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Executives

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

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

Analysts

Benjamin Fidler - Deutsche Bank AG, Research Division

Ben Bourne - Liberum Capital Limited, Research Division

Christian A. Laughlin - Sanford C. Bernstein & Co., LLC., Research Division

Steven Cahall - RBC Capital Markets, LLC, Research Division

Nick Cunningham

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

Edward Stacey - Espirito Santo Investment Bank, Research Division

Rupinder S. Vig - Morgan Stanley, Research Division

Zafar Khan - Societe Generale Cross Asset Research

Sandy Morris - Jefferies LLC, Research Division

Andrew Gollan - Investec Securities (UK), Research Division

Rolls Royce Holdings (OTCPK:RYCEY) 2013 Earnings Call February 13, 2014 4:00 AM ET

John F. Rishton

Good morning, everyone. It's 9:00, so I'm going to suggest that we start. Thank you for joining us today. Let me start by introducing my colleagues from the board. Mark Morris, Chief Financial Officer; Colin Smith, Director of Engineering and Technology; and Jim Guyette, President, Rolls-Royce North America. I'm pleased that we are joined by our Chairman, Ian Davis, who is in the audience. I said that rather hesitatingly because I haven't actually seen him this morning. I'm pleased that we are not joined by our Chairman. I think our Chairman, Ian Davis, is going to be here. For those of you who haven't met him, you know that we replaced Simon Robertson, since Simon Robertson retired last year, and Ian Davis replaced him. I know that he'll be joining us shortly. And what I would suggest at the end of the presentations, Q&As, you don't all flock around me and Mark. Ian Davis, our new Chairman, who is not here, well, is the person you really want to speak to.

So I'm going to give you an overview of our performance in 2013 and provide some longer-term context, and then I'm going to cover guidance for 2014.

This forecast of pausing growth for reasons that are particular to this year, and I'm going to spend a few minutes explaining them. Mark will then talk you through the numbers, and then we'll have a Q&A.

So let's start with 2013, which I would describe as a good year with plenty of positives and, as always, some areas where we need to improve. This performance required a great deal of hard work by our staff and by our partners and suppliers, so I would like to thank everyone who contributed to these results.

I suggest that the first number on this slide is the most important one. Our order book increased by 19% to GBP 71.6 billion or up 16%, excluding Tognum, that is now being renamed Rolls-Royce Power Systems, a division that also includes Bergen. This record figure confirms our trajectory for significant long-term growth and demonstrates the confidence that our customers continue to place in our technology. The book includes orders for more than 1,600 XWBs, our best-selling Trent engine. But of course, that is in the future.

Group revenue was up by 27%, 6% excluding Tognum. Profit was up 23%, 11%, excluding Tognum. The 13% increase in payment to shareholders reflects the belief we have in the fundamental strength of the business, as well as its future prospects.

I hope by now you are familiar with the 4Cs that provide the focus for our business: Customer, Concentration, Cost and Cash. Each of these is a journey rather than a destination, and our mindset needs to be one of continuous improvement. On Customer, we've made big improvements, with plenty more to do. To give you some examples, in 2013, we achieved 100% on-time delivery in civil large engines for the first time ever, the first time ever. By the end of the year, our corporate and regional jet business also achieved a 100% on-time delivery. And in Marine, delivery was 96% on-time, up from 55% last year and just 10% 2 years ago.

There has also been progress on quality. With Airbus, one of our most important aerospace customers, registering improved quality metrics. And BP, a major customer in our Energy business, now placing us among their most highly-ranked suppliers.

Tangible progress on quality and delivery strengthens customer relationships and makes discussions about future business much easier. It is also an essential first step to achieving better financial performance, as delivering product on-time and at the right quality reduces inventory and lowers costs.

I am delighted with the progress on our biggest program, the Trent XWB, that has completed more than 200 test flights and more than 6,000 testing hours. The engine is performing well and will power the Airbus A350 into service later this year.

Concentration means deciding where to invest for future growth and where not. I am completely clear that we need to stand on 2 strong legs, and that requires continued investment in both of our technology platforms: Gas turbines and reciprocating engines.

We clearly have a strong Civil Aerospace business that is already assured of substantial growth. In 3 years time, we will be producing twice as many Trent engines as we are today. So while we need to keep investing in gas turbines, and we also -- we'll also look for opportunities to expand in reciprocating engines, both to maintain balance in our portfolio and to generate the cash required in the much longer-cycle gas turbine business.

Back in 2011, we invested in Tognum to add scale, reach and capability to our reciprocating engine business. This is an important business and has proved a good investment. I spend a good deal of time there, most recently last week. I had been extremely impressed by Tognum's quality of management, customer insight and high-speed engine technology.

It will not have escaped your notice that we also entered preliminary talks about the acquisition of Wartsila. This would have added to our portfolio of medium-speed engines, with applications in marine and land power. On January 9, we announced that these talks have ended. We aim to strengthen our medium-speed engine portfolio, and we will continue to look at options to achieve that.

Turning to Cost. You have heard me say before but it's worth repeating. The Aerospace industry is, quite rightly, strictly regulated. That means it takes both time and tenacity to drive cost out from the business. And you will not be surprised to hear me say that we are not where we need to be.

But while the pace of change may be slower than we would like, there are a number of areas where progress is being made. We have reduced indirect headcount by 11%, beating our own target of 10%, with more to come from the current year. Unit cost is down in Marine, Energy and Power Systems, although slightly higher than our Aerospace divisions. We are building new, more efficient facilities and capacity that will support a doubling in production of Trent engines. We are moving production away from high-cost countries, negotiating to -- we are improving productivity and designing cost reduction into our engines.

Our cash inflow was GBP 359 million. We have a great full focus on inventory, so it's good to see stock turns improving from 3x to 3.4x. There's more to do, but by way of context, this is among the largest 1-year improvement recorded and the highest stock turn we have yet achieved.

All of these actions will develop -- deliver benefits in time. So overall, we've made headway on the 4Cs, and these are the areas where I will continue to focus.

Because this is a long-term business, to understand it properly, you need to take a long-term view, looking back as well as forward. So for example, in 2003, it is interesting to note that revenue fell by 3%. But taking the long view, you can see that revenues have almost tripled in a decade since. Profit growth over the same period has been even stronger. And of course, the order book, that has quadrupled, now stands at record levels, underpinning growth for years to come.

So we turn to 2014, where we've guided for flat revenue and profit. This is a break in a 10-year trend that will be followed by a return to growth in 2015, so it requires some explanation. Let's look at revenue and profit in turn.

On revenue, there are 2 main drivers: first, after 2 years of impressive growth, we will see Defence revenue decline by between 15% and 20%. This will take revenue from its current record back to 2010 levels. Growth will return in 2015. This 1-year decline is the consequence of well-publicized cuts in defense spending among major customers and completion of the delivery phase of 2 important export programs. The $1 billion multi-year agreement announced yesterday with Lockheed Martin to supply nearly 600 engines for Super Hercules aircraft underpins our confidence that growth will resume from a new base in 2015.

