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Rolls-Royce Holding PLC (ADR) (OTCPK:RYCEY)

H1 2013 Earnings Call

July 25, 2013 3:00 am ET

Executives

Jilinda Crowley

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

Mark Morris - Chief Financial Officer, Executive Director and Member of Risk Committee

Analysts

Rupinder S. Vig - Morgan Stanley, Research Division

Benjamin Fidler - Deutsche Bank AG, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Carter Copeland - Barclays Capital, Research Division

Nick Cunningham

Andrew Gollan - Investec Securities (UK), Research Division

Olivier Brochet - Exane BNP Paribas, Research Division

Celine Fornaro - BofA Merrill Lynch, Research Division

Sandy Morris - Jefferies LLC, Research Division

Roger Johnston - Edison Investment Research Limited

Operator

Good morning, and welcome to the Rolls-Royce Holdings plc 2013 Half-Year Results Conference Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm very happy to present Jilinda Crowley, Assistant Director of Investor Relations. Please begin, ma'am.

Jilinda Crowley

Good morning, everyone, and a warm welcome to everybody to our half-year 2013 results webcast. Regarding the material for today, we issued the results via stock exchange announcement earlier this morning. The presentation slides for this call are available both via the WebEx and also via our website.

As always, elements of this presentation contain forward-looking statements and are based on our view of the world and our businesses as we see them today. Clearly, these elements can change as the world changes, so please consider them in that context.

For today's webcast, I'm pleased to be joined by our Chief Executive, John Rishton; and our CFO, Mark Morris. John?

John F. Rishton

Thanks, Jilinda. Good morning. Thanks very much for joining us on the call. I'll make a few comments about our performance in the first half of the year and then Mark will take you through the detail.

At first glance, I think that these appear impressive results, but I suspect many of you have already stripped the numbers apart, and you'll realize that there are some significant one-off benefits. Well the true picture is rather more complicated. So while there are some strong elements of the group performance, our profit continues to be held back, in my view -- our view, by a lack of progress on unit cost, and our cash flow is unacceptable.

Fortunately, we have significant opportunities to improve both. As you will have seen, we've consolidated Tognum for the first time and you can see that the contribution has made quite an impact on the results. The order book is up 15% or 12%, excluding Tognum. Underlying revenue is up 27% or 9%, excluding Tognum. The underlying profit is up 34% or 32%, without Tognum. We've increased our payment to shareholders by 13% and maintained our full year group guidance.

If I measure this first half performance against our priorities, I would say the following. In terms of delivering on our promises, we've made progress. We were all very pleased to see the first flight of the Airbus A350 powered by our XWB engines, the A400M military transport aircraft has achieved certification, is about to enter service, powered by our TP400 engines. And we have delivered our first Environship that's now in service off the coast of Norway.

The second priority, deciding where to grow and where not to, we've continued to invest in capacity around the world, for example, in the U.K. close to completing a turbine blade facility in Rotherham and advanced disc factory in Washington, Tyne & Wear. In the U.S.A., we're building a new turbine machining facility at Crosspointe in Virginia. In terms of where not to grow, I'm sure you know that we've decided to sell our 50% stake in the RTM322 military helicopter program to Turbomeca.

On improving financial performance, as I have said, there is plenty of scope for improvement. Our profit increased by 34% in the first half. But as you have seen, this includes a contribution of GBP 112 million from the IAE restructuring, as well as benefits from volume growth. Whilst progress has been made in some areas on cost, we need to do much more. So the cash and outflow of GBP 460 million is not acceptable, and we must do better, particularly on inventory performance. This will take time and a firm resolve to deliver.

I look forward to take your questions later. For now, Mark will take you through the details.

Mark Morris

Thank you, John, and good morning. As usual, I will draw up the main highlights of the group's financial performance for the period. Tognum has been consolidated for the first time. I've shown our main trading figures, including and excluding Tognum in this chart. You will recall from the prelims, I said we would provide guidance for Tognum separately from the rest of the group this year, because at the start of the year, we could not provide for Tognum whilst they were listed. We'll continue this way for the remainder of 2013.

So the group, excluding Tognum first. I will come back to Tognum later. Overall, the figures show good progression at group level on orders, revenues and profits. But as John said, we have more work to do around cost and cash. The order book is up 12% after booking GBP 14.1 billion of new orders, predominantly in civil, and the order intake in the first half was up 54% compared to 2012. Revenue, up 9%, reflects good growth in OE and services. Both segments displaying overall growth, ranging from 6% to 16%. Overall, growth includes the 1.5 percentage point benefit from favorable exchange rates. Profits increased by 32%, which I will cover on the next slide.

Turning to cash. We started the year with GBP 1.3 billion and ended with GBP 921 million of net cash, a reduction of GBP 396 million. It predominantly reflects the growth in working capital, continued investment, which I will cover in more detail shortly. We've increased the half-year payment to shareholders by 13% to 8.6p, reflecting our continued confidence in the business.

So turning to profit, one of the key components of growth. Increased volume is worth around GBP 103 million, the IAE revised trading arrangements contributing GBP 112 million. Within the GBP 24 million other movements, there are a number of positive and negative items, around trading mix, R&D, restructuring, foreign exchange and entry fees. Entry fees increased by GBP 76 million relating to where we are on the development of the Trent 1000-TEN, the Trent XWB 97K programs. We expect a similar benefit over the full year.

