Rolls-Royce Holdings plc

Hello, 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 Erginbilgic; and our CFO, Helen McCabe. Before we begin, I'm required to show you our safe harbor statement on Slide 2.

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, achieved record results.

Our strategic focus and disciplined execution helped to grow our operating profit to GBP 1.6 billion, and we converted this into GBP 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 plans less than 18 months ago. In Civil Aerospace, we delivered a fourfold margin increase.

In Power Systems, we talk about the potential of the division if managed well, and now we have the best 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. 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 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 midterm targets.

By the end of 2024, we expect to deliver more than as we are targeting for the midterm. We plan to achieve our targets by 2027 time frame.

But if we can get there sooner, we will. Let's look at 2023 in more detail.

Operating profit of GBP 1.6 billion was more than GBP 900 million higher than in 2022. Our midterm target of GBP 2.5 billion to GBP 2.8 billion implies around GBP 2 billion of profit growth between 2022 and 2027.

In '23 alone, we delivered almost half of that. Our group operating margin of 10.3% in '23 more than doubled year-on-year as we focused on commercial optimization and cost efficiencies across the group.

Again, this represents our midterm target of 13% to 15% as we close the gap to our competition. Free cash flow also more than doubled from GBP 0.5 billion to GBP 1.3 billion, a record for Rolls-Royce.

This was achieved despite continued supply chain challenges. Our higher operating profit and a net GBP 1.1 billion movement in the LTSA balance drove this improvement.

Free cash flow was GBP 400 million higher than in 2019 despite engine flying hours of only 88% compared to 2019. This again demonstrated how much -- same 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 focused 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 GBP [Technical Difficulty] million improvement in operating profit and a 9 percentage points increase in margins to 11%. Putting this in context, in 2022, at the Civilian 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 change. 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 percentage points, 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 4 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 these first 2 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 UltraFan program successfully tested at full power in 2023 in trials that also showed the power gearbox handled accelerations and decelerations 20x faster than we had previously achieved.

Last year, we continued to invest in our Pearl 700 engine was certified by FAA for gas streams, G700 and G800 aircraft. In Defense, we [indiscernible] of the AUKUS submarine program and received formal confirmation of the FLRAA program in the U.S.

Work has commenced on both programs as we image 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 2 decades. In SMR, we entered the second phase of the GDA regulatory process and were shortlisted in the U.K.

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 midterm.

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 Aerospace, we are investing GBP 1 billion in time on wing improvements.

This is a multiyear investment. We are working on the final stages with Boeing and the FAA on certifying the new Trent 1000 blade.

This will double the engines time on wing. We expect it to be approved this year taking us to a competitive level of durability by next year, while the reliability remains very strong.

This is the same improvement that's 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 amongst over the next 2 to 3 years with our investment in HBT blade coatings that are more resilient in areas with plus 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 visits costs.

For example, we achieved 10% reduction in this assembly and repair ours on the Trent XWB-84 in 2023, and we have a clear plan for continuous improvement. As part of our program, last year 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 system anywhere in Europe. Now moving to our other 2 strategic pillars.

We are becoming a more efficient business and simplified organization. Our efficiency and simplification initiatives aim to deliver sustainable annualized savings of GBP 400 million to GBP 500 million.

Around GBP 150 million of this has already been achieved in our 2023 results. And we expect a further GBP 200 million from our organizational design changes, which will remove 2,000 to 2,500 [indiscernible] by the end of 2025.

Earlier this month, we began the consultation on our new proposed organization design, which will remove 2 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 GBP 1 billion cumulative savings by the midterm.

Last year, we achieved GBP 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.

This will aim to save an additional targeted 10% to 15% in cost 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 fuel with 100% SAF transatlantic commercial flight 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 a say of that getting good results.

We have successful hydrogen testing programs in Civil Aerospace and Power Systems and digital tools. For example, we implemented a new digitally mapped demand forecasting tool for supply chain management in Defense, resulting in GBP 75 million estimated cost savings in the next 3 years.

This value should increase as the remaining engine programs are onboarded 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.

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 program are delivering at pace.

The key financial highlights. 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 a 140% to GBP 1.6 billion, operating margin more than doubled to 10.3% due primarily to commercial optimization and cost efficiency actions across the whole of the group.

The largest year-on-year performance was in Civil Aerospace, but margins in Defense and Power Systems also substantially increased. Free cash flow was GBP 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 GBP 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 impacted industry-wide headwind.

Civil Aerospace delivered the largest year-on-year improvement in profit and operating margins. We delivered operating profit almost 6x higher than that of the prior year.

It increased to GBP 850 million from GBP 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 GBP 7.3 billion.

That was driven by large engines and business aviation deliveries as well as higher shop visits and commercial optimization. OE engine deliveries.