Second, the largest part of our Marine business offshore will not produce the growth we've seen in 2013. This is because customer investment decisions are being deferred, and I do believe that they're being deferred rather than lost. In terms of profit, Defence profit down 15% to 20% clearly has an impact, but we also find ourselves fighting headwinds of lower capitalization, lower entry fees and negative foreign exchange, alongside higher restructuring costs that will produce cost benefits in the future. The combination of these events produces a result for 2014 that goes against the long-term trend. But for the reasons I explained, and supported by our record order book, we remain confident that this is a pausing growth, not a change in direction.

So in summary then, 2013, a good year with a healthy increase in order book underpinning long-term growth. The 4Cs, a big improvement on Customer, Concentration, making sure we have 2 strong legs to stand on. Cost, not good enough despite encouraging progress in places; Cash, an increase in stock turns and a cash inflow. 2014, a pause before growth resumes in 2015, as our Defence business rebases and as orders in Marine Offshore take longer to come through.

Now Mark will take you through the numbers.

Mark Morris

Thanks, John, and good morning to you all. I'm going to talk about the group highlights and business performance, and then I'll move on to provide some guidance for 2014.

You will recall, for most of 2013, we guided Tognum separately to the rest of the group. Today, we have split out Tognum so that you can make the right comparisons in our key metrics. As usual, I'll restrict my comments to the underlying performance.

So as John says, 2013 has been a good year for the group, with some mixed performances in our businesses. As I step back and look at the progress that we've made in some of the key areas, such as on-time delivery, inventory and headcount reductions, I'm really pleased. But there are some areas like unit cost where progress has been slower than I would've liked, and we'll touch upon those areas in just a moment.

But first, looking at the financials for 2013. We've made good progress with growth in the order book, revenue and profit, and generated a cash inflow of GBP 359 million. The order book stands at a record GBP 71.6 billion, having grown 19% during the year, with a record order intake of GBP 27 billion. This includes a GBP 2.55 billion order intake from Tognum and GBP 18.9 billion from our Civil business, and reflects a very successful year for our Trent XWB program.

Our order book provides good visibility of future growth and underpins our confidence to invest. Order cover for 2014 is around 75% and similar to last year. Revenue increased 27% to GBP 15.5 billion, GBP 2.6 billion of that was Tognum. The remaining 6% increase reflects 7% growth in OE, with good revenue growth in Defence and Marine and a 4% growth in services. Profit is up 23% to GBP 1.8 billion, including GBP 180 million from Tognum. 11% growth, excluding Tognum, reflects strong margin in Defence, the benefit of IAE restructuring and a lower R&D charge.

These positives have been partially offset by price pressure in our Marine business and slow progress on cost reduction in our Civil business.

Tognum did well in a challenging environment. The management team demonstrated strong market insight, calling the market exactly right and hitting guidance. Remember that Tognum's profit contribution to the group reflects transition from a joint venture in 2012 to full consolidation in 2013.

I'm pleased with our cash performance, particularly the improvements we've made in inventory turns rising from 3x to 3.4x, excluding Tognum. We've had a good flow of deposits, and overall, broadly flat working capital and higher volume. We still have more work to do on working capital, and I'm confident we can get our inventory turns even higher. Finally, we've increased the full year payment to shareholders by 13% to 22p, reflecting our confidence in the business underpinned by our record order book.

So now let's turn to the key components of profit growth. Our trading performance was mixed. The benefit of volume growth this year has been eroded predominantly by higher cost in Civil, price pressure in Marine and a number of one-offs. I will talk about these items as we go through the segments.

The year-on-year benefit of the new trading arrangements with IAE, which you will recall was effective from the end of June 2012, was around GBP 112 million. On entry fees, you will remember that the half year, the year-on-year increase was GBP 76 million, and some of you may be surprised to see only GBP 26 million today. We have changed our accounting policy to match our policy for capitalized development costs, so some of those entry fees have now been deferred.

You'll see the impact of this accounting change when we look at our Civil results, and you can find all the details on this change in Note 1 of the press release.

On R&D, although we spent slightly more in 2013, our R&D charge was down by GBP 56 million. This was primarily because we started capitalizing the XWB development costs following certification. This will reverse in 2014 as the XWB enters service, and we continue to invest in R&D, so you can expect a higher charge in 2014. Restructuring costs increased by GBP 37 million to GBP 54 million, reflecting indirect headcount reductions and facility consolidations that will improve our future financial performance. This will continue in 2014. You can expect a similar increase in restructuring charges as we drive down costs.

Turning now to cash. I'm going to pick out the major themes in this chart, which you're all familiar with. Net working capital improved slightly, reflecting a good second half performance on inventory and higher deposits from our growing order book. We've made good progress on inventory, and we will build on that success again this year. For 2014, the phasing investments and trading will be weighted towards the second half, so expect a cash outflow at the half year. CapEx in software was GBP 650 million, and included major projects such as new test beds in the U.S. and Germany, new blade and disc facilities in the U.K. and U.S. and a new test and assembly facility in Brazil.

The remaining balance of our GBP 400 million relates to higher development certification and recoverable engine costs. We expect CapEx to be flat in 2014. So the result is a free cash flow of GBP 669 million prior to the payment of dividends. Our focus will be to further improve working capital as we drive inventory turns up. As I said earlier, we are pleased with our cash performance, GBP 312 million, or GBP 359 million including Tognum. Our Tognum cash flow of GBP 47 million is after paying a GBP 60 million dividend to our joint venture partner, Daimler.

So turning to the Civil businesses. Our Civil business has seen strong order intake, confirming the confidence our customers have in our technology and products. Our biggest program, the XWB, is performing well and will go into service in the fourth quarter of 2014.

Revenue increased 3%. OE growth of 3% reflects a 20% increase in business jet engines, and a small increase in Trent deliveries. This was suppressed by Trent 1000 launch pricing and lower V2500 revenue, mainly as a consequence of transferring more parts to Pratt & Whitney. Aftermarket revenue increased 3%, slightly lower than a 5% growth in the installed thrust. This reflects a 20% decline in RB211 revenue, as these engines retire or fly fewer hours, resulting in fewer shop visits and part sales.

Now turning to profit, which increased by 14%. This reflects a number of things: Higher volume; the benefit from IAE; a lower R&D charge, as we capitalize XWB costs; and higher entry fees, although this benefit was reduced by our new accounting policy. The improvements were offset by higher unit costs and costs to support the XWB's entry into service.

On unit cost in Civil, the performance in the year has been slower than we would've liked, but we are confident that the actions taken in 2013 will yield savings in 2014 and beyond. Changes in design and manufacturing require certification and new tooling, and this takes time. A number of our new factories are not yet running at full capacity. But we know that fixed cost absorption will improve as production ramps up.