Restructuring costs are up GBP 25 million in the first half, which includes severance payments relating to the indirect cost reduction and site restructuring activity. Group profit before Tognum was GBP 787 million, up 32%. Our profits in Tognum of GBP 53 million reflects full consolidation compared to our share last year, which was equity accounted.

Group cash flow. As usual, I'll just pick out major things in this chart that you're all familiar with. Firstly, net working capital increased by GBP 803 million reflects a number of moving parts. The main items are inventory, which increased by GBP 261 million, which are volume with no improvement in our turns, is disappointing and is receiving intense focus. And Civil Care -- sorry, and Civil TotalCare assets, which increased by GBP 240 million, representing a combination of new deliveries and shop visits. CapEx and intangibles were up GBP 402 million and includes GBP 261 million of capital expenditure and GBP 141 million of intangibles. Remember, intangibles are capitalized development costs, diversification costs, recoverable engine costs and software.

Trading outflow of GBP 208 million is before payments of GBP 250 million to our main stakeholder groups, pensioners, taxes and our shareholders. Tognum's trading cash flow was GBP 62 million after paying a GBP 60 million dividend to Daimler. Looking through the full year, we continue to expect cash flow, excluding Tognum, to be around breakeven.

Turning to the business segments, Civil has seen strong order flow during the period. Order book increased 14%, with intake of GBP 10.9 billion that included orders for Trent engines for over 200 wide-body aircraft. Trent engines now make up over 90% of Civil's order book as our market share continues to grow. OE revenue increased by 8%, which reflects an 11% increase in engine deliveries, partly offset by adverse mix. Services revenue was up 3%, broadly in line with the growth of the installed trust base. Profits increased by 59%, reflecting the benefit of increased volume. GBP 112 million from the IAE restructuring, GBP 76 million higher entry fees, partially offset by higher restructuring and product launch costs.

Remember that the IAE benefit is a first half effect compared to 2012, because the deal was completed in the first half of last year. Profit performance in the second half will be lower than the first half, which is facing an entry fee receipt to R&D. Consequently, for the full year, we continue to expect modest growth in Civil's revenue and strong growth in profit.

Defense has performed slightly better than we anticipated, but there remains a lot of uncertainty regarding sequestration and broader austerity measures, which governments have to contend with. It is evident in the order book, which contracted by 4%, and the low growth in services revenues as a consequence of reduced flying hours. Full year revenue increased, while engine deliveries were unchanged, benefiting from a favorable mix and increased export sales. Profit increased by 10%, reflecting OE volume growth, favorable revenue mix and a lower R&D charge. Good first half performance now gives us the confidence to improve guidance for the full year from a modest reduction in profit broadly flat.

Our Marine business is a mixed story in terms of performance in the first half. Order intake was strong at GBP 1.7 billion, included a GBP 0.8 billion enabling contract for the MoD, which contributes to the order book increase of 10%. Excluding submarines, order intake was up 4%. Top line growth was also good. Revenue increased by 16%, reflecting OE volumes in the Offshore sector and services growth in Offshore and Naval. Foreign exchange benefits made up 3% of growth. Profit performance was disappointing and decreased by 8% due to adverse revenue mix, pricing pressures, foreign sea costs, partially offset by cost-reduction and foreign exchange benefit. [indiscernible] remains encouraging and good order cover for the second half gives us confidence to [indiscernible] the full year guidance with modest growth to Marine's revenue and profit.

In Energy, there are some large percentage changes. Remember, numbers are small in the context of the group. We are clear that the performance of this segment is unacceptable. We continue to explore avenues to improve the returns in the segment. OE growth of 6% was driven by increased demand in Oil & Gas, and the 12% services growth was driven by higher spare part sales and better capture of market share. Profit was reduced by GBP 3 million, and we expect some improvement in Energy's profit for the full year.

Finally, turning to Power Systems, our new segment. Let's just remind ourselves that Power Systems was formally known as Engine Holding, comprises of our Bergen business and Tognum. This chart illustrates the relative size of the 2 businesses and the impact of Tognum moving from being equity accounted in 2012 before consolidation in 2013. As you can see, Tognum has no impact on revenues in 2012, and its profit contribution represents our share of profits after tax.

This chart shows the performance of Power Systems as if Tognum had been fully consolidated in both years, so to provide a trading comparison. Power Systems' order book increased by 14%, and new orders were up 8%. OE revenue was down 9% due to weak sales in onshore Oil & Gas, the U.S. frac-ing market is reducing gas prices resulting in lower investment in new projects.

Similarly, in the aftermarket, weak commodity prices are resulting in reduced activity in mining. The lower use of equipment is depressing spare parts sales. Profit reduced by 45% as a consequence of the revenue fall, prior [ph] R&D and some warranty adjustments. We expect the second half performance to improve. Based on strong order cover, we continue to guide Tognum's revenue and profit performance as broadly flat for the full year.

Turning to financial strength, we continue to place considerable importance on maintaining investment-grade rating, given the long-term nature of our business, and having strong liquidity. During the period, we took advantage of favorable market conditions to raise GBP 1 billion of new funds, which provides a combination of refinancing and capital for general corporate purposes.

So to wrap up, we continue to see good order flow and top line growth across the company. Profit growth reflects the benefit of volume in the IAE restructuring, with other largely one-off impact broadly offsetting each other. While some progress has been made on costs, there is still much to do, as there is around cash generation, particularly working capital, while maintaining our full year group guidance of modest revenue growth and good profit growth, and cash flow of around breakeven.

