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Executives

Simon Goodson

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

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

Mike J. Terrett - Chief Operating Officer, Executive Director, Chairman of Exports Committee and Member of Risk Committee

Analysts

Celine Fornaro - BofA Merrill Lynch, Research Division

Benjamin Fidler - Deutsche Bank AG, Research Division

Nick Cunningham

Rupinder S. Vig - Morgan Stanley, Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

David H. Perry - Goldman Sachs Group Inc., Research Division

Finbar T. Sheehy - Sanford C. Bernstein & Co., LLC., Research Division

Sandy Morris - Jefferies & Company, Inc., Research Division

Rolls Royce Holdings (OTCPK:RYCEY) H1 2012 Earnings Call July 26, 2012 3:00 AM ET

Operator

Good morning, and welcome to the Rolls-Royce Holdings plc 2012 Half-Year Results Conference Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today I'm pleased to present Simon Goodson, Director of Investor Relations. Please begin your meeting, sir.

Simon Goodson

Thank you, Hugh. Good morning, and a warm welcome to everybody to our half-year 2012 results webcast.

Just regarding the materials for today. We issued the results stock exchange announcement earlier this morning. The presentation slides for the webcast are available both via this webcast and also via our website, www.rolls-royce.com.

As always, elements of this presentation contain forward-looking statements that 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 this context.

So for today's webcast, I'm pleased to be joined by our Chief Executive, John Rishton; our Finance Director, Mark Morris; and also our Chief Operations Officer, Mike Terrett.

It's a busy morning for everyone, so I'll pass straight over to John.

John Rishton

Thanks, Simon. Good morning. Thanks for joining us on this call. As you will have seen from the press release, we've delivered a solid set of results with the order book up 4%; underlying revenue, up 5%; underlying profit, up 7%; and our half-year payment to shareholders, up 10%. We also confirmed our full year group guidance.

Mark will take you through the details after I finished my brief comments.

As you've heard me say before, we are focused on 3 main areas: delivering the promises we've made; deciding where to grow, and just as importantly, where not to; and improving our financial performance.

Let me give you a few examples of progress in these areas. In terms of delivering promises to our customers, one of our Cs, gas turbine original equipment delivery performance improved in the first half compared with the same period last year. Where are we going to grow? You can see an extensive list of investments in the press release, providing clear evidence of our growth ambitions. Where will we not be growing? Fuel cells. You are, I hope, all aware that LG are now majority shareholders in that business. And for financial performance, our revenue and profit and margins are up in the first half. But we have lots more opportunity, including, of course, fixing the Energy segment performance. I look forward to taking your questions a little later. Mark will now take you through the numbers.

Mark Morris

Thanks, John, and good morning. I'll draw out the main highlights of the group's financial performance for the period, and then I'll update you on Tognum and IAE. As usual, I'll concentrate on the underlying performance.

You'll see from this slide, the order book revenues and profits are all heading in the right direction. And as John just described, we are investing for future growth. The order book of GBP 60.1 billion is up 4%, adjusted for the sale of IAE and reflects GBP 9.1 billion of order intake. Group revenue was up 5% with growth pretty evenly split between original equipment and services supported by good performances in Civil and Defence as you'll see in a minute. Profit increased by 7%, reflecting increased volume and productivity improvements and a GBP 32 million net contribution from Tognum. We ended the year with GBP 869 million of net cash. This includes the GBP 953 million we have received from the sale of our shareholding in IAE and another GBP 167 million from the transfer of Bergen into Engine Holding, our joint venture with Daimler. Excluding these, there was a cash outflow of GBP 447 million. This reflects where we are in the investment cycle and is in line with our expectations. We're increasing the payments to shareholders by 10% to 7.6p, reflecting our continued confidence in the business.

So let's look at the key components of profit growth. Trading, up GBP 120 million, reflects the benefits from higher volume, favorable mix of business and lower unit costs, offset by the nonrecurrence of last year's GBP 60 million SDSR benefit. The net R&D charge is higher, reflecting our major development programs. As I guided at the prelims, the R&D charge would be higher this year, reflecting increased spend, higher amortization and lower capitalization reflecting where we are. You can expect the increase in the R&D charge for the full year to be roughly double what it is at the half year. Entry fees are lower as the Trent XWB program approaches certification later in the year. And finally, we have the net profit contribution from Tognum.