Let me give you an example. In our Singapore facility last year, we produced 41 engines. In the next few years, production capacity will be over 200, so fixed cost absorption will improve.

We're also working hard with our suppliers to drive down costs. We've had some successes in 2013, and there will be more this year. So there's a lot going on, and cost remains an area of intense focus that we are actively addressing on a number of fronts.

Looking ahead to 2014 in Civil, we expect modest growth in revenue and good growth in profit. Revenue growth will be tempered by fewer business jet engine deliveries, having come off a record year. We also expect launch pricing and RB211 retirements to further dampen growth. Revenue will return to higher growth levels in 2015, driven by significant increases in Trent engine deliveries, including the XWB. The profit growth will reflect the cost reductions I've just talked about and volume growth after taking account of lower R&D capitalization and lower entry fees.

The TotalCare net debt has increased by around GBP 270 million, reflecting a combination of linked sales and engine overhauls. You can expect a similar increase in 2014. Many of you have asked about TotalCare accounting, and we'll be doing a briefing session this year at Farnborough.

So to summarize in Civil, a good year, especially on new orders. On cost, progress has been slower than we had hoped, but there has been a lot of activity which will begin to flow through this year.

Now let's take a look at Defence, which had a good year. Revenue was up 7%, and profit increased 11%, driven by strong exports of EJ200 and Adour engines and lower R&D spend.

Services revenue grew just 2%, reflecting lower flying hours and some retirements of older C-130Js. Our 2013 performance in a tight budgetary environment sets a high bar for a 2014 comparison. Against the background of a declining order book and the completion of the delivery phase of a number of our major export programs, we expect a 15% to 20% decline in revenue and profit in 2014. This reflects lower deliveries of engines to power the C-130Js, V-22 Ospreys and the Typhoon, as well as fewer Adour kits.

As always, it is important to put this into perspective. We've had 2 good years of revenue and profit growth that outperformed the market trend. For 2014, our guidance essentially brings us back to around 2010 revenue levels before revenue grows again in 2015, and demonstrates the scale and the opportunities that still exist. Even with the revenue reduction, we still expect to maintain broadly similar margins in 2014, as cost reductions kick in.

So moving on to our Marine business. Marine had mixed results in a tough environment, with good revenue growth of 12%, offset on the profit side by price pressure.

The order book grew 1%, reflecting lower order intake, particularly in Offshore and submarines. Competition remains tough in both Offshore and in Merchant. There is considerable bid activity, but the pace is slow on some projects because of project financing and capital expenditure phasing by some of our customers.

Our Marine business did a good job of reducing product cost by around 2% during the year, but the benefits of volume and cost reduction have been eroded by price pressure and adverse mix, particularly in the aftermarket, and infrastructure costs, as the Marine business -- rationalizes its footprint.

Looking ahead to 2014, we expect a modest reduction in revenue and modest growth in profit. Profit rises against a declining volume because of the cost reduction actions we've taken in 2013 and continued actions in 2014. We expect 2014 revenue to reduce, driven by the lower order intake in 2013, particularly in Offshore, due to deferred customer investments.

Next, let's take a look at our Energy business. We've seen good growth in the order book, with GBP 1.1 billion order intake for the year, predominantly in Oil & Gas, which provides good visibility for 2014. We have a well-established Oil & Gas business that makes up around 2/3 of the revenue, and more than all of the profit in our Energy business.

Revenue increased 9%, driven by higher OE volumes in our Oil & Gas business. Profit increased GBP 7 million, reflecting higher volumes, partially offset by pricing pressure and continued investments in our Civil Nuclear business. In 2014, we expect further good growth in revenue and profit. But as you can see, the margins remained poor in this business, and this is an area we continue to work on.

Turning to our Power Systems business. We are pleased with the contribution Tognum has made, and we are pleased with our investments. We continue to build on 2 strong technology platforms, and Tognum has added significantly to the breadth of our reciprocating engine portfolio. The chart shows the trading comparisons for Tognum. We saw good growth in the order book, with an intake of GBP 2.7 billion. Tognum had a tough first half and a good second half, exactly as we said. That strong performance in the second half was driven by sales in marine and agricultural markets, but included the effect of customers buying ahead of new emissions legislation that came into effect this year.

Revenue was broadly flat. We saw good growth in our marine and industrial markets, offset by lower revenue in oil and gas, mining and lower aftermarket sales. Profit was also broadly flat after a strong second half recovery, which is helped by unit cost reductions, too. In 2014, we expect modest growth in revenue and good growth in profit, driven by marine engines and land power systems.

Turning now to our financial strength. We are in good shape, we have good liquidity and a strong investment-grade credit rating. Our financial strength gives us flexibility and assures us our customers will be there for the long-term. As we said before, we are committed to maintaining a strong investment-grade credit rating.

So now before talking about our guidance for 2014, it's worth highlighting that we created 2 new reporting segments: Aerospace and Marine & Industrial Power Systems, which we call MIPS. This reflects our 2 strong technology platforms of gas turbines and reciprocating engines. Aerospace will comprise our Civil and Defence businesses, while Marine, Power Systems and our Energy business will now sit in MIPS. Our Energy business will now be called Energy & Nuclear and will include our nuclear submarines business, which transfers from Marine.

Now turning to our guidance for 2014, which will include Tognum. 2014 will be a pausing growth, not a change in direction. And in 2015, growth will resume. At a group level, we expect flat revenue and profit. On cash, we are guiding on a free cash flow basis, which is more consistent with market practice. For 2014, we expect free cash flow to be similar to 2013, which is around GBP 780 million.

Now looking at our guidance for each of the different businesses. Civil Aerospace, modest growth in revenue and good growth in profit. In Defence Aerospace, a 15% to 20% decline in revenue and profit. In Marine, a modest reduction in revenue and a modest increase in profit. In Energy & Nuclear, further good growth in revenue and profit. And in Power Systems, modest growth in revenue and good growth in profit.

And some additional guidance for you in 2014. We expect our cash and profit phasing to be H2-weighted, reflecting cost and restructuring initiatives underway, phasing of CapEx spend and our MIPS business, which is traditionally more H2-weighted. CapEx for the year will be broadly flat. And on R&D, expect a modest increase in spending, but a higher P&L charge as we stop capitalizing the XWB. And lastly, we expect an underlying tax rate of around 24%.

So let me close by being clear about our focus. The 4Cs: Customer, Concentration, Cost and Cash. We have GBP 71.6 billion order book. This is a concrete measure of the confidence our customers have in our products and technology. Delivering on the promises we have made is crucial, and I am pleased with the progress.

On Concentration, we have a long-term strategy that's been applied consistently over many years. We will continue to invest in our 2 strong technology platforms to deliver long-term profitable growth. As the CFO, you would expect me to be focused on cost and cash, and I am. Progress has been slower than I would've liked, and I get this. We understand that improving financial performance is key to our long-term success, and we are engaged in many cost-reduction programs. These will drive down costs as they are sustained across the business and as volume, in particular in our Civil business, ramp up.