With that, I'll hand back to John.

John F. Rishton

Thanks so much, Mark. We're now very happy to take any questions that you have. Over to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Rupinder Vig of Morgan Stanley.

Rupinder S. Vig - Morgan Stanley, Research Division

I've just got 2 questions, perhaps 1 for John and 1 for Mark. John, first, just a question around the Four Cs. You've talked about the progress that needs to be made on cost and cash. Can you just give us a bit more color around what's happened in terms of the concentration, if you like, you're not happy with the portfolio post the disposals in Energy? And in terms of customers, what progress is being made there? And second question perhaps for Mark, on the IAE, what should we be now thinking for the full year in terms of the IAE payment? And are there any expectations at this stage of any RFP from the second half of the year?

John F. Rishton

I'm very pleased that you've asked me about the other Cs rather than cost and cash. That's always a good start to any discussion. I think we've made good progress on customer. The organization is really starting to get that. We're starting to measure things well and the feedback that I'm hearing from our customers has improved, which is always welcome and reassuring. In terms of our performance, I just highlight several large engines. We've been up purchase order, 100%, all of this year on all the products. Marine, which was a drag as I think you're all well aware, the performance of those [ph] orders improved significantly. We're now well over 70% on time. You may remember that I've said in the past that if you look back 2 years, we're about 10%. Last year, we were running at 55% and we're now running at close to 75%. So good progress in terms of customer, in terms of delivery. Good performance, I think, in terms of quality. I think we've still got much more work to do in what I would call responsiveness to issues. So the nature of our business is such that there are always going to be issues. We need to respond much more rapidly and effectively to those issues and we're turning our attention to those. But overall, I'm very pleased with the progress we've made in terms of customer and the attention it's getting within the organization. In terms of concentration, I think that, for me, there were 2 parts of that. The first part is the one that you referred to, which is, if you like, around the portfolio. And I've been long clear, I think that the Energy portfolio didn't make much sense to me. It's quite clear from the results again this half that we've still got more work to do on that. Good news, within Energy is, we've made lots of progress in terms of the product, in terms of the customer. They're starting to really get the groups [ph] of the cost base. We've got much more work to do there. So we haven't finished our thinking on that yet, more thinking to do. And as in all businesses, we'll continue to address portfolio issues as we see them and as opportunities arise. And I think the sale of our 50% holding in the RTM322 helicopter is just evidence of opportunistic in some ways and a view that, that wasn't something we wanted to invest in at this point in time. So there will always going to be those kind of activities going on. Energy will be the area that I'm still most concerned about from the overall financial performance within the group. Again, nothing new for you there. And, in fact, you're probably bored of me saying that, but I can assure you lots of work going on behind the scenes. The other thing that concentration means within the group is, I want people to concentrate on doing their job to the best of their ability and not be distracted by other things. So there's 2 elements to it, and I think we're seeing some progress there. Mark, do you want to talk about IAE and revenue sharing partners?

Mark Morris

If I have to. Rupinder, I think I've got your question, which really was just looking, I guess, it's H1 and then the full year and trying to sort of gather to the guidance when we look at it. Profits at the group level of 32% and obviously, Civil, even higher. The IAE question really is a fading issue and of course, an impact of comparing H1 with H1. So if we go back to 2012, we were under the -- as I refer to them, the old trading arrangements. And of course, if you recall, back then, we originally guided, I guess the estimation has gone up from then about GBP 140 million for the full year and obviously when it would have been updated, it became GBP 92 million for the half year. And of course, this year I'll give you some numbers of GBP 112 million for the first half. So I think as I said in my presentation, except a similar benefit for the full year and what -- in terms of just looking at phasing of how we bring those profit numbers back to where our guidance was, really, what you've got are some phasing issues, we've got the IAE impact that only happens in the first half and impact much less in the second half, and then phasing issues of entry fee receipts, which are front-end loaded and R&D charge, which rises in the second half. So those will bring those profit numbers more in line with the guidance that we've given. So hopefully, that answers your question, Rupinder.

Operator

The next question is from the line of Ben Fidler at Deutsche Bank.

Benjamin Fidler - Deutsche Bank AG, Research Division

A few questions, if I could, please. Firstly, just to understand within Civil Aerospace some of the moving pieces driving the profit performance there. And I guess, specifically, if you're able to just give us a bit more detail of what the level of product launch costs were in Civil Aerospace and the restructuring costs there? Just trying to get a view of the true underlying progress that you're making, John, on the unit cost base.

John F. Rishton

Do you want to -- we'll look at your questions and then we'll [indiscernible].

Benjamin Fidler - Deutsche Bank AG, Research Division

Yes, I'm afraid there's some more. The second one is, just to understand with your confidence level as to why Tognum's profit performance will be so second half-loaded this year and why there's such a second half improvement, just to understand your confidence around that. And the third question that I had is just around how -- your opening statements clearly talk about the progress you're making on cost and cash, but as you say in the press release, this will take time and firm resolve to deliver. What sort of timescale are we looking at to deliver those benefits in your mind?

John F. Rishton

Okay, let me maybe hand over the Civil question to Mark. Or maybe, Mark, if you talk about Tognum as well, then I'll talk a little bit about the cost and cash? That's okay?

