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Executives

John F. Rishton - Chief Executive Officer, Director, Chairman of Risk Committee, Member of Audit Committee, Member of Nominations Committee and Member of Ethics Committee

Mark Morris - Finance Director, Director and Member of Risk Committee

James M. Guyette - Director, Member of Risk Committee, Chief Executive officer of Rolls-Royce North America Inc and President of Rolls-Royce North America Inc

Colin P. Smith - Director of Engineering & Technology, Executive Director and Member of Risk Committee

Analysts

Christian Laughlin - Barclays Capital, Research Division

Benjamin Fidler - Deutsche Bank AG, Research Division

Nick Cunningham

Steven Cahall - RBC Capital Markets, LLC, Research Division

David H. Perry - JP Morgan Chase & Co, Research Division

Celine Fornaro - BofA Merrill Lynch, Research Division

Rupinder S. Vig - Morgan Stanley, Research Division

Andrew Gollan - Investec Securities (NASDAQ:UK), Research Division

Jeremy D. Bragg - Citigroup Inc, Research Division

Gordon Hunting

Charles Armitage - UBS Investment Bank, Research Division

Rolls Royce Holdings (OTCPK:RYCEY) 2012 Earnings Call February 14, 2013 4:00 AM ET

John F. Rishton

Good morning. Thank you for joining us today. Let me start by introducing my colleagues from the board. Mark Morris, our Chief Financial Officer: Colin Smith, Director of Engineering and Technology; and Jim Guyette, President of Rolls-Royce North America. I'm going to give you a brief overview, then Mark will take you through the numbers, and then we'll have Q&A.

I would like to start by saying a few words about our Chairman, Simon Robertson, who I know is in the audience today. Many of you will have seen that he's going to retire from Rolls-Royce at our Annual General Meeting in May. Simon has made an exceptional contribution over the past 8 years. He's worked tirelessly on behalf of the company and his energy and enthusiasm have been an example to us all. I wish him every success in the future. I'm delighted to welcome Ian Davis as our new Chairman and look forward to working closely with him.

Now turning to the results. The order book is up 4% to GBP 60.1 billion, adjusted for the sale of IAE. Underlying revenue is up 8% to GBP 12.2 billion, underlying profit up 24% to GBP 1.4 billion with margins improving by 150 basis points to 12.2%. Payment to shareholders, up 11% to 19.5p. These results are a tribute to the hard work and dedication of everyone at Rolls-Royce, to the support of our partners and suppliers, and most important of all, to our customers, who continue to place their trust in our technology.

You'll have heard me say before, but it is worth repeating that this is a long-term business. And while a year may seem a long time, I think you get a far better view if you look at the performance over a longer period, both back and forward. I'm pleased to say that today's results add to a record of consistent delivery that has been established over the past decade.

Revenue, order book and profit have all increased steadily for the last 10 years. Over that period, revenue has doubled, the order book has tripled, and the profits have more than quadrupled. In the same time, the share price has risen just over GBP 1 in January 2003 to GBP 9.84 at last night's close, and we've more than doubled our payment to shareholders.

The strategy that has produced that decade of growth has been consistent and has proved itself in battle. During the last year, we've reflected on how we express our strategy. And as you can see, we've made some changes. In particular, we make it crystal clear that the customer is at the heart of our business. We have sophisticated customers with a deep understanding of our technology. Our success depends on shaping and meeting their requirements on time, at the right price and at the right quality. Innovation is critical in creating future opportunities. For example, the Trent 1000-TEN will offer up to 3% fuel improvement when it enters service in 2016, while the Trent XWB is proving itself to be the most efficient large jet engine in the world. To put it simply, we need to be world-class in terms of understanding and satisfying our customers' needs, and we need to be world-class at innovation and execution. And of course, we need to grow profitably, not just grow.

I said at last year's results presentation that the business has 3 priorities: deliver on the promises we've made, decide where to grow and where not to, and improve financial performance. I categorize these into the 4 Cs of customer, concentration or focus, cost and cash. So let me say a few words about each of these priorities.

Delivering promises is principally about our customers, although it can clearly be applied to all of our stakeholders. During the year, we have worked hard to improve quality and delivery. We've made particularly good progress within civil large engines and Marine, but there's still a lot to do. In terms of products, I'm delighted with the progress of the Trent XWB engine for the Airbus A350. The XWB was certified last week, and the engines for the first A350 have been delivered. Our Trent 1000 engine has had the best entry into service we have had, and we continue to work on improving it.

Growth. You can see where we have chosen to grow from the investments we have made. Just a few examples are our acquisition of AEC, the XWB and the BR725 programs, the expansion of our Civil Nuclear business, the growth of our global network of marine service centers, along with 19 new facilities we have opened around the world in the past 3 years. Where we have chosen not to grow, as you know, we have sold our Tidal business and the majority stake in our fuel cells business. While these businesses may both prove to be successful, they did not play to our strengths.

Financial performance. We've increased profits and improved margins in 2012. And the good news is we have plenty of opportunities for further progress. We need to increase sales and continue to drive cost performance to make sure that we are not just growing, but improving our margins as well. In terms of cash, clearly reducing our costs will help, but there is also significant scope to improve inventory turns.

So while I'm pleased with the overall progress in 2012, we can deliver much more. But this will take time and will need to be carefully managed. Therefore, it should not surprise you to learn that our priorities for 2013 are unchanged from 2012: deliver on the promises we have made, decide where to grow and where not to, and improve financial performance.

Mark will now take us through the numbers.

Mark Morris

Thanks, John, and good morning to you, all. I'm going to draw out the main highlights of the group and segmented performance for 2012. I'll then provide 2013 guidance for the group. This will exclude the impact of Tognum while it continues to remain listed. Finally, I'll update you on where we are with Tognum. As usual, I will restrict my comments to the underlying performance.

It's been a good year for the group with the order book, revenue and profit all growing. At a segmental level, I would summarize 2012 performance like this: Civil and defense both had a good year with more subdued performances for Marine and Energy.

Turning to the group, the order book grew 4% with a GBP 16 billion order intake, which is marginally lower than 2011. The GBP 60 billion order book represents good top line visibility and underpins our confidence to invest. Order cover for 2013 is around 75%.

Revenue, which is up 8%, includes OE revenue growth of 12%, driven primarily by higher engine deliveries in civil, defense and aftermarket revenue growth of 5%, reflecting contributions from all businesses with around half coming from civil.

Profit, which is up 24%, is well ahead of turnover and includes a GBP 77 million contribution from Tognum, as well as an incremental GBP 92 million benefit from the revised IAE trading arrangements. Excluding these effects, profit grew 12%, so a pleasing result.

Let's break down the 1.5 percentage point margin progression, 1.1 of which came from Tognum and IAE and the remaining 0.4 from other trading in the group. I'm pleased with the cash performance this year given where we are in the investment cycle. We started the year with GBP 223 million and ended with GBP 1.3 billion of net cash. This was after generating GBP 137 million inflow from the business and receiving just under GBP 1 billion from acquisition and disposal activities, including the IAE proceeds. Liquidity remains strong at GBP 3.5 billion. Finally, reflecting our confidence in the business, we've increased the full year payment to shareholders by 11% to 19.5p.