Rolls-Royce is an exciting place to be right now. There's a great deal going on, including the entry into service of our biggest-ever program and good momentum established towards improving our financial performance.

Thank you very much for listening. And now, we'll take your questions. Thank you.

Question-and-Answer Session

John F. Rishton

Thanks, Mark. Okay. As usual, I will point, as people will go around, everyone will get a chance with the questions. If you could say your name and your affiliation before you start, and then we will take your questions. So we'll start right in front, maybe with Ben.

Benjamin Fidler - Deutsche Bank AG, Research Division

Yes, Ben from Deutsche here. Maybe kick us off with a couple of questions. First one, just on part of your slide, Mark, I guess on capital allocation, but also build again maybe with your comment, John, about your desire to grow in medium-speed engines. What should we think about capital allocation, about M&A, about leverage? And about your comment about continuing to want to grow in medium-speed engines, does that mean M&A or is there organic opportunity to do that? That's the first question. I can come out with the second one, or do you want me to ask it now? I'll ask the second one now?

John F. Rishton

Ask it or otherwise you'll lose the microphone.

Benjamin Fidler - Deutsche Bank AG, Research Division

Oh, wow, shocking.

John F. Rishton

This may be a good idea.

Benjamin Fidler - Deutsche Bank AG, Research Division

The second one is just -- and I recognize this is probably a slight delicate topic, but just on this FRC issue. Is the FRC looking into any other accounting issues? Or does this draw a line under absolutely everything, there's no other issues we should be concerned about? Just if you can update us on what's actually going on there in discussions with the FRC?

John F. Rishton

Okay. Why don't I make a couple of comments, and then ask Mark to speak on both of those topics. In terms of capital allocation, a couple of fundamentals that you're all familiar with. First of all, we think it's essential that we have a strong credit rating. We're a very long-term business and we need to maintain that. In terms of M&A, it won't surprise me even the slightest, and I'm not going to get sucked into any discussions or speculation about what we are or not doing there. We've never talked about in the past, I'm not going to talk about it today, and I don't want to talk about it in the future. So what I would say is, as we look at the business and again, it shouldn't be a great surprise, we look at it in terms of the gas turbines and the reciprocating engine businesses. We've got those 2 platforms, and they have some similar characteristics in terms of the fact that they are complex integrated power systems in the sense of an OE and an aftermarket. And they also, I think, in terms -- importantly, in terms of the balance that they bring to the group, in terms of the different nature of the financials and the industries that they're in, with shorter-cycle, longer-cycle, earlier cash generation, longer-cash generation, more capital intensive, less capital intensive. So there's a mix there that I think is important to get that balance right. In terms of the medium speed, as we look at our portfolio in Marine, which is a strong portfolio in terms of what we can offer to Marine, an area that I think we need to strengthen is our medium-speed diesel portfolio where we are relatively small. So if you look at the medium-speed diesel, the big players, Wartsila is a big player there. And if we look at our Marine business, an attractive part of that portfolio that we need to strengthen is medium speed, and it's important in terms of pull-through of other products. How do we strengthen that? Well, as I said, there are various options there. Clearly, you're well aware that we considered an M&A approach. And as I said, those talks have stopped. In terms of other approaches, we can certainly, and we are working, Colin can comment on this, on developing engines, more engines in the medium-speed in-house, so dual-fuel engines, different medium-speed engines. So we're working on that as well. Mark, if you want to make some more comments on the capital allocation or whether you'd like to talk about the FRC?

Mark Morris

Well, I can -- I'll do both. On capital allocation, I think one of the main drivers will be sensitivity and desire to retain a strong investment-grade rating. I think from that, you can infer some leverage levels. I mean, there is always, a quantitative element that put on these things, but there's a qualitative element that goes in the rating agencies as well. And of course, it's important to understand that like all these things, whilst we desire to maintain a certain rating, it's not openly our gift to give. But obviously, that sits in the context of them understanding our business and what we're doing. So that's the important driver, having a strong grade -- rating for us, as you know, just because we're a long-term business and want to ensure that governments and customers know that we're going to be around to continue servicing them in sort of 5, 10, 15, 20 years time. And as John said, there are a number of factors we have to think about in capital allocation in terms of how we look across our businesses, where are we going to invest it, where we haven't, whether it's long versus short versus medium-term and all around the areas of how the capital is deployed, and it's also return on capital employed, and so forth. So that gives you some idea, I think, on that. Just turning now to the FRC, you sort of made a reference in this thought. I think the question was, are there any other ongoing inquiries or do you want us to explain a little bit first about the FRC, the accounting change that we've done?

Ben Bourne - Liberum Capital Limited, Research Division

[indiscernible] it's more around looking at further issues [indiscernible].

Mark Morris

Well, look, a couple of things. I don't think it's unusual for companies from time to time to get inquiries from the FRC, and we are no exception. I mean, clearly, we're not going to comment on any private discussions that we have with the FRC until such time as -- like in all these things, there is something to say. So on the FRC, that's what I would say. I mean, if there was some specific question around the change in policy, which I think is explained quite a lot of detail in Note 1, I'm happy to talk about that as well.

John F. Rishton

Okay. The next -- in the front again. So from this side, we kind of wind our way a little bit up and come back, unless Sandy likes to be at the end.

Christian A. Laughlin - Sanford C. Bernstein & Co., LLC., Research Division

Christian Laughlin from Bernstein. Just one question regarding around -- or the profit strength phasing next year, if you will. I was just wondering if you could provide some commentary on where you expect to see some tailwinds, some margin tailwinds in H2, just given that we should expect to see XWB ramping up and then, of course, C1000 running at higher production rates this year?

Mark Morris

Well, we don't normally get into sort of detailed breakdown of half year phasing. But I mean, what I would say is this, and as I alluded to in the presentation, a number of restructuring and cost-reduction initiatives, how we're spending CapEx, some movements in R&D, but also just when you look at our MIPS business, generally, the volume load is generally a bit more second-half weighted and that's what will drive some of the profit phasing as well.

John F. Rishton

Could I just pick up on that? You kind of threw in there the XWB ramp up, just to be clear, the XWB engine volumes in 2014 are very small. Entering into services this year, our XWB really starts ramping up '15 and particularly, in '16. So this is a small volume of engines next year in terms of XWB. So that's still coming, just to be clear on that point.

And the next, so we just go back -- yes, gentleman just behind Christian.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Steven Cahall from Royal Bank of Canada. Maybe just a couple of questions on what we're expecting next year in Civil versus some of the trends this year. So maybe first on IAE, I mean, do we expect any uplift next year? It looks like we didn't have any uplift versus 2012 in H2 of 2013, so maybe just what your assumption is there. And then similarly, on the RB211, if you can give us maybe any color about what retirement rates were in 2013, and what's the expectation for that trend in 2014? Because it does look like it accelerated in terms of retirements in '13.