Mark Morris

Okay. Yes. Look, in civil, we -- like I sort of highlighted, again, we had volume growth, you've got the IAE restructuring and we've got a number of things that we sort of put in Other. Product launch costs are sort of in the 10s of millions -- low 10s of millions. And on unit cost, I mean, we've had some progression on what I'll call indirect CNA, which will be around the sort of GBP 10 million mark, but not sort of getting into sort of breaking out all the other components that we've got in here. I mean, we'll just go down a rabbit hole, frankly. But I think the key point to say is we're seeing progression.

Benjamin Fidler - Deutsche Bank AG, Research Division

Yes, I mean, where I guess -- and thank you for some of those numbers you shared. Again, I'm not expecting you to give full disclosure of that. My question is really coming from, you had 6% revenue growth in Civil. If we strip out the increase in the IAE effect and increase in partnership receipts, arguably neither of which are trading items, you could argue. We have 6% revenue growth and the underlying profitability fell even before we start looking at what you put on the balance sheet on TotalCare, et cetera. Now just to understand what's going on in driving some of these unit costs, hence, my question about was it a big one, was it a big product launch cost? Was it a big restructuring cost? Because it looks like unit cost have clearly gone up quite significantly in Civil Aerospace?

John F. Rishton

What I would say, Ben, is that there's a lot of one-offs in the negative GBP 24 million. We've broken out of the IAE, you can clearly see the RRSPs. But my perspective is, it's pretty simple. We've got volume growth. We have the IAE benefit that we've broken out. Then there were a whole raft of broadly one-offs that broadly offset each other, which, if you conclude, you take on what I've just said, what it says is that we didn't make much progress on unit cost or costs within Aerospace. We've made some progress in other areas. The biggest issue that I have, if I sort of pick up your last question in terms of cost of cash, really centers around the Aerospace area, and it particularly centers around Civil. Defense actually did make some progress on cost and is working hard on it. So if I narrow down where we -- where I am least pleased with the progress, it is Civil Aerospace in terms of costs. There are other areas in Civil Aerospace where I'm very pleased with the progress and I gave you some examples in the response to customers. So in broad terms, cost progression in Aerospace is virtually nothing, and we have to address that because it is our biggest cost base and our biggest issue. And as I think I've said to a number of you at various times, when you get into sort of why is that, in part, it's just human nature, I'm afraid. So if you just talk a little bit about what's been going on, my simplistic story is that when you announce record profits, which we've just done again; when you announce record order book, which we've just done again; when you announced record everything, then people have a difficulty understanding why it is that I'm talking about costs. They really do have a difficulty. Now you guys kind of get it immediately. You look at things from a slightly different perspective to most people. If I break our company down, the defense guys kind of get the cost issue because there's something called sequestration in the U.S. and they've been through the spending review in the U.K. and they kind of get it and their world has changed. The Energy guys get it because of the environment that they're operating in. The Marine guys have started to get it and are making progress in terms of their cost reduction, as we have to, because we've got a very high cost base largely been based in Scandinavia, which is uncompetitive. So they get it. The area, understandably, that is struggling the most is the area where the growth and the benefits are -- a big growth, they're all flying through, which is Civil Aerospace, because Civil Aerospace is in a boom period. So what we did is, as again as you're well aware, is I've got a group of 6 senior managers to go away and look at this and come up with a whole lot of ideas. They finished their report. We've had a great discussion with those guys. We had a great discussion with Civil -- Civil management. Civil management are quite clear on the opportunities that exist within their business and there are significant opportunities. We are now grappling with the hardest part. So I've got people's heads of the management team in the right place. We've done a lot of work in terms of identifying opportunities. We're now moving to delivering the opportunities. Now in some businesses, and I've worked in some, it's pretty easy. I would suggest in the banking industry, it's usually pretty easy to reduce costs. You've got to know where your costs are, you just get rid of them. In our industry, particularly in Civil Aerospace, when you're dealing with gas turbine engines, and the biggest part of those costs are the engines, it isn't quite as easy. It takes engineering resource, it takes time, energy, effort, you've got to go through simulator reviews. Some of the cost benefits are associated with how can you get longer on-wing service to reduce servicing costs. Some of the benefits are around how do we drive repairs into our services business rather than replacement, which is something we are comparatively weaker relative to our competition. Now there's lots of opportunity there, but it takes time. Other areas, and Mark mentioned one, our indirect cost-reduction program, we're making progress on that. But frankly, you don't see any benefit of that because we've got a restructuring cost, which offsets the financial benefits at this point, but they'll flow through at some point in the future. So in simple terms, if you're looking for cost benefit, your cost performance in Aerospace, you're not going to find much. So that's the short answer to -- or a long answer, I should say, to your simple question.

Benjamin Fidler - Deutsche Bank AG, Research Division

That's a very interesting answer. And I guess, I think, just drilling down a bit further with that question. So in terms of timescale, and how long does that take to push through that scale of cultural change and the inevitable scale of restructuring change in what is a very complex business and supply chain in Civil Aerospace? I mean, is that a 2-year -- is it 2 years? Is it 5 years? When do you think you'll start to really see benefits come through?

John F. Rishton

You're sitting in my board meeting yesterday?

Benjamin Fidler - Deutsche Bank AG, Research Division

I was actually, yes. But I'm small, so I'm easily missed.

