that’s going to be key driver there.

And as per CapEx then -- it’s going to be flattish over that period. We are investing quite lot at the moment in modernizing facilities.

A lot of those modernization activities will have taken place and so there will be some downward pressure in those factories would need to be updated in the short-term but then we will be into the next wave. So, I'm sure will be flattish.

We’ll actually manage it by the way in terms of -- we don’t just operate with an open checkbook, we’ll be managing that capital expenditure and phasing it in the normal project approval process.

So, one additional question from the online guest, do you intend to pay for the ITP and shares and if so have you discussed with the vendor what they intend to do with our stock?

Well as everybody knows we have an agreement with the vendor, that we can pay anyone or more of the eight quarterly installments after the transaction close in shares rather than cash. And as far as the vendor is concerned you know that is the option that we have and that is up to us is our decision.

As to what the vendor does with those shares, we don't have an influence over what the vendor does. But we will take those decisions as they come on a quarter-by-quarter basis.

We have no intent at the moment to drive specifically down the share route or specifically down the cash route we’ll be managing the cash as we go through that period and we will be always keeping an eye to other requirements by cash what’s going on with the share price and long-term shareholder value. So, it's a decision that will be taken in the round and the Board will be involved every quarter.

David in the middle and then…

David Perry with JPMorgan. So, Warren high-level question in two parts I think.

The strategic review I am sure you want to keep some of your powder dry but may be its taking a bit longer than we thought just -- can I ask is it going to be more biased to the operational or more biased to portfolio? And then the second part is related to it, does the possibility of a border tax adjustment impact the strategic review and you think at this stage if you got any thoughts of the positives and negatives that might have on Rolls-Royce?

If you want the high-level piece thus, in terms of where we are today as I said when I was presenting, I would have like to have been a bit further ahead. But if isn't that this is a difficult problem that is taking us longer is more a question of getting started and what actually took a little bit longer was to assemble the team.

But I think we had to make some difficult calls and it would not have been right for me to been concentrating on long-term vision well the short-term performance of the border was not improving and even as we go through 2017 we got a lot of work to do as a team to make sure that we continue to improve the operational performance of the business. Will it be more operational or will it be more portfolio oriented, the answer is that you can't ignore the operational piece, that's going to happen anyway.

And so, I think when we took about strategic review, it will be more what does the shape of our business look like out into the future and what do we need to do in 2017 '18, '19, '20 to get there? And its a given that in that time period we need to keep improving the operational performance.

I think you were actually referring to the U.S. process, I mean clearly, you've got more detail than I have.

I haven’t seen a lot of detail around those proposals and I assume that they're going to take a lot of filling out and we already have enough custom things to think about as well, but I think the key for us like any company that needs to trade over bonuses to retain flexibility. So, we have a site in Indianapolis that we're reinvesting in, which is very capable of producing engines or other parts that we have our own compartment facilities.

So, we'll just have to see David, where all of that comes out, but as an international company that trades across forward as we will have to retain flexibility if we see changes in duty or border tax regimes to make sure that we get as efficient as possible.

We already do a little bit of civil work in that facility and so we're going to move around the organization as required. Yes, okay.

So, I think we need to move to the penultimate question.

Thanks. Rami Myerson from Investec.

F-35B how many modules did you deliver in '16 and how many do you plan to deliver in '17 and is that a headwind to profitability or is that already profitable?

I don't have the answer off the top of my head, I am afraid. The number of F-35B modules.

The second one is on SSRO what is the percentage of revenues of the group that could be subject to SSRO regulation? I understand that the super five is going to be also against you lease with the SSRO on that boat and you talked about accelerating UltraFan R&D.

Is that for middle of the market aircraft?

Okay. So, on the SSRO it's roughly 10% of our business, but it's potentially exposed, but this is ongoing dialogue at the moment and the SSRO is consulting with companies such as Rolls-Royce around how they can move forward.

So, your second I missed -- middle of the market aircraft, it's a paper airplane at the moment and there is potentially an opportunity for about 5% of the traffic may be to be taken by that sort of airplane. But we're a long way away from any decision there.

If it makes business sense and if that airplane goes ahead, then we would be very keen to power it and Boeing now I'm sure will make a decision based on sound business principles and they understand that if we're going to put an engine on the plane has to make business sense for us as well.

Yes, it looks like it was actually flat in '15, '16, and moving again in '17.

So was there a final question? Oh, there is one final question from out there.

This is the last one.

This is [indiscernible] and thank you for taking the last question. If you could just tell us what is your relationship with U.K.

export finance agency just regarding the press releases saying that they may request some funding or may not support your concerts in the future and the second question, just on the FX hedges, do you expect any cash impact in the medium term as some of the hedges matures or just continue to roll over the hedge book at the same as you said?

So very quickly we actually work really closely with the U.K. on a number of projects each year.

I think we have an excellent relationship and I think they would say that as well. Clearly there were a couple of the contracts that were mentioned in the DPA that had financing originally that was quite a long time ago.

So, they're doing some additional diligence around but the ongoing relationship is actually really strong and very supportive of the business. On FX, sorry I forgot the question again.

Cash impact. There is absolutely no cash characterization requirement if that was your question.

In terms of as those mature, clearly, they will either be positive or negative but then the underlying transaction that hedging will be positive or negative or the other way around. So, it's basically those hedges give us an effective rate of $155 and the moment and that's the end result of those transactions.

Okay. So, that concludes the questions and answers and before we break, I would just like to, this is David [Smith].

So, I would like to thank him as well for being a great support.