Mark Morris

Okay, on IAE, let's try and put this one to bed. For the full year, as I said, there's GBP 112 million uplift and again, if you recall, if you go back to 2012, we had a half year of what I'll call the old world and then half-year of the new world. And your observation is right, there was no uptick in the second half. Going forward, we're not going to breakout IAE anymore. It just gets too difficult. We're working off assumptions of the old model back from 2012 and we don't know what they really were. What I will say is that generally, as we move forward, the uplift will reduce and I think we've given you that guidance before. On RB211 retirements, for this year -- sorry for 2013, we said the impact was a reduction of RB211 revenues of about 20%. And that's sort of what continues as we go forward. And again, this isn't a surprise to us. We factored in -- I mean, there's always some movements a little bit backwards and forwards, but we are anticipating that as it goes out we will start to see some retirements because one of the things that we're keen to do is to ensure that by lowering the cost of overhauls and so forth we can extend the life of those. But it's in our planning.

John F. Rishton

From this side.

Nick Cunningham

Nick Cunningham from Agency Partners. I hope it doesn't seem too aggressive, that sort of.

John F. Rishton

Very aggressive.

Nick Cunningham

But the Defence has been sort of enormously strong for several years. We kept on asking about that. Can this go on? And you haven't been specific in this one. But I think takeaway has been that it's sort of sustainable. But now we're looking at 15% to 20% decline, hence sort of when you notice. And which is unusual for a large company to do that. So I'm just wondering what happened? And why was it not flagged earlier? And I have another couple shall I ask them?

John F. Rishton

Please ask them all.

Unknown Analyst

And on the change in RSP treatment, I was just wondering why the FRC recommendation was only sort of half-adopted? What's the thinking behind your decision to adopt a different treatment from them? And finally, and this probably just displays my own ignorance, but why is the minority so small? One would have thought that half of Tognum would generate much bigger P&L minority, or it's probably just me.

John F. Rishton

Okay. I'm going to ask Jim on Defence. I think in part, the answer to Defence question, though, is we have given in year guidance, and you kind of run into that, which is well do we -- how do you handle that? Well, we give in year guidance now, clearly this time we start talking a little bit about the future and I think that's made us think a little bit more carefully about how we manage that. So what I would say is what we are trying and we're heading in the direction of and I know it again will be slower than many of you would like, is trying to get more transparent about the whole variety of issues, including length of time potentially and details around it. As Mark said we will have a session on TCA accounting of Farnborough. But, in a nutshell, that's sort of answer that, but Jim, maybe if you could make a few comments on Defence, that may be helpful?

James M. Guyette

Thank you. What I'd like to do is why I may is take your narrow question and maybe provide a little more color to the Defence story, because I think it would be helpful to all of you and I suspect it's one of the primary issues of concern. Let's start with a couple of points of background. Let's go back 5 years and let's look at our revenue and profits. Our revenue improved 54% over the last 5 years; profits, 96%. Now this is against a backdrop of a very, very difficult defense budget situation, U.S., U.K. and a couple of other jurisdictions as well. So in this outsized performance, given the backdrop of a tough, turbulent environment. And the reason that we were able to do so well is product portfolio mix, and also some contracts that served us through that difficult period. What we're now finding is that the defense reductions are beginning to bite and they didn't begin to bite just this year. If we go back and look, our order book has been decreasing over the last 3 years. So I think quite a signal that things were going to catch up with us. And they have. Last year, it was the aftermarket business that did not do as well as one would've hoped or as we have done in the past. And if you look, it only increased 2%. So that's where we took the first hit. And it was in reduced flying, and it was also with respect to some airplanes that have been retired. So this year, it's now manifesting itself in an OE, and I'll cover that in just a second. But I'd like to provide a couple of other points that might be helpful to you.

If you look at the U.S. for a moment, last year, I provided a tutorial on sequestration. My colleagues have asked that I don't do that again this year, but we can do it later if you would like. We do have a defense budget for the first time in several years in the U.S. And that's good news. The other good news is it, for this 1 year, it put aside the effects of sequestration, only for 1 year. The other good news is that it is a GBP 12 billion improvement over where sequestration would've been. The bad news is the defense budget is $40 billion less than the President requested. So again, a little bit of gain here, but not as much as the Defense Department thought it needed to run its business. The other thing that I would point out to you, again, for background, is if you look at the political situation in the U.S., yesterday, House of Representatives passed legislation on debt ceiling, another signal of stability. And that will carry us through March of next year. So I think that's helpful. The other point that I would raise is this is a year of midterm elections. So every member of the House is up for reelection, 1/3 of the Senate. And I think it means that there is probably less room for political mischief. People are going to be on their better behavior. Now what is that mean for sequestration next year? Don't know, but I suspect, again, better behavior. If I could then move to another aspect of this. We have, in my view, good clarity on 2014, and we're having increased clarity on 2015. The next bit of information that we will have will come on March 4, when the President releases his budget to the Congress. We'll have a much better sense of what's in, what's out. Usually, we know about this in February. It's been delayed a month. So we're a month behind in all of that. But still, I think we understand pretty well what 2015 will look like. There are puts and takes. But a better understanding. If I were to, again, walk you through now the OE side of what is happening to us. Again, we're going to concentrate on the U.S. because that's where the volatility is today. The C-130J, it is our bread-and-butter airplane. We have been at a high watermark on deliveries of C-130s. This year, it will drop approximately 30%. You heard the announcement of the new order, a 5-year order, that will bring us up above this year, but not back up to the high watermark. V-22 Osprey has been an award winner for us over the last couple of years, and that drops by more than half this year. And we would anticipate that, that levels off. Now there is going to be some prospect for perhaps some sales to Israel and some other countries that would be nice upside. But for us, we think we know where we are. And, of course, A400M is delivering. We have now JSF starting to deliver. There are some opportunities in the tanker world that we're also having a look at.

The other side of this equation is cost. And a very, very important element of what is happening in Defence. Simply said, we are resizing the business. We're attacking every single element of cost. Overheads over the last 3 years, we pulled overhead down 20%. This year, we are bringing our production costs, our manpower on the shop floor, down 15%. That's almost 500 people. Most of that is in the U.S., and almost all of those people will be off the payroll within 2 weeks. So it's not a plan, it is a reality. We're now moving on product costs, what can we do to reduce product costs? Aggressive actions there as well, those take time to implement but they're under way. We're looking at production footprint. How do we consolidate, how do we reduce? Again, actions underway. So there is a cost element to this, we have got to resize, reshape the business to today's Defence reality. And lastly, John, I would also mention this for the group that we're up in the international marketplace, looking to see what we can do too, to sell equipment and we're working with our platforms suppliers. And then there's the aftermarket and one of the things that we're focused on in this kind of environment is how do we help our customers do more with less? An example of that, we have a new product upgrade for the T56 engine that serves the legacy C-130s. It is now a program of record in the U.S. Very, very helpful. And what we do is upgrade the engine and what it provides to the customer is somewhere between a 10% and 15% reduction in fuel. And so with the small investment, there's a big gain. So we're looking for every opportunity again to help those customers that we have do more with less in a budget-constrained environment. So I apologize for a long answer, but I do think that since Defence was kind of a headline item that perhaps it might be helpful to handle it in a comprehensive way, to answer your direct question, yes, we saw it coming, reflected in order book declining.