So what are the key components of profit growth? Trading is up GBP 296 million. This reflects an 8% volume increase, and that's about GBP 200 million of the uplift and another GBP 50 million from unit cost reduction. The remaining balance is a combination of better mix in margins in civil and defense, offset by the one-off benefit of the SDSR settlement in 2011, which you're all familiar with.

The R&D charge was higher for 3 reasons. One, higher spend of GBP 57 million, an increase of about 11%; two, lower capitalization of GBP 55 million, reflecting the Trent 1000 entry into service at the end of 2011; and three, higher amortization of GBP 14 million, again, mainly due to the Trent 1000 entry into service.

In 2013, our R&D spend will be slightly higher, but the charge will be slightly lower as we start to capitalize the Trent XWB following its certification. Our entry fees, which are primarily related to the XWB, were lower as the program moves towards entry into service. So the core profit was GBP 1.26 billion.

So let's have a look at the effect of Tognum and IAE on the underlying profit of GBP 1.4 billion. The revised IAE trading contributed profit of GBP 92 million for the second half, higher than our original estimate of GBP 70 million. This was mainly due to a higher volume and more favorable mix of parts than originally envisaged. Tognum GBP 77 million contribution reflects full year compared with only 4 months for 2011. So in arriving at the 24% increase in full year profit of GBP 1.4 billion, approximately half of the increase is from IAE and Tognum, and the rest is from the group. Of course, IAE and Tognum have a bigger effect on margin progression because they mostly add to profit, not revenue.

So turning to cash flow, I'm just going to pick out the major themes from this chart, which you're all familiar with. Firstly, net working capital, which increased by GBP 175 million, reflects a number of moving parts. Inventory was up GBP 156 million as we prepare to ramp up production, and net debt has increased by GBP 116 million. These increases were partially offset by a high level of deposits at GBP 99 million, mainly in civil and Marine.

Second, CapEx and intangibles reflect continued investment to meet the rising load of delivering 2,000 Trent engines over the next 5 years. CapEx accounted for about GBP 550 million of the spend and included major projects, such as Seletar, the new disc facilities in the U.K. and a new facility in Brazil for our Energy business. The remaining balance of about GBP 130 million relates to higher development and certification costs. We expect CapEx to be about GBP 100 million higher in 2013. Our trading cash flow of GBP 914 million represents 64% cash conversion, slightly down on last year, as we continue to invest for the rise in load. Our return on capital of about 18% would indicate this is a good return on investment and the right thing to do. Going forward, my focus will be on improving working capital.

Finally, we spent just under GBP 800 million in 2012 in payments to our main stakeholder groups of shareholders, pensioners and taxation. This leads us with an underlying cash flow of GBP 137 million. The underlying cash flow performance is slightly better than where we expect it to be at this point in the cycle. So in summary, a pleasing result.

So turning to the business segments. Our civil business has seen strong top and bottom line growth. The order book increased by 5% to GBP 50 billion with an intake of over GBP 10 billion. This was slightly down on 2011, but we continue to grow our wide-body market share with Trent engines now making up 75% of the civil order book.

Revenue rose by 16% in the year, driven by 31% increase in OE revenue off 23% more deliveries of higher thrust engines. And remember, you know the correlation between thrust and revenues. Services grew by 5%. This was in line with the growth in the installed thrust base.

Now turning to profit, the 46% increase includes the impact of the new IAE trading arrangements, which contributed GBP 92 million and 1.4 percentage points of the margin improvement. Excluding IAE, profit increased by 27% and the underlying margin by 0.9 percentage points. This was due to improvements in volume, mix and unit costs that more than offset a higher R&D charge and lower entry fees.

So let's take a look at defense. The 15% reduction in the order book reflects a slightly lower intake than in 2011, as budgetary constraints played out together with some cancellations, mainly related to the C27J contract. As you're aware, defense budgets remain under pressure, so we're pleased with our revenue performance this year, which is up 8%. This reflects good OE performance, especially from our combat and trainer exports and incremental deliveries from civil helicopter engines.

Services revenue grew 5% with a good contribution from our transport business that makes up well over half of the revenue. Profit, which is up 7%, reflects volume increase, higher-margin exports, lower R&D spend and cost reduction. We expect a modest reduction in profits for 2013 as budget constraints continue to put pressure on pricing, engine flying hours and new opportunities, along with some adverse mix issues.

Our Marine business has 3 sectors, as you know: Offshore, which makes up around 1/2 of the business; Naval, which is around 1/3, with the balance in Merchant. I'd characterize Marine's performance this way: Offshore had a good year in terms of OE and aftermarket growth, offset by more subdued performances in Naval and Merchant. OE revenue was down overall reflecting lower activity, some delays by customers and a 3% adverse foreign exchange impact. Revenue wise, this was partially offset by some improvement in services as our expanded network starts to capture more business.

In Offshore, there continues to be encouraging signs of recovery, driven by higher oil prices. You can see this in the rising order intake, and we expect this to continue in 2013.

In Naval, our customers face budgetary pressures similar to our Defence Aerospace business, but we're pleased to have secured some important wins during the year. Firstly, the GBP 1 billion contract to power the U.K. nuclear submarines, then the ship-to-shore connector contract for the U.S. Navy and also a new customer with the South Korean Navy. All of these leave us well placed for the future.

In Merchant, demand remained subdued, and there isn't much sign of any pickup yet. The modest uplift in profit is mainly due to cost-reduction improvements that have offset the lower OE volume and the pricing pressure we continue to see in the market.

Finally, to our Energy business. There are some big percentage movements here, but remember the absolute numbers are small in the context of the group. Similar to Marine, Energy revenue performance has been subdued by lower OE deliveries due to less volume and customer delays, partially compensated by good growth in services revenues. Importantly, the level of bid activity has risen both in our Oil & Gas and Power Generation businesses. We have a well-established Oil & Gas business that makes up around 2/3 of the revenue and nearly all the profit in our Energy segments. The 4 less mature businesses of Power Generation, Civil Nuclear, fuel cells and Tidal have suppressed financial performance with continued investment.

As you are aware, we have now sold our Tidal business and the 51% stake in our fuel cells business as we focus on the areas we want to grow. We'll carry on investing in the Civil Nuclear business where we see significant opportunities ahead.

So returning to the group, we continue to place considerable importance on retaining a strong investment-grade credit rating. And we're pleased to have received an upgrade from Standard & Poor's during the year. A strong credit rating provides assurance to our customers that we are here for the long term and ensures continued access to funding. Our liquidity is strong at GBP 3.5 billion, representing GBP 1.3 billion in net cash and GBP 2.2 billion of committed facilities. And there are no material maturities over the next few years.

So looking ahead to 2013 and turning to our guidance. As I said earlier and as usual, we provide our guidance on an underlying basis. And for 2013, this will exclude Tognum, while it remains listed. For the full year, we expect the group to see modest growth in revenue and good growth in profit, with cash flow around breakeven as we continue to invest for future growth.

For the businesses, Civil Aerospace, modest growth in revenue and a strong growth in profits; in Defence Aerospace, modest growth in revenue and a modest reduction in profit; in Marine, modest growth in revenue and profit; and in Energy, some improvement in revenue and profit. To help you with your modeling, we provided some additional areas of guidance, which are shown up here on the slide here. It's what you'd expect from where we are in the cycle.