They grew by 29% to 458, that was achieved despite supply chain challenges. Of these, 262 were widebody engines, which included 53 spares.

That supported increasing number of shop visits, that did as our fleet grows and total shop visits grew by 18% to 1,227. Of these, 368 were large engine refirms compared to 248 in 2022.

Operating profit in more detail. There were 3 key factors behind that sixfold increase.

First, widebody. We delivered higher aftermarket profitability with an increased volume of LTSA shop visits and a higher profitability per shop visit driven by our commercial optimization 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 optimization 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. Our 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 of higher costs and the net movement of onerous contract provisions. Catch-ups were a charge of GBP 29 million, GBP 119 million benefit in 2022.

But if you recall, 2022 benefited from a material positive adjustment associated with inflation that triggered price escalation causes which, as we expected, did not repeat in 2023. We also took onerous contract provisions totaling GBP 410 million again, primarily as the result of industry supply chain challenges as we recognize the impact of higher future product cost.

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 and wing improvements drove a significant release of provisions in the year, GBP 385 million cash.

Civil Aerospace delivered trading cash flows of GBP 626 million. A GBP 400 million [Technical Difficulty] mainly due to higher operating profit and a continued LTSA balance growth as engine flying hours increased to GBP 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.

Defense. The results reflect a material improvement in operating profit and margins as we delivered on our commercial organization and cost actions [Technical Difficulty] GBP 562 million, a 30% increase.

Operating margins for the full year were 30.8%, around a 2 percentage point increase on the previous year and very close to our midterm targets, as you've heard from Tufan. We saw strong demand across all of Defense's key end markets with strong order inflows with a book-to-bill ratio of 1.3x, which drove a record order book of GBP 9.2 billion.

Revenue growth was double digit, 12%. This was driven by volume and 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 3 key factors: commercial optimization.

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 and revenue grew and indeed, we just indirect costs, reflecting the impact of our strategic choices and increased customer funding with an R&D fund. Defense's cash flow increased to GBP 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 GBP 413 million with an operating margin of 10.4%, a 2 percentage point increase compared to 2022.

Order intake was GBP 4.3 million with a book to bill ratio of 1.1x with 80% OE order cover for 2024. Demand was strong in our advantaged businesses of power generation, marine and governmental.

Revenues grew to GBP 4 billion, a 16% increase with a 34% growth in power generation, in particular, data centers 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 optimization, our actions to address all subsegments, cost efficiency our actions, which resulted in lower indirect costs, again, despite volume growth and inflationary pressure and power gen. 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 GBP 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 Defense brought home a very strong 2023 performance.

Now we delivered GBP 1.3 billion of free cash flow, approximately GBP 800 million higher than 2022. The main driver of the year-on-year increase was higher operating profit, which grew by over GBP 900 million.

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 midterm and beyond, such as time on wing, investments were around GBP 200 million higher year-on-year. LTSA.

As expected, the net LTSA balance grew. It was around GBP 300 million higher than the prior year, reflecting engine flying hour growth and higher normalized engine flying hour rate.

It also included some one-off benefits such as the recovery of the GBP 100 million of debt that we had previously written off. Then working capital.

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 3 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 program we have in place, and I expect that to continue into 2024 and beyond.

Next, provisions. They moved by just over GBP 200 million.

This includes the payment for the Collins legal judgment and outflows as we traded through our onerous contract provisions, then overdue hedging costs, sorry then overhedge costs. GBP 100 million, GBP 60 million higher than in 2022.

Net interest costs. These reduced by over GBP 140 million, driven by improved cash delivery and the benefit of higher interest rates.

And finally, cash tax costs of GBP 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 rate of RRSPA to GBP 1.2 billion.

This reflects growth in short visits and mix impact and a non-repeat of the one-off impacts, such as the GBP 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 GBP 100 million higher as profit grew and the cash cost of unwinding the overhedge position to reduce to GBP 146 million, as we have previously signaled. 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 GBP 150 million of cost efficiencies and the GBP 130 million of reduction in third-party costs. Actions such as these have supported our TCC to GM ratio improving to 0.5x, significantly [Technical Difficulty] 2022 and indeed in 2019 pre-COVID.

We are making strong progress towards our midterm target of 0.4x to 0.5x as well as making our profit delivery more resilient and expanding the earnings potential of the business, we have also strengthened the balance sheet to GBP 2 billion and our net debt-to-EBITDA ratio at the end of the year was below 1x. Our gross debt of GBP 4 billion was broadly unchanged, and it remains our intent to repay the forthcoming EUR 550 million bond from underlying cash as it falls due midyear.

Liquidity remained strong, standing at GBP 7.2 billion at the end of the year and that is after we retired 2 undrawn facilities of GBP 1 billion each in the year. Our efforts to improve resilience, rebuild the balance sheet and put in place has been recognized with upgrades from all 3 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. And with that, let me hand you back to Tufan.