John F. Rishton

Thanks, Jim. Mark?

Mark Morris

Right. FRC, look I think the key thing here is that risk and revenue sharing partnerships, which you're familiar with, Nick, are not directly covered by any particular standard under IFRS. So it requires judgment in arriving at what we believe is the right treatment and ultimately, it's like all these things, there is level of interpretation. And as we've alluded to, we've been in discussions with the FRC. We have a view on how we think it should be interpreted, they have another. There are both good arguments for both. But when we looked at it and looked at the difference in terms of where we ended up, we concluded that it was relatively immaterial. But for us, it's important that we stand behind what we believe is the right accounting treatment. And that's the position that we take, and for us, it's consistent with what the rest of the industry does.

John F. Rishton

I think what we found was in discussions we have seem extremely constructive and helpful, and they made us really reflect on what we saw and how it works. I think it was really helpful in terms of getting us to think clearly about something that we haven't perhaps thought as clearly about in the past, so they were good discussions, I think very constructive and useful.

Mark Morris

Absolutely.

John F. Rishton

Mark, you had a question on minorities as well.

Mark Morris

Yes. I'm not quite sure I fully understood the question. But obviously Tognum has been from being JV accounted to fully accounted, and I think if there's a technical question we'll sort of take it off-line.

John F. Rishton

Okay, we'll do that. Next, let's just go back to this side.

Unknown Executive

Those of you who are sitting at the back will learn have to sit in the front in the future.

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

It's David Perry from JPMorgan. 2 questions, please. The first one John, just this issue of medium speed diesel engines where you think Rolls needs to become stronger. When we were given the presentation on Tognum, that was the major raise on debtor [ph] if I understood correctly? So can you just explain why Tognum isn't meeting the need and why you felt the need to have talks with Wartsila please? And the second 1 goes back to Ben's question, right at the beginning about the FRC talks because I think you can't really ignore it and you might have private discussions. I mean, are you absolutely rock-solid sure that there will be no forced changes to TotalCare accounting going forward?

John F. Rishton

Okay, let me take the first one. What has become clear and maybe it's been clear all along, is that we need to do a much better job explaining our non-civil business to many people, which is an issue for us rather than issue for you, if that makes sense. So one of the things that we'll be doing later this year is we will have an investor meeting on our Marine and reciprocating engine business and it isn't just about Marine. There's a land power part to it as well. So we need to make sure that you understand that business I think much more clearly than you do. We recognize that, that's something that we haven't been particularly good at doing. And to clarify that point, Tognum is sort of the high-speed diesel engine company rather than a medium speed. So if you look at reciprocating engines. In simple terms, you've got 3 speeds: Low, medium and high. Low is something you put in huge vessels and you build them into the vessel in place with a vessel is in simple sense of making it all simple. Medium speed is what we make at Bergen, and what Wartsila was good and has a very large market share. Tognum is a high-speed diesel engine, and if you look at the different engines it makes there, I think Mark in total it goes about 28,000 engines, 20,000 of which are what we would call low-power high-speed engines, which primarily for Daimler and there's 8,000 which goes to a variety of different sources of different sizes whether that's agriculture equipment, construction equipment, the Oil & Gas industry, et cetera, et cetera, though a very diversified customer base. But the fundamental difference is high speed, medium speed, low speed, Tognum high speed, medium speed is an area that we need to build that portfolio.

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

I'm sorry, because clearly I phrased the question wrongly. I mean I think back of the Tognum meeting, back of the Tognum meeting, the point was you were not interested in that medium speed area. I know it was your predecessor, but the point was all about the niche folks not in the commodity market and you wanted the Tognum high-speed to clarify the gas turbine capability that Rolls had already in Marine. So I ask the question correctly, why the need to move into the medium speed market that previously, maybe by previous management wasn't perceived as important?

John F. Rishton

Okay. So I'll answer that slightly differently. I think that, one, Tognum is a good acquisition, as I said in my presentation. The management team are doing a terrific, they did a terrific job last year, I'm sure they will this year. And were getting the benefits that we foresaw when we made that acquisition. As I said, I was there last week, one of the things that I go through when I go there is to look at where are we getting the revenue synergies that we spoke about, and how well they're progressing, and we do well, we got a detailed plan on that, lots of detailed examples where that's working. So as an acquisition, I am comfortable that was a good acquisition and a good plan. In terms of medium speed, though, it doesn't address some of the issues that I think we have, we think we have in terms of Marine and the growing land power business. So irrespective of what was understood or said in the past, to be clear, we believe that we need to strengthen our medium speed diesel engine businesses. FRC, Mark?

Mark Morris

Okay, look, we have a huge number of accounting policies that we apply. We are confident with all the ones that we apply. They are viewed and vetted by our auditors. And in relation to TCA accounting, we are confident with that one. And like I said, to Ben, I mean, in terms of conversations or inquiries with the FRC, it's not unusual for companies to have them. But like I said, in any respect, conversations that go on between companies and the FRC are private.

John F. Rishton

Okay, let's go back one more, this side.

Edward Stacey - Espirito Santo Investment Bank, Research Division

It's Ed Stacey from Espírito Santo. Just one question, which is cost savings in 2014. When I look at both Civil and Marine, you're talking about some kind of margin negative effects. So in Civil you're saying you've got the RB211s coming out of service and you've got lower pricing, so both pricing and mix problems. And Marine, you're saying the Offshore is a bit weaker than you thought so that's, I guess, mix-negative and you're saying there is fierce competition. So I guess, we're worried about pricing there as well. So I could imagine if you were doing nothing on cost savings, then your margins would actually be down for both of those businesses. And then when I look at you're saying actually both of them had decent profit growth, there must be a lot of cost savings. Can you tell me, am I right that it's a really pretty big number? And if so, what is it that is nailed down and I could be confident that it comes through the cost savings?

Mark Morris

Okay, yes, I mean, look, obviously, our guidance for Civil, we've guided modest growth in revenue and good growth in profits. And I think what you're seeing there, as I alluded to in my presentation, is that obviously, you're going to start seeing cost benefits coming through. Interestingly, in Civil, that's against the headwind of lower RSP entry fees and lower capitalization. So there are number of things going. As usual, there's a number of moving parts and this usually include mix and various other things as well. On the Marine side, yes, absolutely they took 2% out in 2013, we expect continued cost reduction on that front, along with some restructuring and rationalization, again, those will start to flow through as well. But that doesn't mean that the price pressure is coming off, that's obviously something that is still with us in the Marine side in particular, in particular commercial Marine.

John F. Rishton

Yes?