Before we move on to Q&A, let's just remind ourselves where we are with Tognum. As of the 1st of January this year, we now have management control through our Engine Holding joint venture with Daimler, and we'll consolidate Tognum for the full year. So what does this mean? It will enable us to work more closely with the Tognum management and to realize the planned synergies. The legal process to squeeze out the remaining minority interest continues, and we expect this process to continue during the year.

So in summary, I'd say it's been a good year, and I'm pleased with our performance. However, there is more work to do in order to deliver the margin progression and the cash performance that I expect. And with that, we'll move on to Q&A. Thank you.

Question-and-Answer Session

John F. Rishton

Okay, why don't we start at the beginning, start at the front on this side, and we'll move around. If you could maybe just introduce yourself and the institution that you represent and then ask your question, that would be great. Thank you.

Christian Laughlin - Barclays Capital, Research Division

Christian Laughlin from Barclays. Just a kind of couple of general questions around patterns and trends that you see emerging. As old TCAs come up for renewal or roll-off, do you find some customers increase or decrease their level of service contract on subsequent renewals? Is there a certain subset of customer who are more likely to let their TCAs roll off and revert to a T&M construct, or is it kind of, it heavily depends on the individual situation?

Mark Morris

Yes, look, I think every situation is unique. I mean the first thing to recognize is that once an airline looks to outsource its servicing and capabilities, at the end of it, if it doesn't want to carry on, it's got some decisions about whether it does it itself or whether it puts it to other third-party markets. We have experience of sort of all outcomes, those that continue with TCA, those that switch to T&M, and that tends to be driven by how short they plan to keep their service in fleet. So we certainly look and seek to extend TCA contracts. And generally, the way we do that is by using our scale of economy to help make it cost effective and share some of that benefit with the customer. So we see all outcomes, but generally, we've been quite successful at continuing to extend TCA contracts.

Christian Laughlin - Barclays Capital, Research Division

Great. And just a quick question on margin progression, particularly in Civil Aerospace. So I've noticed in 2012, about 40 basis points, I think, of the overall margin improvement were attributed to cost-cutting measures and initial gains realized. Do you see an acceleration -- did you see an acceleration from the first half to the second half? And is this expected to continue or accelerate in 2013? Said another way, are you in the phase where you're picking low-hanging fruit, so to speak, and we can expect some jumps here and there over the next several halves?

Mark Morris

Sure. Firstly, we don't measure things in halves. I just don't think we have the granularity to pick up trends over from one half to the other. I mean I think as both John and I have alluded to, when we talk about our 4 Cs, cost and cash are big drivers of those. And clearly, unit cost reduction is a key part of that. And of course, now as we are larger and we have far more larger share, our ability to leverage our supply chain and deploy far higher levels of TCA contracts in terms of the amount of capture we take, which enables us to schedule how we do overhauls and the work scope, all of that helps us with efficiency, and therefore, cost improvements as well. So it's an ongoing journey. I wouldn't sort of take -- draw any conclusions from any blips you see between one half to the other, other than a strong desire and determination from us to continue to take unit cost out.

John F. Rishton

If I could add just maybe in sort of more general terms. As you see, one of the 4 Cs that we have is around cost. And one of the things we are all aware of is we need to improve our margin performance, and specifically, I think, in civil. Couple of observations. One, as Mark says, these things take time. It isn't sort of a quick journey. It takes time, and it takes time for a number of reasons. First of all, we're trying to grow and expand our civil business significantly at the moment, so we have a lot of new facilities coming into play. We've got new engines being launched. All of those are very important issues for us. So balancing the determination to reduce cost, improve margin alongside execution and satisfying our customers is something that we're playing with all the time. So how we balance those is a challenge for the business, and we spend a lot of time and energy on those. The direction of travel for civil, in particular, is driving margins and improving the profitability, whilst bearing in mind the point that I'm making, which is one of our other 4 Cs is about making sure we satisfy our customers and deliver to our customers at a time when we have new engines being launched and developed, new facilities being launched and developed. So this will take -- this takes some time. As I said in my little set piece, it has to be carefully managed and will take time. Okay, why don't we stick with the front, maybe Ben on the front?

Benjamin Fidler - Deutsche Bank AG, Research Division

Ben Fidler from Deutsche. A couple of questions. Firstly, on the TCP net debtor, which about GBP 360 million increase looked quite a sizable increase, I guess that was driven by the strong growth in OE deliveries, was it? And also how should we think of that increase going forward and where you see that TCP debtor number, the GBP 1.3 billion, maybe settling out at? That's the first one. I'll come back with the others if you want to answer that.

John F. Rishton

[indiscernible] Go for all three. [indiscernible] Then we'll test our memory to see whether we've got it -- memorized the questions.

Benjamin Fidler - Deutsche Bank AG, Research Division

Yes, the other one was the earn-out expectation. That, clearly, did a little bit better than you were anticipating and we were all anticipating in 2012 H2, wondered where that leaves you with your sort of prior commentary about GBP 140 million as a sort of full year type of number. Has that also gone up? And the final one was just looking at the Marine services side. 1% growth in the Marine services revenues, where you think that could well get to this year, particularly with further rollout in your Marine service centers, which presumably, are now coming onstream in a big way?

John F. Rishton

Mark, I'm going to ask you as [indiscernible]. I said to Mark before we started this morning that one of the joys of not being the CFO anymore is that any difficult questions I can give to him, and I can take the easy ones. So they're all yours, Mark.

Mark Morris

Okay, well, let me start with the TCA net debtor, the increase of GBP 360 million. I mean I think you've alluded to, to part of the right answer. Obviously, we've got rising OE deliveries that you saw particular in civil of 23%. Higher thrust engines, Germany, we're sort of getting about 85% to 90% penetration on TotalCare and sort of linked contracts. And again, this phase where you tend to have gaining market share at the front, sort of deeper discounting, it can accentuate a little bit of the TCA debt. But that's 1/2 of the equation. The other 1/2 of the equation is, of course, the number of overhauls that you do. And of course, as the overhauls come in and they can be quite lumpy sometimes, they reduce the size of the creditor and of course that results in the net debtor growing. So there's 2 parts of that element. I think the second sub-point of that first question was, is there a sort of end in sight? I think the short answer is, it will move up and down and grow in line with engines in service, I think would be a sort of natural -- and of course, the combination also between where we are in the cycle and which engines are on TotalCare and which ones are not, so there's lots of moving parts. But I would expect it to grow broadly in line with our installed base. Your next question, I think, was on the IAE uplift. So if we just sort of re-datum ourselves for a second, the guidance I gave back in 2012 was that we'd see a full year impact of about GBP 140 million for IAE. Of course, we sold our equity share at the half year, so you've got half of that, that GBP 70 million which you had plugged into your models, and we've ended up with GBP 92 million. That was higher than our own original estimates, and it reflects a number of things. It reflects the change of the trading arrangements, but in particular, what we're seeing as a supplier sales of more volumes of certain parts at -- had higher margins. And again, when we think about us as a supplier now, selling parts and spare parts, the order lead cycle is much shorter. It's typically sort of 30 to 60 days, so our ability to forecast that accuracy is a little bit more difficult. So we saw an uplift. Whether it repeats itself this year, we don't know. But in short, we don't plan to sort of, to break out IAE in the civil reporting going forward for 2013. It's now part and parcel of our new trading arrangements. And question 3, this was Marine services progression. I think the short answer is, yes, we're expecting services margin -- the services -- so was it services or services margin, just to be clear?