Thanks, Helen. 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 reduced availability of credit have also impacted some of our suppliers. This is something that we will continue to monitor closely, [Technical Difficulty] 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 gross margin ratio and strengthening our balance sheet, as Helen mentioned. In addition to our actions, some trends affecting our business partly insulators.

In Civil Aerospace, we have a growing market share in widebody. 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 FLRAA, AUKUS and B52 will drive growth for decades to come.

In Power Systems, we expect to see growth in governmental driven by secular data center growth. Turning now to our guidance for this year.

We expect progress towards our midterm targets. We expect to deliver operating profit of GBP 1.7 billion to 2 billion, with margin improvements in all divisions and free cash flow of GBP 1.7 billion to GBP 1.9 billion, driven primarily by higher operating profit.

This guidance assumes large engine flying hours at 100% to 110% of 2019 levels, reflecting yet to deliver 500 to 550 OE engines, of which around half will be widebody engines. Spare engine deliveries are expected to be broadly similar to 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 midterm 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 midterm targets.

We have a bold, but achievable plan to transform Rolls-Royce into high-performing competitor and resilient business with growing sustainable cash flows, a strong balance sheet and growing strategy to achieve this, which is owned across the organization. Our transformation is based on building a sustainably distinctive business.

It has 4 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 carriers.

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 advantaged 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 one Rolls-Royce that can fully realize its [indiscernible].

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.

It's David Perry, JPMorgan. Congratulations on your successful first year, Tufan.

So 2 questions. One is, obviously, this huge jump in Civil Aero EBIT, and it's even better if you look at it without the contract catch-up of last year, it's over GBP 1 billion.

And Helen, you talked a bit to the reasons, but could you 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.

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 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 T&M, time and material LLPs. And in both of them, commercial optimization play their role.

And then business aviation growth was significant profitable growth. Costs are interesting because if you're actually thinking about net cost efficiency but cost thing is, you more than offset inflation there because there is inflation in direct cost, more than offset the inflation, i.e., net of inflation, you are 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 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, some very disciplined execution.

But within that, there is lots of dynamic thinking going on. And as a result of that, some of this -- so 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 our CMD numbers and it's similar to -- 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.

Ross from Morgan Stanley. So first one on the engine flyer assumptions for this year, 100%, 110% of 2019 what's assumed in that in terms of installed fleet size?

Is that going to continue to grow? Secondly, on and material pricing, Helen, you mentioned you achieved 12% in '23.

Interested in your thoughts for '24 there. And then lastly, just on the provision in Civil of GBP 410 million.

You said that's obviously supply chain led, maybe a bit more detail about what types of supplier or what types of product drove this?

Okay. I'm going to ask Helen to pick up the product cost.

I think on EFH effectively 100%, 110%. Yes.

Short answer to your question. Yes, our installed engine base growing, and you should expect that to grow because our market share is growing.

So -- 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. Looking forward, you want to have much recovery rather, you will see more normal market growth, but over and above that our growth.

So we actually said in CMD widebody 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 T&M, yes, we made similar price increase this year as well. That will be my short answer.

Nick Cunningham, Agency Partners. I just wanted to apologize in advance for a very simplistic typical analyst question, but some -- 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 give backs in terms of investment in R&D, for example, that we should be thinking about in terms of how you get to that sort of net.

To math right, because I don't get there with that math. But I think we effectively said GBP 400 million to GBP 500 million indirect costs, right, net savings.

So GBP 150 million, we delivered obviously. So the rest, that means around GBP 250 million, we will deliver.

So that will contribute to our midterm targets. But it doesn't achieve itself midterm targets.

I'm sure you appreciate that. So there are -- 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. I talked about one of the 6 levers, we have product cost reduction project.

We were actually using the baseline we knew then because it was November, we knew then bit higher. So from that baseline, we are effectively reducing the product cost.

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.

Thanks for sitting there. That's our inside joke last time I couldn't see him.

He was hiding somewhere else.

It's Ian Douglas from 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 pretty.

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?

Fantastic. So supply chain and inventory.

As I said, 2023 was a difficult environment for everyone. Since we launched our program 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, reduction in inviable improvement, do we need to build inventory? One of the things that we're doing, we're doing multiple things, as 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, Defense and Power Systems, we have got work plans in place to be much tighter in our sales and operating plan, and we've 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 agreeing how they manage their inventory flow so that, that didn't set as work in 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 program 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 of our midterm 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 investment-grade profile, we are committed to resuming shareholder distributions.

And at that point, we'll come back and update you further.

Victor Allard from Goldman Sachs. I wanted to follow up on T&M, we've seen a very strong increase in 2023.

We talked about pricing 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 do you see volume growing this year?