Rupinder S. Vig - Morgan Stanley, Research Division

It's Rupi Vig from Morgan Stanley. Just 2 questions perhaps. One for John, first. Just when I think about Defence, and perhaps Jim can kind of weigh in on this as well, what is the right long-term margin your Defence business? I mean you have this reset in '14. Are we going to go back to a period over time where we get towards a low kind of teens margin, or can we maintain the margins where they are? Then perhaps one for Mark around cash. When I look at the 2014 guidance, obviously, you're saying roughly the same sort of level. But if we have a good or some improvement, should I say, in working capital, is there a chance that cash will come to look little bit better, specially got flat CapEx as well?

John F. Rishton

Well, I'm very impressed that you managed to find a topic that Jim didn't cover in his explanation of Defence. So congratulations on that. I'm not sure that I can answer you what the right long-term margin is in our defense business. Clearly, depends on whole variety of things. What we are clear about, what Jim did cover is that we need to manage the things that we can manage, which in the specific instance would be cost, or we need to be make sure that we are as efficient as we possibly can be and that's where our focus is.

Mark Morris

Yes, look, I think in terms of cash, I think the key thing to recognize obviously is the improvements, and certainly flat CapEx, and our working capital what we could recognize there is, and I've signaled that is, when we look at the TCA net debt arising by similar levels, again. So that's really what's bringing down some of the effect. We've got a cost reduction out of [indiscernible] cash is being countered by obviously a rise in net TCA data. So that's why we are signaling around at similar levels.

John F. Rishton

Let's just keep going back, and then we'll come back down to the front here. We'll get there. First one?

Zafar Khan - Societe Generale Cross Asset Research

It's Zafar Khan from Soc Gen. Just on the headcount reduction, the 11% you mentioned. Could you give a little bit more detail on that, please? Where that actually happened and what the numbers are in the different divisions now? And how they compare with 2012 year-end?

John F. Rishton

Yes, Mark, I think...

Mark Morris

Yes, I can't break it down by division. I don't think it's -- as we've indicated this is all around sort of what we call indirect -- a large chunk of it would've been in the U.K. but it's everywhere we -- our indirect 11% is the number we get from where we started back in October in 2012 as our benchmark. And it will continue. So that's -- but we don't break it down by division.

Zafar Khan - Societe Generale Cross Asset Research

How many in total, roughly, how many people in total Mark?

Mark Morris

About 1,100. Yes.

John F. Rishton

About 1,100 people. And as Mark said, if it is the overhead area and as I think I've explained to you, my view is that we've carried too much overhead. Many mature businesses we've grown and we've had too much overhead. We need to improve our efficiency a lot in this area, so we're driving process improvements in the whole variety of ways and we'll continue to do that. So if I look at simple things like transaction processing, where do we do that, how do we do it, how many people have got doing it, how efficient are we doing it? Those are the areas that we're getting -- like in terms of the cost you can see huge change in the costs in the year because, of course, we had the cost of restructuring offsetting the savings and we should start to see the benefits of that coming through this year, but we're putting more restructuring in this year to drive more cost savings in the future. And we will drive a similar numbers again this year. Okay, next? Okay, come right down to the front again in the change with policy.

Unknown Analyst

Morning, it's Chris Alami [ph] from Goldman Sachs. Just 1 very quick question about your 2014 profit guidance. How confident you are in that guidance? Because if Defence is down 15% to 20%, and you're guiding for flat, it implies you're non-Defence segment is growing low single digits, but 85% of that non-Defence segment you said is good profit growth. So it seems you must be very confident on flat for the group, for this year?

John F. Rishton

Well, I said, we give guidance every year and I think the track record at a group level has been pretty good, which is a dangerous thing to say, obviously. And it's our best view as we look out into the future. As with all these things it's a projection into what's going to happen in the future, but it's certainly our best view, which we've been reasonably good at doing at the total level, I think as you look into the various divisions you get some ups and downs, which you inevitably do as you breakdown into the detail. But you wouldn't expect me to say anything other than we're pretty confident, otherwise we wouldn't have given it. We've got Sandy, who's just twitched.

Sandy Morris - Jefferies LLC, Research Division

As you welling [ph] some boots on just in terms of our cost base in Civil, the simple average number of employees in 2012 was 21,500 and in 2013, it was 23,400. I know you've taken overhead out. We are clearly sitting on a massive chunk of production capacity that we aren't using. And I mean, if we sort of assuming that engine deliveries aren't going -- trends aren't going up markedly in '14 versus '13, despite 787, is that right?

John F. Rishton

Okay, let me -- may kind of consider Mark refers to this and your point is well-made, Sandy. So if we take the most obvious example, in Singapore last year, we made 41 engines, and it has the capacity to make an engine a day. So clearly, that is a cost burden for us in the way that you're talking about. Next year, there will be a small ramp-up in Singapore. But in total, Trent engines do start to pick up next year, although there's a mix issue there, in terms of Trents, large ones going up and the smaller ones going down a little bit, which is the way that we're forecasting it. The issue for us is in terms of balancing that is preparing Singapore to take over the build of the Trent 1000, the Trent 900 at the moment, last year just build 900, we'll start building 1000s this year, and then the buildup of the XWB, which is our [indiscernible] is very small this year, starting in '15 and then really ramping up '15, '16 in particular. And that's when we start to see that change in mix. So if your question is, am I carrying too much fixed cost and fixed overhead at the moment for the level of production? The answer is yes. And that's what Mark was saying, which is as production ramps up, particularly in Civil, that will bring us benefits. If that's your question.

Sandy Morris - Jefferies LLC, Research Division

Well, it is sort of almost, precisely. Because we can muck about with unit cost in the Civil, I mean god sakes, give us a break. We're carrying a massive amount. So if you then confirm...

John F. Rishton

You're doing a good job for me.

Sandy Morris - Jefferies LLC, Research Division

Oh God. What's the share price if that happened? And therefore, if you tell me that actually notwithstanding that change is difficult, we are content with the progress we're making so that when we hit the button the business in the shape you want it to be, then I would regard that as a very encouraging comment, are you going to make it?

John F. Rishton

Yes, I would. So for us, it's about shaping the business for the future and in the future we're going to get extra benefits of volume, and when we start getting the capacity and the demand in balance, we get that as a windfall. But if we right-costed the business before we get there, then we're in great shape, which I think is the point that we're making. And that's what we're striving to do.

Sandy Morris - Jefferies LLC, Research Division

And you're happy?

John F. Rishton

Yes. Happy is not a word I ever use, by the way.

Sandy Morris - Jefferies LLC, Research Division

Less miserable.

John F. Rishton

Happy was 1974, about 1.5 hours and that was it. It's over. I'm confident. That's a much better word.

Sandy Morris - Jefferies LLC, Research Division

Gosh, you've got a charmed life. And then look, I mean, just blundering into TotalCare. Where actually the disclosure has gone up a lot. The liabilities are a bit smaller than I had imagined. And it's just part of this accruals and spend. Just in broad terms, how much does engine overhauls go up last year? And what's the trend in engine overhauls, just so we can capture the cash spend, please?