Unknown Executive

The revenue.

Mark Morris

Services volume. Yes, we expect services to increase this year for 2013. I think was the question you were asking.

Benjamin Fidler - Deutsche Bank AG, Research Division

Okay. Is that sort of in line with, I guess, what's going on in the market? My question was more around where I'm finding a bit tricky to keep track of is where you're at with the growth of the services network, because once you have increased that network [indiscernible].

Mark Morris

Well, yes, careful. So if we just dial back for a little bit. We've increased the number of service centers to about 37 now, and it's quite important strategically where you place them. But the Marine market tends to be far more reliant on time and materials because ships just turn in to the nearest relevant port and overhaul center where they can go to. So whilst there is some penetration, and we're obviously, that's an area that we're keen to develop, you've got to have the logistics and the supporting network to deliver that. So the investment has been going there. Certainly, the more centers we have, the more ability that we have to capture revenue. And of course, we saw that in after the second half of Marine in 2012. And we expect that to continue in 2013. I don't think you can draw a straight correlations just between adding a servicing center. I mean, intuitively, to a first order, you'd expect to be able to capture more revenue, but whether it sort of goes up at the same sort of rate, I think remains to be seen.

John F. Rishton

You remember the half year, one of the comments that we made about the Marine services was what we were seeing, to a certain extent, was owners and operators being more specific about what they wanted repaired rather than fix everything, fix this, this and this, but don't look at it or don't worry about anything else. So we saw some of that. So there are other dynamics that go on in this business. But certainly, overall, having more service centers will result in us getting more service business.

Okay, yes, stick on the front row, and then we're going to move backwards and then come forwards.

Nick Cunningham

Nick Cunningham from Agency Partners. I thought I'd follow the 3 question trend. Just back to the -- and I'll ask them all together. Just back to the TCA issue, just to clarify, Mark said that 85% to 90% of OE sales were linked. And I think linked hasn't been that big a percentage in the past. Is that now what you expect to achieve going forward and is that sort of an underlying assumption? That's one question. Secondly, on cash, cash has flowed into inventory to some degree over the last few years. I think part of that has been to do with Singapore and other new facilities. Should we expect a lump of cash to flow back out of inventory at some point in the next few years? Are you going to surprise us at some point or will wide-body engine growth absorb that? And finally, in Defense, on the service side, clearly, the services in the U.S. are talking about a full year's continuing resolution impacting on their overhauls in the second half of their fiscal. What's your assumption about CR for the rest of the year?

John F. Rishton

I'm going to spread things out a bit. I'm going to ask Mark to take the first one. I'll maybe take the second, and then I'll ask Jim Guyette at the end to take the third one on the state of the American economy.

Mark Morris

So your first question, TCA capture rather than just TCA linked, so we can have contracts that will have a long-term contract that's not linked to the OE. So we haven't broken out and don't break out what is linked. But aftermarket capture in terms of where we have got some type of contract to ensure that we can either divert overhauls to our bases and ensure that we capture the spares, on new product typically seems to be up at those sorts of levels, but they're not all linked. That's question one.

John F. Rishton

And I don't think you should assume 85% is a trend or something for the future.

Mark Morris

Yes, absolutely.

John F. Rishton

You need to be careful with that thought process. But as Mark says, you've got linked and unlinked, and the difference in the 2. On cash, surprises are frequently good. So I'm not going to try to disappoint you with the potential for surprises. What I would say is that the inventory that we have is not simply where [indiscernible] and that is, once you've sorted that out, it will be okay. The scale of the changes that we've got coming at us in terms of the growth potential, or the growth of the business that we've got built in and the potential growth, means that we have to be thoughtful about inventory. If I look at our turn rate across the group, for the sake of argument, it's around 3%. That is too low. We need to work at driving that inventory turn rate up, but it will be, as I've said about cost, take us some time and will have to be carefully managed because again, what we're trying to balance there is delivery to customer and execution, where I do not want to fail and we will not fail, against the benefits of -- the financial benefits of releasing cash. So in my simple world, we have lots of parts that are out to build an engine, and we're missing a couple of parts. That means we can't build the engine, therefore, I got all these part hanging around. So how do I get focused on the couple of parts that are missing to make sure that we can build the engine at the right time, so I can plan more efficiently and effectively, so that I can drive the inventory performance, whilst still meeting the customer, which is unrelated in some ways to -- when you've got more facilities, therefore, you've got more inventory. So the focus is how do I drive inventory turns, how do I get more specific and detailed in that inventory planning to make sure that I've got the right bits at the right time to deliver the plan, to deliver the customer so that I can drive the inventory turn rate. So that will take us some time. Jim, do you want to talk about continuing resolutions and U.S. budgetary constraints?

James M. Guyette

Yes, thank you. The simple answer to your question is, yes. However, it's much more complex. Perhaps 3 points of context: First, as a business, we have worked our way through the cuts on this side of the Atlantic, SDSR. We have worked our way through the first series of cuts in the U.S. that were brought about by the Budget Control Act introduced in August of 2011. What we now have to face is this much more difficult circumstance. The other point that I would mention is, with the background of a very challenging defense environment, I think our defense team posted some fairly positive results in light of all of that. So I mention that for purposes of perspective. Now to 2 things. One is the sequester; and two is a continuing resolution. Whether or not there is a sequester or not, a continuing resolution or not, I think we all know that budgets in the developed world for defense are going down. So we have that kind of challenging environment. What makes this much more difficult for us is a sequester. Because a sequester -- by the way, our opinion, not necessarily it's going to be fact. But our opinion is it will kick in on March 1. That will bring with it a lot of chaos. Chaos, because the Department of Defense and the various service chiefs have no ability to move money. They can't change the priority. All they can do is simply take a cut. What makes it even worse is because of the way the law works, they're going to have to take a year's worth of cut in 7 months, and they can't do this with a running start. So again, significant chaos. It's been described as a shave with a chainsaw, and I suspect that, that's probably an accurate representation. Now you asked the specific question of continuing resolution and that the current continuing resolution expires on March 27. In light of everything that's going on, I just don't see how the Congress is going to be able to enact a budget to take us from that point until the end of the fiscal year, the end of September. So again, a continuing resolution.