John F. Rishton

Because as you would expect the civil questions are getting asked there. And rather conversely, the guy who sort of has a reputation for cost and cash management sort of [indiscernible] him away, that happened overnight. I think the answer, Ben, is back in what I was saying about the complexity of the changes that we need to make here that will determine the start. As you might well expect, I'm not going to get hung up on a timescale on this. What I can do is absolutely assure you that it has a lot of attention at the moment and we are determined, I am determined, Mark is determined, the management team in Aerospace is determined, to make progress, because it is affecting what we can do and where we can invest, as is the cash performance. But people are starting to understand that, they're starting to understand, that if we don't improve our cost of cash performance, we can't invest as much as we want in new products and do the things we want to do in terms of people, trading, infrastructure, products, all those kinds of things. So I'm not going to get on a hook in terms of a week on Friday, but it's going to take us some time. It's hard.

Mark Morris

Okay. You had one other question, Ben, we rambled around. Probably one [indiscernible], so you had a question around...

Benjamin Fidler - Deutsche Bank AG, Research Division

Just Tognum, the confidence level around, obviously, there's a very big improvement that needs to be delivered in H2. You mentioned R&D phasing. Is that -- I was just understanding why you're so confident on what has got to be a big step-up in the second half that it will be delivered?

Mark Morris

This is a much shorter cycle business. They have got good order coverage that go into the second half. And again, this is very much a higher-volume business, obviously it helps on the overhead recovery. We've got some phasing on R&D, and obviously, we had some warrant adjustments in the first half, which won't repeat in the second half. So those are the sort of things as to why we're confident that Tognum will end up consistent with guidance we originally gave.

John F. Rishton

Ben, what we've seen in that business is, the first part of the year was dreadful and it's been improving ever since. So the trend is -- gives us confidence as well. And that's what you've sort of seen. If you look at the direct competitors with Tognum, you look at their kind of results, you saw the same kind of thing in their first quarter and second quarter results. So the trend is positive. Order book -- their order coverage is high. The management team at Tognum, I think, understood the realities to the pricing at the start of the year, which means we don't have to change guidance, but I think they got it right the first time around.

Operator

Our next question is from the line of Robert Stallard at RBC.

Robert Stallard - RBC Capital Markets, LLC, Research Division

I just got a couple of questions on the aftermarket, if that's okay. In Civil, I was wondering if you could give us some idea of what Trent was up in the quarter and how that contrasted with the RB211 aftermarket?

Mark Morris

Look, we don't sort of break out individual engine programs. I mean, as you'll take from the numbers, the aftermarket was up 3%, broadly in line with our thrust base. I mean, within that, obviously in aftermarket revenues, we've got a combination of T&M and long-term service agreements. And within that, of course, we've got our product range, some of which are new and young coming on and building up in terms of LTSAs and so forth, and some of which, that are coming now to the end of their lifecycle and you've referenced to some of them in the RB211. What I would say on RB211 is that the 535 continues to perform well. And of course, as you'd expect, we try and manage the lifecycle to extend life. And whilst as aircraft get parked and engines come off, we also have a part of our business, which we call parts trading, which we'll tie-up parts to help reduce overhauls and extend their lives. On the RB211, so the 767 fleet and the old 747 fleet, of course, they are older and much smaller fleet, so the impacts are much smaller. But by and large, and as we've guided, when you look at H1 versus H2, Civil, as well as every other division, will see growth in revenues in H2, both at the OE level and at the aftermarket level.

Robert Stallard - RBC Capital Markets, LLC, Research Division

And do you expect that aftermarket growth to accelerate in the second half or be similar to what we've seen in the first half?

Mark Morris

Well, I think we've given our view of revenue guidance for the year, I'm not going to start breaking out. All I've said is it's higher than the first half in terms of absolute revenues.

Carter Copeland - Barclays Capital, Research Division

Okay. And then on the defense side, you mentioned that there's a lot of uncertainty here. But the defense aftermarket here, how do you expect this to progress given this lack of visibility? Is it possible to say, we expect this to be similar in the second half or could it possibly be down?

Mark Morris

Well, I mean, like I said -- I mean all of our divisions, we are expecting for H2, have higher revenues than H1, both at the OE and aftermarket level. And again, I don't want to assume they're massive swings, but I mean, again, we generally tend to have a bit of a bias in general between in H1 and H2. And in certain cases, and particularly when we're dealing with government bodies and quasi-government bodies, in terms of buying, that there tends to be some behavioral activity that they with their budgets at beginning of the year and they're very cautious, then they sort of try and make sure they spend them by the end of the year. So you've got a little bit of that behavior in some areas and defense, I guess, is no exception. Of course, with the continuing uncertainty around sequestration and just generally austerity measures in defense, I think, as I alluded to in our results, maybe there's some [ph] suppressed flying hours in the first half, that may change slightly in the second.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And then just finally on Energy, you mentioned that there's still work to be done. Are you contemplating some -- gross level mechanical action here like potentially selling or spinning off or joint venturing some of the businesses here?

John F. Rishton

We're not going to get towards any specifics. But what I've said and what you've all told me and whatever everybody knows, is that the financial performance of that segment is totally unacceptable, and we need to address that. There are a whole raft of things, as I said, that we've already done in terms of improving the product, improving our customer position, reducing our costs, improving deliveries, all these kind of things that are going on, we have to address those issues. You could break the Energy down into it's 2 main parts, but those are the issues. Fuel -- Oil & Gas is a good business, as I've said, on a number of times, but it's small. We had a good market share. It's basically us and GE. If there's [indiscernible], Power Generation is much troublesome for us in terms of financials, where we are a tiny, tiny, tiny flare. We're looking at what we should or shouldn't do, how we could or couldn't do it, and when we've got our minds around that, we'll let you know.

Operator

Our next question is from the line of Nick Cunningham at Agency Partners.