Mark Morris

Yes, I think there's so many moving parts here and you've alluded last year GBP 270 million and interestingly, about GBP 240 million of which is in the first half, and only GBP 30 million of which was in the second half, and that really reflects to various moving parts we have in, and what contributes to the net TCA debtor. And again, we get into live it more this when we get into Farnborough. But yes, we had more shop visits and overhauls in H1 than we did in H2. And that's the sort of main drivers, because that drives the creditor down, which in turn creates the net debtor being high. That's the main reason behind it, Sandy. But you had a pretty good go at answering yourself, so...

Sandy Morris - Jefferies LLC, Research Division

Yes, I do that and I move on.

Mark Morris

Well, you're right.

Sandy Morris - Jefferies LLC, Research Division

Are we adjusted to go up again, or have we like hit a maturity average level because my sense is the spend has gone up a lot for the last 2 or 3 years as the fleet matured.

Mark Morris

The levels of H1 -- it will continue -- I mean, obviously, that they will ebb and flow from 1 H to another just depending on how they are scheduled and where the aircraft delivered, and more importantly, how the aircraft are used. Because you can't say that every aircraft has 1 coming in every 5 years. If aircraft has been worked hard it'll be 4 years, so there's lots of moving parts that drive that. And of course, as you know, shop visits and overall costs are just 1 part of what makes up the net TCA debtor. But they will ebb and flow. But of course, as you got more volume under management, they're going to grow over time. That's the reality.

John F. Rishton

Okay. Just one more here.

Andrew Gollan - Investec Securities (UK), Research Division

Andrew Gollan from Berenberg. 2 questions, 1 on aftermarket and 1 on revenue drivers. Civil aftermarkets, could you possibly tell us the split or broad split now between TotalCare and time and materials? And within the time and materials, a broad indication of how important the RB211 program is? Secondly, on revenue drivers, sort of a couple of sub questions here. The launch pricing issue on T1000. Presumably, we knew about that because these are agreements that were made some time back. Or is it a factor that's becoming more of a headwind than we thought? Or do we know where we're going with this issue for '14 and '15? And I guess, the same applies to when we get into Trent XWB down the line. And secondly, on T2500, I believe that was down year-on-year, and I understand that to be part of the services supplied into the platform. Why was that lower given that industry volumes were up, please?

Mark Morris

Okay. Three questions there. I mean, on aftermarket, the split is about 70-30. On the issue about launch costs, yes, of course, we know about them. They're contracted a number of years in advance. Lead times are typically sort of 18 months, 2 years, right out to sort of 5, 6, 7 as a set of delivery for what will go through. But again, when we guide on profit, that is just one element, along with where are we on if you just look at the OE element, what are the other deliveries are doing, and in particular within Civil, you've not just got Civil large, you've also got the business jet engines, which traditionally have higher-margin, and because they fly less hours in the aftermarket. So a logical business analysis says you get more on the OE. V2500, again, let's just remind ourselves of what we continue to manufacture and supply parts, and it's a transitioning process that's going on. And over time, some of the parts that's where we are sourced and supply will eventually transfer through to Pratt & Whitney. We will continue manufacturing a number of parts and again, even over time, some of those will start to drift as well, which is why we usually guided it will start come down over time. So that's the driver behind it. It's just as time's gone on, there's been some parts transfers of what was coming in through us and now what's been transferred and goes straight to Pratt & Whitney. So that's the driver. On the -- previously, I mean, obviously, some of the parts where we have volume is it's just a function of what part sales are being driven. You can forecast them, but what actually turns out may be different. And last year, for instance, we had a number of cases where more expensive parts are being ordered, and more of them which drove part of that revenue.

Unknown Analyst

And obviously that's within [indiscernible]

Mark Morris

I said it's about -- sorry, RB211, off the top of my head I haven't got that, but we'll get that for you.

John F. Rishton

It's obviously, quite significant.

Mark Morris

Yes it is. Within time and materials of RB211 is going to be...

John F. Rishton

Almost all of it.

Mark Morris

Yes, 70%, 80%, I think. Yes.

John F. Rishton

And the 70-30, Mike just to be clear is the total as opposed to the split of sales that we've got at the moment where we got higher TotalCare and less time and materials.

Mark Morris

That's correct. So it's just on the existing and still...

John F. Rishton

That's the total, now it's different. Anything else? Just one more from -- last one from Ben, last of the last.

Unknown Analyst

Sorry to come back with a few more, and then I'll lay a point maybe. But just a couple of follow-ups. Firstly, you mentioned there was some deposit inflows that helped -- or deposit inflows, an item in the cash flow in 2013. Maybe you do just disclose it and I just can't find it but I wondered if you could share with us what that scale of deposit inflows was in the free cash flow number in 2013? The second question and I guess it builds partly on this launch pricing point, but just you clearly have good visibility about the launch pricing effects. But on XWB as those volumes rise on '15 and '16, just how that plays out and how we should think about the headwinds that may or may not create? And maybe the final one is just your comfort level on Trent 500 TotalCare net debtors. Your Trent 500 is 12% of your installed base, we've got 10% of the aircraft on the ground. Your offering understandably an improved package for the airlines of overhaul all the other 3, I was just wondering how that plays out in terms of your view on whatever the TCP net debtors is on Trent 500?

John F. Rishton

Mark is delighted to have 1 last question.

Mark Morris

On deposit flows, I mean, we're surprised the bulk of that has really come from Civil and the massive growth in the order inflow, order intake and order book. At the same time, of course, Defence has been running down as the production delivery phase has been coming through. But one has more than offset the other. I don't think we sort of revealed the sort of net difference between the 2, but that's what's been driving it, Ben. On launch pricing of XWB, look, we are not going to sort of get staked out by some program-by-program in giving you the guidance from '14, and what I'll call it be a figure painting for 2015. We factor that in, into our corporate. And again, ditto on Trent 500 net debtor, it's a small contribution to the overall net debtors. As you know, Trent 500, as a 4 engine aircraft is not doing as well given the high fuel price environment. Again, that's factored into our calculations. But I'm not going to break it out specifically. But again, it's reflected in the total rise in net TotalCare debtor that I gave you for 2014.

John F. Rishton

Thank you. As you see, if we have one extra question. The answer's tend to get a bit less answers I think is the way I would describe it. Less specific, maybe. Thank you very much for joining us this morning. It's very good to see you all again today. If I leave you with just a couple of thoughts. First of all, cost, cash, concentration and customer. Really, really important for us in the business. That's where our focus is, where my focus is, where the board's focus is, to make sure that we can do as Sandy was suggesting. Really important that we get the customer elements right, we're making good progress on that. We've still got a ways to go. 2014, pause for growth, not a change of direction. Growth comes back in 2015. Thanks very much for your time this morning.

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