That just adds to the drama because here again, the service chiefs in the Department of Defense do not have the ability to move money around. It is less money because all they can do is last year's budget, less inflation, again, applied to the same programs. So it is quite difficult. Now having said that, I just don't see how a sequester survives. I just -- I may be wrong here. A great quote by the #2 person in the Pentagon in front of the Senate Armed Services Committee this week. And his quote was, "Sequester is a self-inflicted wound." So we have the ability to stop this and right it because if it continues on, forget defense for a moment, the impact on the U.S. economy is staggering. It probably means over 2 million jobs, and it probably means a couple of points off of GDP. That can't stand, in my view. I may be wrong. So to sum, to sum it up, yes, I think sequester will take effect. It's unfortunate. We'll go through the chaos. It will be painful, but I think we're all going to have to come to our senses after the fistfight is over and resolve it. Now the question you didn't ask me is have we baked some of this into our assumptions? Yes, we have as best as we know how. But again, I want to reflect back to my comments on perspective. I think we have managed through this environment fairly well given circumstances. And we're preparing ourselves for this challenging environment, which means we're going to be looking for other areas of growth, and of course, we're going to be looking to where we can reduce our costs. So I hope that is responsive to what was a rather simple question.

John F. Rishton

Okay, let's progress a little bit down.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Steven Cahall from Royal Bank of Canada. Just 2 questions on Civil Aerospace. The first, in terms of margin trends, I was wondering if you could talk a little bit about the margin trend in OE versus services? We get the impression with the cost unit reduction in OE, I think we have a good idea what's going on there with leverage. So I guess the question is more focused on what the margin trend has been at services? Are we seeing more contingency release on TotalCare because of better cost accounting and forecasting? Is there anything that's going on in the RB211 fleet that affects that trend? And then relatedly, if you could talk maybe a little bit about what the installed thrust looked like in the second half? It looks like the services revenues took a sequential change, so if you could speak a little bit to that, and again, maybe contrast what's going on in Trent versus RB211?

John F. Rishton

Mark, you're up again.

Mark Morris

I will try and answer those multiple questions. I mean, margin on OE and aftermarkets, I mean, at one element, they're both linked because at the end of the day, whether it's a spare part or a part that goes into an installed engine, the cost of the part is the cost of the part. I think we've talked about margin progression. John gave you some color, and I did too, so I won't sort of cover that on the OE stuff again, other than that unit cost remains a key focus for us. Aftermarket, of course, one of the things that we try and seek to do to improve margins is that if you have a T&M model where at short notice, engines are coming in and a work scope may be declared by somebody else that's going into your shop or even someone else's shop. The ability to sweat the assets that you have in terms of your shop utilization, the loading goes through it, designing the work scope is not yours. In the aftermarket world and TCA capture, we would typically set the work scope. And we can decide when and where we're going to pull engines off. So it allows us to optimize the loading into the shops, so that should help, and of course that's a focus we remain on in addressing. And of course, in driving those costs down to ensure that we incentivize customers to come back, some of that is shared. But net-net, it should help drive margins. I think you then sort of dipped into having described that what's happened in H2, and you're comparing H2 of 2012 to H2 of 2011 and sort of said, why is that flat? I think -- is that the comment you were driving at?

Steven Cahall - RBC Capital Markets, LLC, Research Division

Well, that was the sequential change of services sales [indiscernible]

Mark Morris

And I would just say a couple of things. Just step back a little bit, there's a lot of moving parts that go on in aftermarket revenues. And you can't draw any conclusions just by looking at one half. Remember, what drives these are where new engines go in and whether they are -- they have a TCA contract attached to them. So a TCA contract that starts in December will get 1 month's worth of revenue, whereas one that starts in January will get 12 months. So if you started in June, you get 6 months. So you got the movement of where engines are coming in and engine deliveries aren't always just constant. You'll have customers who switch from time and material to TCA. And of course, that will drive. So in the half you can get some sort of movements that will make it drive up and down. And then of course, you talked -- you raised the issue about RB211. And again, some of the older fleets, as it starts to come out, 2 things to remember in our total aftermarket, which includes time and materials and spare sales, is that our older engines, we typically have a far lower level of TCA penetration, sort of 40% to 50%. And although engines may sort of grow in a sort of much more predictable pattern, when we look at retirals of engines, they don't typically just go at a straight line. It depends on where the fleets are and what people are doing with them. So 2 things are happening. If you don't have the level of TCA capture on all product, which we don't, and you start to get some lumpy retirals, which we're starting to see in 524, which is totally expected, by the way. You will get those engines being torn down and the service used material going back into the system and stopping some new spare sales. And that's one of the reasons as I wind the clock forward to another question I'm sure someone's going to ask in a minute, which is civil revenue progression in terms of being modest for 2013 looks low, and part of that is being driven by some of those retirals. I think I've captured all of your questions now.

John F. Rishton

Okay, let's take one on this side just to be difficult.

David H. Perry - JP Morgan Chase & Co, Research Division

It is David Perry.

John F. Rishton

Colin Smith, by the way, needs to answer a question at some point in time. [indiscernible] On the basis that we're a technology company, and he's responsible for it.

David H. Perry - JP Morgan Chase & Co, Research Division

Okay. I've got a bunch of questions. The first one, Mark, sorry, so just following up on what you just said. Are you able or willing to give us a guidance on Civil Aero aftermarkets assumption overall for 2013? Second question is I'm just a little bit confused on the guidance for the full year. Does the tax rate, which looks nicely down to 22% to 23%, is that including Tognum, or is that excluding Tognum? So just to clarify that, and I'll try and think of a question for Colin when you answer.

Mark Morris

Okay, well, the short answer to your first question is, no, we don't break out aftermarket guidance on civil. The guidance we've given is excluding Tognum. When we add Tognum to the results, it will drive the effective tax rate higher.

David H. Perry - JP Morgan Chase & Co, Research Division

I was hoping you'd talk longer so I could think of a question...

John F. Rishton

Somebody else, I'm confident will get Colin. I will ask Colin a question, if necessary. So it will be fun.

Celine Fornaro - BofA Merrill Lynch, Research Division

;

Celine Fornaro, Bank of America Merrill Lynch. I actually have one question for Colin. And it's my first one, related to CapEx as well. And it's just if you could explain...

John F. Rishton

[indiscernible] anything to do with finance as well, he really does.

Celine Fornaro - BofA Merrill Lynch, Research Division

If you could explain looking at the cash R&D and also the CapEx, what is driving the increase on '13 against '12, so where is that going again, I would say? My second question is on the Energy division. I thought we had a GBP 26 million charge in 2011 related to industrial trends. So actually, the improvement in margin in '12 is actually probably slightly lower than anticipated, is that a fair point. And thirdly is related to the 787 grounding situation. There a lot of ANAs engines out there that are grounded, how should we think about that in terms of the impact for the group if that was to continue another couple of months?

John F. Rishton

Okay, I'm going to ask Mark to start on the R&D and Colin to make a few comments about what we're actually doing in terms of research and development. Mark, you may want to comment on Energy, and then I'll maybe pick up the 787 and Jim can add a few comments on that as well.

Mark Morris

Okay. So on R&D, as I sort of guided during my presentation, so spend will be up this year, sort of modestly up is what we've said. But the charge is going to be down, and that really reflects as the Trent XWB has been certified now, we start to capitalize, if you remember, between certification entry into service. And in effect, what we create is a sort of a headwind and tailwind depending on when you start and stop capitalizing and expensing. And that creates the volatility. But the R&D is still being driven predominantly -- remember, XWB 97k, Trent 1000-TEN, continued R&D still on XWB as you bring it into service. And some still some more work on Trent 900. So with that, I'll hand over for Colin to give you the details.