Nick Cunningham

I think it falls to me to ask some of the nerdy rather than the philosophical questions. An elephant issue as far as the margin outcome in Civil is concerned, is the mix between the linked and unlinked engine sales. And judging from the big rise in the TotalCare in Civil and the very small rise in capitalized engine cost, it was mostly linked in the first half. Is that going to continue to be the case for the rest of the year? And is there any indication as to how that's going to look next year? And also just to clarify on IAE and the entry fee receipts, I think what you're saying is that you've had most of them for the year, there will only be a little in the second half, I just want to make sure I got that right. And then final detailed question, just I've sort of lost track of what the basis is for Tognum in saying that you're going to do something similar this year compared to last year. So would you just be able to clarify what last year's basis was?

Mark Morris

Yes, let me just answer in reverse order for a second. So the Tognum stuff that's actually on the charts we showed you -- the second to last chart, which shows how Power Systems, what I'll call Tognum -- with Tognum at 100% trading. And what we've said is that we were guiding revenues and profits broadly flat. And if you want, I can give you the breakout for those, which revenues -- I mean, broadly around about GBP 1.3 billion -- sorry, for the full year. Are you looking at the full year?

Nick Cunningham

Yes, yes.

Mark Morris

Give me one second here. Let me get that for you in a moment, I'll just answer the other questions. So your second question. So what was your second question?

Nick Cunningham

It was -- I was looking at just clarifying the IAE and entry fee receipts, the --

Mark Morris

Yes, your assumption was right on question 2, yes. Most of it is particularly in the first half.

Nick Cunningham

And then the linked and the unlinked ratio?

Mark Morris

Yes. Okay, so in terms of the net TCA debt, yes, it's risen. And again, you remember, there are 2 components to that. We've got the combination of more engine deliveries. And again, with the linked, we get the benefit of -- or we get the impact of, clearly, revenue ahead of cash, which builds up a deficit [ph]. But on the flip side of that, shop visits will obviously drive down the trade credits and it's really a combination of those. And I think your question was relating to is, has there been a bias towards linked versus REC? And the answer in the first half is, yes. And I don't want to sort of get into specifics of next what happens in H2 and then what happens in next year. And I think you're aware, Nick, that obviously it relates to XWB. As the volumes grow there, that will -- tend to be REC accounted rather than accounted just because of the nature of the contract we have with Airbus there. And obviously, as those grow, then you can expect some increases in RECs versus linked. For the full year, so just to give you some broad picture on Tognum's revenues, last year, they're about GBP 3 billion and profit of around about GBP 300 million. And again, we've guided flat for the year, so the same again, effectively for Tognum 100% level.

Operator

Our next question is from the line of Andrew Gollan at Investec.

Andrew Gollan - Investec Securities (UK), Research Division

Just to extend -- or 2 questions really. First on Civil aftermarket and to extend I think what Rob was asking earlier on. The growth year-on-year was 3% in the aftermarket, could you perhaps give us a split between -- or rough split between Tognum materials and LTSA? That will be quite helpful. That's the first one. Second one, again, a clarification on the IAE guidance for the full year. Are we talking about roughly GBP 200 million versus the GBP 140 million that you've talked about a year or so ago? And the other sort of sub-question to the IAE number, can you explain what's exactly going on relative to your expectations, I guess, in terms of supplying parts into the V2500 build program or some parts into the spares system? Just explain why it is outperforming by so much.

John F. Rishton

Okay. So a couple of questions. The issue around IAE, I mean, again, I've given you sort of guidance or indicators for the full year, so similar effect for the full year. So I guess, around about GBP 200 million will give you the flavor. Your last question was?

Andrew Gollan - Investec Securities (UK), Research Division

The last question relates to IAE was why that is so outperforming where we thought we were 1.5 years ago in the context of what's going on within the sort of build program and the spares environment?

John F. Rishton

Okay. In terms of -- I mean, it always reflected the amount of part sales and the type of part sales and therefore the type of margins that we make. We make estimates, but obviously spare parts sales are relatively short term, they're sort of typically on sort of 30 days, sometimes lead time even less. It's just a question of what's happening both in T&M and the LTSA market as to what can drive that. And in effect, we've sort of under-called in the past what those are. And of course, the other part of this is there is some transfers that are ongoing between us and UTC. And we've assumed the timeline for that. Some of those timelines have sort of moved a little bit to the right, so there is some stuff we're doing more that eventually we won't be doing. But again, all of those is factored in. So it's really a combination of -- the volumes are a little bit higher. The types of parts you sold make slightly better margins. Some of the work transfer that was destined to go on a certain schedule is delayed a little bit. Your first question --

Andrew Gollan - Investec Securities (UK), Research Division

I'm sorry, can I just ask then, do we expect a sort of similar rates of fade from the sort of 200 or so annual number we were talking about?

John F. Rishton

Look, when we reach the -- I'm not going to give multiyear guidance. But when we originally raised the IAE effect, what we said is, we're going to get an uplift in profit, reflecting the revised trading arrangements. And again, just to clarify what they are, in effect, we've gone from being an equity partner to a supplier. We continue to make parts. We've made -- we continue to assemble engines, and we've achieved a number of -- a value of dollars per engine flying hour on the installed fleet at the point-of-sale. So those are the sort of revenue sources. And what we've said is, yes, eventually it will start to drift down. But for the first few years, it will sort of remain relatively flat. Your first question, just to come back to it because I didn't write it down, was the split between T&M and LTSA. I mean, I'm not going to get down into sort of individual breakdowns. What I will say is that our T&M and LTSA between them, if I look at H1 to H1, was slightly up on T&M in the first half. I expect it to be slightly less in the second half, but it will -- could be more than compensated by LTSA revenue in H2. And that's why we continue to see revenue growth and higher revenues in H2 on aftermarket for Civil.