Should we think about it as growing in line with large refer but probably even outpacing that figure?

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. So roughly, roughly talking.

So -- but going forward, differently, we want to make whole system more flexible. So that's the drive.

So if you actually think about this is not only for T&M, but for everything we do because we are taking actions, proactive actions and the more -- 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 trade. Therefore, I advise not to take a linear approach to that because that's not how this is going to work.

I'm Stephan from Bank of America. Just asking from the credit side about investment-grade profile and obviously, net debt is a big part of that, but also just wondering what ideally be?

And then -- and 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, okay?

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.

With that over to you.

So how you should hold gross debt, net debt so we've got a strong liquidity position. You heard me say GBP 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 that we have. We look at that very 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 detail in '24 and '25.

Our intent is for the bonds that fall due in '24 and '25 to repay those from cash. But it's something that we look at very closely.

It is tied to that balance sheet resilience.

So Isabel, you are well, let's go there.

Just checking one microphones on do I need to. Yes it is grand.

I would need to use the seat microphone as well. I've got 3 different areas of questions online.

The first one in terms of Phil Buller, Berenberg, who sadly can't be in the room today. He asked labor shortages were cited as part of the reasons of the provision.

So are we taking -- we're taking employees out of our own organization and has given what we see?

Okay. Let me -- yes, 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 it really have that issue. May mean that you are not actually producing the engine.

So it just our plans. We are very clear.

We have been actually increasing direct labor, but we look at productivity improvements. So we actually improved the productivity last year.

And while you are increasing direct labor, you are increasing production, direct labor supports that we drive productivity improvements. Our 2,000, 2,500 is mostly what we call sort of indirect.

Therefore it is not volume related and 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.

If I could follow up. I've got 3 analysts with 3 questions on the same theme.

So I'll read all of them out and cover them in the answers. So Emerick Folan from Kepler Chevreux asks, what is the current time on wing for Trent 1000 and Trent XWB?

And how does that compare with the Trent 700? Clari Lemarie asks, could we talk about the Trent 1000 fix as of today is the HPT blade on the take across both the Trent 7000 and the Trent 1000 fleets -- and again, Ben Helene of Bank of Ameria also asks, could we discuss time on wing, Trump 1000 and where we are on certification of the final fix?

So thank you all 3 of them. Thank you for your answer.

I then frankly, let me take it up in that order. But -- so engine technology change in Civil Aerospace because Civil Aerospace went to 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. It's not Rolls-Royce specific issue.

You are -- this industry, as you know, I'm not insider, but I came from outside. My reflection of it somehow industry move their expecting different results.

Frankly automotive industry went through this journey before aviation industry because of the emission standards in automotive industry. When you want more efficiency, it comes with higher temperature and so on, and therefore, cycle time is lower.

So no, I think no engine we will produce Trent 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. XWB824 is the best engine right now, durability, reliability and fuel efficiency in widebody market without any doubt, and 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 GBP 1 billion investment in time on wing. We -- it is a very structured program.

Not to mention, Rob. I actually reviewed.

It is an important project, we put our best engineers on it. Trent 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 and it got delayed.

And this year, we now -- we are working with both Boeing and FAA. Frankly, I was there, I met meetings a month ago with both Dave Cardon and the new head of FAA work with and accelerate and certified this year.

Then shop visits, how long it is going to take this year -- in '22, if you remember, we already retrofitted 20% of it 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 Trent 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 none -- sort of in benign environments, it's actually a good engine. We like -- I'll give you some numbers and it sells really well.

Last year's orders, 135 aircrafts. We only expect that to grow on 97.

So it is a good performing engine in what is called as non-dusty, non-[indiscernible] environments, i.e., sort of something like Middle East and so on. But our 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, 2, 3 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 enable 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 nonbenign environments. And already good performance in benign environments.

We will increase it 50%. So once we do all that, thinking 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 4 years, 3 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 GBP 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 6 levers that Rob drives very hard.

Thank you, Tufan. Before I go on to -- 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 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 started from Vertical Research, who has said Airbus noted last week that the pricing on current widebody competition is challenging. How does this reconcile with Rolls-Royce's ambition of getting much better pricing on new Trent engines?

So I think we are very aligned with Airbus. First of all, I should say.

And I had Saturday dinner with [indiscernible] as well, by the way. So we have very good alignment between the 2 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 good 12 months.

There is no new ambition, we will continuously implement that pricing framework that Airbus is well aware and well aligned. 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 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, Tufan.

Any pressing question in the room, I always ask sort of okay, 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 Rolls-Royce, actually implementing similar actions where the market opportunity is. 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, thinking about cumulative delivery.

And 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 projects at pace.

Some years, that will mean you over deliver. Some other years may offset that a little bit.

Most important thing on a 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 2 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.