Colin P. Smith

Well, that's the R&D. As Mark said, it's broadly what we actually do. The amount of work is broadly, consistent a little bit up this year. And underneath that, a part of that is the research and technology, which is the very long-term technology sometimes up to 25 years out. We try and be broadly consistent because we've got technology centers and universities working on this stuff, and you can't keep turning it on and off. And as new programs come in, you pull it off the shelf and implement it. So I think that's pretty covered the R&D component of discussion. On the 787, maybe a little bit of [indiscernible]. Boeing are working very hard to try and get the aircraft back up in the air. As far as we're aware, they're making good progress. We've got 22 aircraft out there powered by Rolls-Royce engines. And we would expect, like aerospace always does to fix the problem relatively soon. We're not going to speculate quite on the timing of that, but they are making progress.

John F. Rishton

And the impact on for us is negligible, frankly.

James M. Guyette

John, I might comment that -- I'll admit this, I have spent 46 years in this industry and have a view on how this industry deals with safety. You'll note that last year was the safest year ever in air travel. And it is in the interest of the manufacturers, be they airframe manufacturers, engine manufacturers, the operators or the regulators, to dial in the highest level of safety that we can. It's in our interest, and we have always done that. And I think this is an example of the industry working together to determine the cause and to get these airplanes back up in the air with safety and confidence. And in our view, Boeing and Airbus and the other manufacturers are very, very highly skilled companies. This will get fixed. It will be fixed properly, and we support the Boeing company.

Mark Morris

Right, Energy. So as I said in the presentation, we look at Energy and profit and margin progression. The Oil & Gas business really drives this business, and the other businesses continue to sort of take an investment, and therefore, drag its financial performance. As we said, we've removed 2 of those, so the R&D associated those would expect to go down and the associated investment with that will start to go down. We continue to see price pressure in the Oil & Gas business. But a lot of good inroads are being made on cost reduction. So we do expect some progression in profit and margin for next year. But again, it's just worth remembering that these are off small numbers. And the Energy business has low volumes of relatively expensive packaging. And so if something slips over the year, the ability to sort of move the numbers can be a bit more accentuated than it can in our other businesses. But certainly, we are expecting both revenue and profit growth during 2013.

John F. Rishton

Let me just add what I said last year. The finance performance of the Energy division is not acceptable. We know that. We're taking steps to address it. You've seen some of the steps we've taken during the course of 2012. We'll continue to work on that.

Celine Fornaro - BofA Merrill Lynch, Research Division

And is the cash, the CapEx spend in '13, that's going up in '12. We start to see them maybe coming down, so where is it going?

John F. Rishton

Yes, I think -- again, there's this sort of belief in some places that well you've done 3 big engines so R&D should come down. You sort of got this new place in Singapore, so CapEx should come down. And that is simply not the case. As Colin and Mark have said, we'll continue to spend money on research and development, and as I've said in the past, if you see us spending less then I think you should be concerned. The nature of this business is very long term and very long cycle. We need to continue to invest for the future success of the business. And it's the same with CapEx. We've got huge growth. So the spend that we've got -- just to pick out a couple of things here. We've got a new facility, turbine facility in the U.K. We've got a new disc facility in the U.K. We've got new test facilities. We're expanding Crosspointe, and we continue to invest in the expansion of our Singapore facility as well. Just to pluck a few items out of the air. So the CapEx spend and the CapEx requirements of the business are significant. And they won't be going down rapidly anytime soon because we continue to invest for that growth. We continue to invest for the fact that we're going to double our revenue over the next decade. We have significant increases in deliveries. So I want to sort of dispel this belief that sort of R&D is suddenly going to go down and CapEx is suddenly going to stop, and everything's going to be fine. We will drive our cash performance, if I can bring you back to that, by cost, getting the cost down over time and by driving working capital, in particular, inventory turns. That's what we need to do.

Okay, let's go a little bit further back on this side, then we'll come back down this side, and we'll get to you. Don't worry.

Rupinder S. Vig - Morgan Stanley, Research Division

Rupinder Vig for Morgan Stanley. Just 2 questions. I have one for Mark first. John just mentioned cash. Outside of inventory, obviously, that's the focus area. Can you just tell us where do you see potential for improvement there, be it the other line items in working capital? Where is the area that you think you can perhaps do most in, if you like, outside of inventory? And then for John perhaps, when we think about the 4 Cs, how is the pace of the 4 Cs progressing versus what you thought it would be when you first took over as CEO? Just an idea of is it progressing in line? Is it going slightly better, et cetera, et cetera?

John F. Rishton

Just your first question, was it where else in working capital can we get improvement?

Rupinder S. Vig - Morgan Stanley, Research Division

Yes, absolutely, yes.

Mark Morris

As John said, we focus inventory, first and foremost. But when we look at the other part, the other elements that make up working capital, clearly, we focus continually on overdue debtors [indiscernible]. But in looking at usual trade debtors and creditors, I mean that will just tend to rise and flow with the sink of where we are. And deposits are clearly a key driver. So beating the drum to ensure we get orders with good deposits. Deposits will be another part that we'll be focusing on. I think that the various components you would expect. It's not that we're just focusing one. We're looking at all of them. And of course, as we start to drive out unit cost and improve ability to make more margin on OE, then of course, that will also help as well.

John F. Rishton

In terms of the 4C's, the pace -- I think -- if I just run through them. Customer. I think we've made good progress through the course of this year. We've still got a long way to go. We made good progress, as I referred to in terms of focus on quality. During the course of year, we introduced something called stop and fix in the facilities. We actually stop production if we think of any issue, so we stop it, fix it and move on. And it's an important mindset change to the business. In terms of delivery, a lot of focus on delivery. And Jim has been leading a particular focus on customers, so I would say good progress on that, still more to do. In terms of concentration, I think if I take it to the kind of things that I've been concerned about, I think the evidence around getting sharper on that is, what do we do and what don't we do, and Tidal and fuel cells would be examples of what we decided that we're not going to do those. But that never really goes away. I think the nature of the business that we have and the kinds of people we employ who are naturally curious, inquisitive are looking to do -- trying to make their focus on what we really want to focus on. It's always going to be a challenge, so it will probably remain one. But I would say some progress there with evidence I've given you. Cash and cost, I would say, less progress and much, much more to do. And I would say to somebody before we came in this morning that one of the differences, as far as I'm concerned with this company as some of the others that I've worked for, is what's the burning platform to be able to get people motivated to work on cost and cash? Because most people don't come to work and say, "Yippee, I've got to reduce costs today and wouldn't it be great if we drove the inventory turns a bit fast -- faster?" And the companies I've worked for, previously, there's been a burning platform of some kind or another. And within our organization, we're in the fullest of position where we've got great growth prospects, we've got a strong share price, very high levels compared to history. We've got profits that are at record levels. It's difficult to get people's attention, so I think we've made a slower start on cost and cash than I would have hoped for. But we're starting to get there, we're starting to get some traction, and we're starting to get the folks' understanding within the business. The ability to get our cost down isn't simply what John Rishton thinks it's important to reduce cost to make him happy. It actually goes to our competitors have an advantage if they have better cost, that means they can price more aggressively than we can. That means they can invest in more product than we can. That means they can invest in more training for people than we can, better facilities, better infrastructure. And getting people to understand that, that's why we need to do it is very important. So that's my sort of, if you like, my performance card would say, I think, good on customer, OK on concentration, room for improvement on cost and cash. Okay. Yes.