Operator

[Operator Instructions] And we go over to the line of Olivier Brochet of Exane BNP Paribas.

Olivier Brochet - Exane BNP Paribas, Research Division

I would like to focus on 3 questions, if I may. The first one is on warranties. You mentioned that a couple of times in the prepared remarks, could you put some more flesh on that for Marine and Tognum? Is there any lumps that we should be aware of there? Second question is on Tognum. Can you update us on the -- your view on the synergies and business opportunities that you found now that you're in complete control of the company, any good or bad surprises there? And third, on inventory and working capital, you clearly look displeased or even upset about the performance in H1. What has exactly been slipping, what has been missed, what will you be doing different now?

John F. Rishton

Let me take a couple of those, maybe ask Mark to comment as well. In terms of inventory, you're correct. Here's what I would say, there are a number of elements to it . First, I think in some ways, most important, we've been driving to improve our customer performance. And our customer performance has been 4 in the past. And I gave 2 examples to an earlier question where Civil at 100% -- large engines at 100% and Marine increasing from 10% to 55% to over 75%. One of the ways that we've achieved that is inevitably, the obvious way, which is we've put more inventory into the system to make sure that we don't let our customers down. So that's part of it. What we were unable to do is to drive the performance better, so that we have more confidence for the moment in the supply chain. So we're getting there. Supply chain performance has improved significantly, but it hasn't reached the tipping point whereby the inventories are starting to flow through the system more efficiently and effectively. So in simple terms, I'll put more inventory in to protect the customers; supply chain performance has improved, but it isn't yet at the point where we can reduce the inventory offering and still protect our customers, but we're getting closer to it. The second point is, the overall management of inventory within the company, if I could take that as a big bucket. So we've -- we've set up an aerospace organization and we're still working through that. So whilst we announced that some time ago, the beginning of the year, anybody who's been involved in large organization changes know that it takes some time. But we're getting down to some of the really important elements in terms of inventory control and the actual individuals responsible for ordering, managing stocks within each individual plant. And we've got to centralize that because at the moment, that's still done at a plant level. And in my experience, if that's the case, you never got control over inventory, you need to get control over it at a central level because what the plants really are still interested in is making sure they don't get beaten up for nonproduction, so they buffer on the buffer on the buffer. So in simple terms, those are some of the main issues that are going on. And that's why it takes time to get to, and why it requires more patience. In terms of Tognum, on the synergies side, yes, we are -- we've been through the synergies side. I think what I would say, I'm not sure I said this before, it is clear there are more benefits in terms of Marine than there are on the Energy side. We're comfortable -- there are synergy. We're comfortable that the acquisition is a sensible one. We are pleased with the program and the progress they're making. Clearly, they have a lot to do with the integration of Bergen into their business. We're already getting benefits from their expertise associated with our Bergen Engines in terms of R&D, in terms of knowledge of the missions, in terms of that technical expertise, and we're starting to see some benefits in terms of sales. We've still got a lot more work to do on that area. And whilst Tognum has been around for 2 years, management control has only been for 6 months, but we're working hard on that now, and that's going, I think, as well as I would expect. Warranties, Mark, I don't know if you want to make any comments on warranties?

Mark Morris

No, not really. We don't break out individual components of warranty. I mean, what I did allude to, obviously, in the presentation were the 2 areas where we increased warranty loss were really around Tognum and B.

Olivier Brochet - Exane BNP Paribas, Research Division

But there's no big lumps that we should be aware of?

Mark Morris

No, I mean, look, it contributed to the movements in profits in terms of affecting adversely though. But -- I don't think there was some sort of material sort of overly stated -- overly sized adjustments, but there was an increase.

John F. Rishton

Yes, quite my normally, warranty costs rise and sink, and that's just part of the business cycle.

Olivier Brochet - Exane BNP Paribas, Research Division

What I was aiming at is, is it something that we should be thinking of continuing in the future or?

Mark Morris

I hope not.

John F. Rishton

If you [indiscernible] -- it's how do I improve my performance to customers? And one of the ways I do that is by making sure the products have the right quality, and it works right the first time. So hopefully, we should get some benefits. But again, they take a long time to flow through.

Operator

Our next question is from the line of Celine Fornaro of Bank of America.

Celine Fornaro - BofA Merrill Lynch, Research Division

My question will be on the Marine weak performance on this first half of the year, because even if we compare it historically, I mean, you used to have the Bergen business, which was slightly below the division margin and now it's been carved out. So how should we think about the margin progress in the H2? And also, when I look at the big increase in the order book in this division, how is the pricing? Is there a risk study of being trading sales for pricing and shall we see that coming through quicker because these orders or this order book is not as lengthy as it used to be 2, 3 years ago?