Andrew Gollan - Investec Securities (UK), Research Division

Andrew Gollan from Investec. Two questions. First one on Engine Holding, I understand why you can't talk about the future perhaps until that situation is resolved. But the number that came through for the current year was slightly below my number. And I know we're all adjusting to a new world. But within that, can you say what's happened maybe between Tognum and Bergen in terms of financial performance? Is that relative to the association of Rolls-Royce starting to benefit from that relationship because we all have no idea. It's some fairly big numbers that go into make that number that kind of falls into the P&L. Just a better understanding of Tognum and Bergen within the Engine Holding venture?

John F. Rishton

Okay, let me make a couple of general observations about Tognum, and then maybe I'll pass over to Mark. The process of getting control of the company has been quite long, but we've lived through it. I think if we fast-forward 5 or 10 years, it will be irrelevant. So the good news is, we've got to a place, January 1, as Mark said, we've got control of the company. We'll finish to hope to squeeze out during the course of this year. That means that we can exert far more influence on the company. That means we can get what -- in some of the details, we can start trying to drive those revenue benefits. But as we've always said around the benefits, they are mostly revenue and with revenue as opposed to cost, they take longer to get at because you have to get at them by country by customer by product rather than cost, which tends to be, "Well, let's close the head office, or let's close this factory." And once you've done it, you've got them. So these benefits take longer to get at. As we reflect on it, what I would say is we still think there's significant benefit as we've got to understand their business more as is always the case in these things. Some of the assumptions we made at the start, we said, well actually that wasn't quite right, negatively. Some of the assumptions we made at the start weren't quite right, positively. So overall, we still think this is absolutely fine, some less, some more. And we need to get driving those benefits during the course of this year and into the future. So overall, I would say we're satisfied with where we are on Tognum. Tognum's business is subject, as all businesses are, to the ups and downs of the market and they've had a, I would say, a tougher time during the course of the last year in some areas of their business than we would have anticipated about a year ago. Mark, maybe you want to talk to specifics?

Mark Morris

Right. I think you asked some questions really about what's in Engine Holdings and the financial performance, presumably looking and comparing '11 with '12, is that right? Just to be clear. So let's just remind ourselves. So Engine Holdings is the vehicle, the joint venture through which Rolls-Royce and Daimler have sought to acquire Tognum. We have also put in our Bergen diesels business that went in from effectively our Marine and Energy businesses into Engine Holdings. Now there is some funny movements in Engine Holdings, which surely our IR people can take you through in detail at some stage. But in essence, the only thing that is in there for 2012 on the revenue side is Bergen revenue. So Bergen was put into Engine Holdings at the beginning of January in 2012. And although Engine Holdings now has Bergen in it and the 99% share that we have of Tognum. Because Tognum is still equity accounted, we only have the profit effects. So if I just go between '11 and '12 just to try and help you quickly, so Bergen profit was GBP 44 million in 2011 and a GBP 32 million contribution in 2012. And that predominantly reflects lower OE deliveries at Bergen diesels, again reflecting the sort of market that we've seen in Energy and Marine, suppressed sales of original equipment. And the contribution from JV -- sorry, from Tognum in both years was GBP 36 million for '11. And again, that's only 4 months, remember, because that's the point at which we started to acquire Tognum. And of course, you got a full year's contribution of GBP 77 million for 2012. Now we're just going to sort of wind the clock a little bit forward now because of course as we go into 2013, we're going to fully consolidate Engine Holdings -- or Tognum in Engine Holdings, and of course, that will move from being equity accounted to being above the line. So but if you want sort of check for reverse, I'm sure Simon and the team can take you on detail on that.

Andrew Gollan - Investec Securities (UK), Research Division

One other question, please. On civil aftermarket, you've already given some answers on that. But at the half year, you gave a split in terms of growth rates on TCAs and time and materials. Can you do the same for the second half given the question that came earlier and I can't remember who from.

Mark Morris

Off the top of my head, I can't actually. I'm sure if we're prepared to give it to you, we'll provide that to you. But I haven't got that off the top of my head.

Andrew Gollan - Investec Securities (UK), Research Division

I would assume that TCA is going to continue to grow steadily and Tognum materials was negative?

Mark Morris

Yes. I mean the key thing to recognize is that the T&M model will tend to be far more volatile market whereas the stability of getting sort of annuity of flow means that you don't see the necessarily the step-ups or the step-downs that you see with T&M. But of course, we do have both, but are heavier weighting towards...

John F. Rishton

[indiscernible] I'm saying, I think at the half year, we talked a little bit about that because it distorted the picture H1, H2. But in the second half that wasn't the case. But Mark's already commented a little bit about next year in terms of some of the Tognum materials as the 524s and 535s come down. So we're trying to give you the significant changes.

Okay, please on this side?

Jeremy D. Bragg - Citigroup Inc, Research Division

Jeremy Bragg from Citi. Predictably, another one on cash, I'm afraid. Now I appreciate there's lots of moving parts, and it's a long-term business. But I guess my question is, when is the first year when we're going to start to see these improvements? Because if it's going to be a matter of cash breakeven until 2017 or '18, then the investment case is very different from one where we see steady improvements from 2014 onwards?

John F. Rishton

You're not going to be surprised when I tell you that I'm not going to tell you when we would anticipate the kind of clarity that you would like. What I would say is, as I try to say is, one, we're well aware of the views on cash from numbers of people. Two, we were working hard to reduce our costs, which will drive our margins and help our cash position. Three, we'll work very hard in terms of driving inventory turn rates, which will improve our cash position. We will continue to invest in R&D and CapEx to support the execution and growth of the business. Exactly when you start to see the benefits of that when you take into account the actual model that we have and you're fully, very familiar with the model we would have, especially in terms of civil, which is where a large part of this sits. You've got -- the OE element of civil, which is growing rapidly and the TotalCare that grows behind that, the margins that we make on the OE equipment, the margins that we make on the aftercare, the way that the accounting works for that in terms of the profit versus the cash, these are things that you're familiar with. So you'll be able to model how you expect that to play out. But I'm not going to give you this year, this year or that year. We're well aware of the views on cash. We did what we said we would do in 2012. We're clear where we think we'll be in 2013. And as we get to the next year, we'll give you clarity about where we will be in the future. Let's go to the -- that's perfect.

Gordon Hunting

Gordon Hunting of Fiske. Question mainly for Colin. At the moment, all your big engines are 3 shaft. On the premise that 2-shaft engine is less likely to have dangerous oil leaks, are you going to switch over to carbon blades and also to 2 shafts for your 777 replacement engines? And are you already doing R&D for the 777 replacement? The second thing is a question mainly for the Chief Executive. Have SFO given you a timetable and also is it affecting your order flow in the Far East?