Mark Morris

Okay. The first thing to say and as I sort of said in the presentation, we're disappointed with profit performance in Marine in H1. There are a number of reasons for that, that I alluded to. I mean a combination of adverse mix, warranty charges, we've just talked about and against, interestingly, some foreign exchange benefit and unit costs. Again, better mix in the second half, good order cover, some non-repeats, some of the one-offs gives us the confidence that's where we'll be. And like I think John alluded to when he gave a sort of broader overview of Marine, I mean there's sort of 3 basic segments in there: Offshore, Merchant and Naval. Offshore, we're seeing some encouraging signs in terms of bid activity and it's certainly as we look into H2. Services revenue growth has got good opportunity. Build up more networks there and that gives us more access. The Merchant business still remains pretty much in the doldrums. But it's only about 20% of the total size of Marine. And Naval, I mean, interesting to watch is sort of you'd argue or sit in terms of defense behavioral patterns. It performed slightly better, certainly in terms of what we've seen this year and for the rest of the year that we're looking for. So I think that's a sort of quick summary of Marine both in terms of what we see profit progression and revenues.

Celine Fornaro - BofA Merrill Lynch, Research Division

But in Offshore, can I just -- I mean do you continue to see a pricing pressure in the Offshore environment?

Mark Morris

Absolutely. I mean, look, it's a tough market. We're seeing, interestingly, a move certainly on things like OSVs to slightly larger ones, which gives us the opportunity to quote for more types of equipment on those vessels. But, yes, it's a tough environment. And I would say that active price pressure more than offsets unit cost even though they've made good progress on unit costs.

Celine Fornaro - BofA Merrill Lynch, Research Division

And my second question would be if you could split -- looking out, you've done that in the past on the service growth in the Civil Aerospace division. If you could give us an idea on how much was Time & Material, and how much was TotalCare on the 3% growth number?

Mark Morris

Well, again, we don't normally break that out. I've actually got it to hand. I'm sure we can give you that number if you need it.

Operator

Our next question is from the line of Sandy Morris at Jefferies.

Sandy Morris - Jefferies LLC, Research Division

A slightly simplistic question, but if I look at Civil Aerospace and I look at engine deliveries in this first half, what we appear to have is nice volume growth on BizJets, and so [indiscernible] in Germany. When you say there was a sort of a GBP 103 million, whatever it was, volume benefit, I'm assuming that it rises. In the meantime, in terms of large engines, we're sort of marking time. And is that the right way to sort of look at it? A big chunk of the business is doing just fine and enjoying strong volumes growth, and the rest of it is still kind of sitting there poised to go at some point, or is that just too simplistic?

Mark Morris

No, I think, as you say, Sandy, I mean, there's an element of truth in that. We've talked about XWB in terms of when you look at our investments, we're looking to double capacity for Trent. The XWBs haven't come online yet, and of course you know there's a huge order book. So this year has been one where, yes, of course, in some divisions, we've got more growth in units. But Trent totally for the year, will be similar numbers to last year. And of course, we're just getting ready for the growth that we'll see -- that starts in 2014.

John F. Rishton

I think you surmised it very well, Sandy, I think -- and Mark's point is right. So you break it down to the engine types, is you kind of see Trent 700 continuing to do well. You're seeing slow and good growth coming in Trent 1000; XWB, yet to come; and a slowdown in Trent 900s, which is exactly what you'd expect based on the aircraft sales. And the growth that we're going to get in Trent, which is evident from the order book, but as Mark says, 90% of the order book related to Trent is yet to come. They will come as the volume of Trent 1000s for 787 grows as the aircraft sells more. I'm sure it will. And it will come even more when the A350 comes online and starts to sell, as it will. So that's what really drives the volume growth. So one of the issues that we as the company grapple with terms of costs is managing the preparation of significant growth in large Civil engines, which hasn't happened yet, but will happen. While we're trying to manage our costs against that future -- the future what we've got to do in the current environment. So you're -- if the summary described as simplistic is exactly right.

Roger Johnston - Edison Investment Research Limited

I mean, I'm not trying to be sort of glass half-full or empty here. It's just, I mean, your comments about driving cash and costs, I think, are generally welcome and I think we appreciate it takes time. How happy are you, though, that when the volumes go up, they won't just absorb cash to keep the comfort zone? And do you think costs are getting to the right place? I mean, I understand that you want to keep the pressure on, but is it a worry or is it just...

John F. Rishton

I don't like worrying about it, if that's what you mean. I think we'll make progress. I think if you work in a company that's shrinking, getting costs out is one thing because people see a clear and present danger. Getting you out in a growing company is about how do you manage the cost expansion relative to the growth. And as I said, to someone earlier today, what we have been doing which was not smart was allowing our costs to grow ahead of the volume increases. In some areas, that's inevitably the case. Building Singapore, we don't need much of Singapore at the moment, going to build 50 engines there this year. But at some point in the foreseeable future, we've going to have one a day. So I have to let those costs increase ahead of the volume because otherwise I haven't got capacity. Some of the fixed cost apparently weren't fixed in this company, we've got to make sure that we nail those down. We've got to get ourselves into this cost mentality is what I would say, Sandy, which is, we're grappling with, particularly in the Civil businesses, I was explaining earlier, so that we are well placed to be much more efficient, much more cost competitive, and therefore, much more profitable, so we can invest in people, products, infrastructure, price, whatever it happens to be. That's what we're trying to do.

Operator

As there are no further questions, gentlemen, may I please return the conference for you to close.

John F. Rishton

Thanks very much for joining us this morning. I hope you found the call useful. It's always a pleasure to talk to you every half-year or so on the results. We look forward to speaking to you early in the next year about the full year results. Thanks very much.

Operator

This now concludes the call. Thank you all very much for attending. You may now disconnect your lines.

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