Colin P. Smith

The simple answer, Gordon, to the first question is, no, we're really comfortable with the 3-shaft concept, for a whole host of technical reasons that I could bore the ears off you, but I won't in the interest of time. We have put an offer into Boeing with an engine that's based on the technology we've been developing, which does include carbon fiber fan blades as I think we've discussed in the press. And all engines have oil in the middle of them, and all engines have a propensity to leak. And each person resolves that in their own way, but I know what you're alluding to.

John F. Rishton

In terms of the SFO, I think you had 2 parts. The second part I remember was sort of the order flow and the first part was?

Gordon Hunting

The timetable [indiscernible]

John F. Rishton

No. The -- in broad terms, I have nothing really to add to what we said in our announcement on December 6. So we provided information to the SFO. We've told you what the potential consequences could be, and that now sits with the SFO. And they will decide what and when they want to do it, and that's clearly nothing that I can comment on. I wouldn't want to comment on what they should or could do. But we haven't heard anything explicitly from them about their plans. In terms of the order inflow, I think that the answer really is, no, we've not seen any change.

Okay? Let's go back, that's the one. Yes, and then we'll come back to the front again.

Charles Armitage - UBS Investment Bank, Research Division

Charles Armitage, UBS. First of all, can you talk though the average cash, which seemed to, having been improving for the last few years, to go backwards, particularly when you got a slug of cash in at the mid-year for IAE?

John F. Rishton

I think it was a problem with paying for Tognum. That was the, that was the main...

Mark Morris

So it's purely the effect of how averaging works. So in Tognum, sort of quarter 4, we made a payment of about GBP 1.5 billion. So in the previous year, you'd only got 1/4 worth of that in the averaging effect where you got the full year. And then we've only had half of year's benefit at the IAE proceeds. So it's mass.

Charles Armitage - UBS Investment Bank, Research Division

Okay. And just on the 777X, how big a change does it need to be for it not to be exclusive to GE?

John F. Rishton

So when you say how big a change?

Charles Armitage - UBS Investment Bank, Research Division

From the current 777, which is exclusive for the [indiscernible]

John F. Rishton

Okay, clearly...

Charles Armitage - UBS Investment Bank, Research Division

To Colin?

John F. Rishton

Boeing decide what they do or don't want to do. Because this is a big engine on a large aircraft, which sort of plays to our strengths, we're obviously very interested, and we're putting in what we believe to be a very competitive bid to get on that aircraft. We don't decide what the outcome's going to be, but Boeing decide that. So irrespective of whether we've made a change of this much, this much or this much, it's still Boeing's decision as to what they want to do. We think we've got a compelling offer, but they'll decide on -- add anything, Colin?

Colin P. Smith

The only thing I'd add is, as John said, the XWB engine that we've just certified is the most efficient engine in the world, so the external validation of the capabilities that we've got, and we've built on that with technology. So we've got the best engine currently flying. GE you've got to chase to catch up with us will be the way I decide -- I'd describe it. And we'll see if Boeing feel the same way.

Charles Armitage - UBS Investment Bank, Research Division

Any ideas on when they might make a decision [indiscernible]

John F. Rishton

No, no. Again, that's with them. And as you would expect, I think -- well, it's with them. Yes, back at the front, and we're getting towards the conclusion as we get to second questions. Now you've worked out all the details. Now you've got more difficult questions [indiscernible].

David H. Perry - JP Morgan Chase & Co, Research Division

No, hopefully, this isn't. I think you said at the last meeting, you'd give us an update on your plans for fixing power gen. Can you just give us some detail on that, please?

John F. Rishton

What I would say is the Energy business in total, we've sort of talked about. You break it down as Mark has done. It had the 5 parts. Fuel cells, we've dealt with. Tidal, we've dealt with. Civil Nuclear is a business we're investing in. Oil & Gas is doing well. Power gen is a challenge for us in a number of ways. What I would say in that area is, one, we have addressed a number of customer satisfaction issues; two, we've addressed a number of product issues, so we're at a better place than we were a year ago, but we're still a small, niche player in that market. And we're trying to get our heads around what are the best -- what's the best approach to address that issue. I don't have any more to say on that today, but it's certainly something that I and others are spending time on.

David H. Perry - JP Morgan Chase & Co, Research Division

Why is it taking longer? Because I think you were fairly clear in the last meeting, you'd come back to us, I think you said by year end with your plan...

John F. Rishton

I'm absolutely sure I didn't give any date. If I said I was going to give you -- if I said I was going to fix something, I wouldn't have given you a date. If I gave you a date, I wouldn't have promised to fix it. I wouldn't have put the 2 things together, so...

David H. Perry - JP Morgan Chase & Co, Research Division

I'll have a look at the transcript, maybe I'm wrong.

John F. Rishton

I've learned a few lessons, but that's certainly one of them. No, I'm absolutely sure I never said that we would come back by year end. The progress we made in Energy in total is the ones that we've talked about. And we have made some progress on some issues in power gen. I'm not going to get hung up on a timetable for this because that undermines some of the things that we may or may not want to do. But we're well aware of the issue. And as I said, we're well aware that the financial performance of the Energy division, in total, is not where it needs to be, and we need to address it.

Unknown Analyst

But it's -- one thing I'm struggling with, and I look back at your second slide in your presentation, you've doubled the scale of the business in the last decade. Through the early 2000s and mid-2000s, you generated a lot of cash flow, about 70%, 80% EBIT free cash conversion. We're doubling the business again, and we're not generating very much cash flow, because we're having to invest. I remember when I first visited Derby in '97, the amount of facility renewal that's gone on there has been huge. So the question is a fairly basic one, apologies. But basically, why is this second phase of doubling the business proving so much more cash and capital intensive than the first phase of doubling the business?

John F. Rishton

My superficial answer would be, let's wait for 10 years' time and look back and see what our perspective is, which is the point that I was trying to make in terms of the time frame, which is if you fast-forward 10 years and look back, you may be surprised at where we are. And you may be asking exactly the same question about why you want to double the business, why is it going to cost so much cash again? But you have a different perspective on what the journey that we've been on. Had we told you 10 years ago that we would quadruple our profits, the share price would go from GBP 1 to GBP 9.84, that we would double our revenues and triple our order book, I suspect there would have been some skepticism about that. So my superficial answer is, when we look back in 10 years' time, we'd be able to see the cash generation of the business, where the investment was made and what happens. In all businesses when you look at the fixed structure, things happen in steps. So you have a factory, you've got nothing in it. You fill it. You need a new factory, you spend a lot more money. You go along, you fill it again, you need another factory, you fill it again. So as you go through those bottlenecks or those big steps, that's when you have to spend more money. So if I take a specific example, for us at the moment, which isn't to do directly with production, IT. We spent a huge amount of money on IT in the last 12, 18 months, and we'll spend quite a lot more because we hadn't spent much on it for the previous 10 years. We had got through the previous 10 years substantially under-investing in that. We got to a point where we have to make a big step change, bang, you've got to spend a lot of money. So it's a slightly superficial answer, which is, "Let's look back and reflect on it in 10 years' time." Secondly is how do you go through the bottlenecks? Mark, I don't know if you want to add anything.

Mark Morris

I think you've summarized enough.

John F. Rishton

Okay, good. Well, thank you very much for joining us this morning. It's been great to have a chance to talk to you again. We look forward to seeing you in 6 months' time. Thank you.

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