Turning to cash flow. I'm just going to pick out the major themes in this chart that you're all familiar with. Firstly, networking capital, which increased because of higher inventory associated with the new factories we are opening and the new products we are delivering, together with an increase in debtors. Second, CapEx and intangibles. As you know, we have good visibility of future growth, and we continue to invest in both capacity and product. Finally, we have spent around GBP 350 million in the first half servicing our main stakeholder groups, shareholders, taxes and pensioners. So we're pretty much where we expected to be.

Looking at the full year, I expect cash flow to be around break-even. The second half of the year will benefit from reductions in inventories as volume of deliveries picks up; further order intake, which will yield increased deposits; and improved cash flow phasing an aftermarket activities.

Turning to the business segments. Our Civil Aerospace business has seen strong top and bottom line growth. The order book increased 4%, adjusted for IAE, and now contains around 3,300 engines of which our Trent engines make up over 70%. Our share of the wide-body market continues to grow and we are on course to double our production of large civil engines by the middle of the decade. OE revenue was up 26%, driven by a 14% increase in Trent deliveries and a 22% increase in deliveries of corporate engines. Services revenue was up 10%, driven by our TotalCare aftermarket model and higher engine flying hours. You can expect this growth to continue as our fleet of younger and more fuel-efficient engines expands and new aircraft, likely Airbus A350, and to service over the next couple of years. Profit increased 24%, primarily reflecting the benefit of the increased volume, better mix and unit cost improvements offset by higher R&D and lower entry fees.

Moving to Defence. We are pleased with the performance in Defence, particularly when we adjust for the SDSR settlement in 2011. Revenue showed 4% growth. OE was up 11% due to a 19% increase in engine deliveries. Services were down 2% but if we adjust for the SDSR settlement, the figure was up 10% highlighting that opportunity still exists as you will have read from our recent contract wins. Profit was down 11% due to the one-off SDSR benefit. Adjusted for this, profit was up 23% due to increased volumes, mix and unit cost improvements. Our Defence order book was down 8%, which reflects the budgetary pressures of our major customers. We have a well-diversified portfolio and a large installed base with around 50% of our revenues coming from transport, which tends to be more resilient.

The Marine business now excludes Bergen, which you remember was transferred to Engine Holding at the start the year. It's worth remembering that Marine has 3 segments: Offshore, which makes up 1/2 of the revenue; Naval which is about 30%; and Merchant, which makes up the rest.

In Offshore, there are encouraging signs of recovery, driven by higher oil prices as you can see in our rising order intake. We expect that recovery to continue in the second half of the year. In Naval, we secured some important strategic wins: the U.K. -- sorry, the U.K. nuclear subs contract, 2 more LCS vessels; and our first ever contract with the South Korean navy. Demand in the Merchant business remains subdued and there's not much sign of a pickup yet. So overall, we expect revenue improvement in the second half of the year, driven principally by demand in the Offshore sector.

It's encouraging to see the 44% increase in our order book with order intake outpacing revenues for the first time in 2 years. Although profit was down 6% due to lower volumes and pricing pressures, looking ahead, we expect profits to be broadly flat for the full year due to increased volume and an improved revenue mix.

In Energy, the numbers also exclude Bergen and there are some big movements here; but remember, these numbers are small in the context of the group. Energy continues to underperform. We have a well-established Oil & Gas business and 4 less mature businesses in power generation, Civil Nuclear, fuel cells and Tidal, which suppressed financial performance. As John had said before, we are reviewing these areas. In the first half, we sold a 51% stake in our fuel cells business to LG, and we continue to invest in the Civil Nuclear business where we see significant opportunities ahead. In Oil & Gas, there is continued bid activity and strong competition for OE, while in Power Gen demand remains weak. However, services in both Oil & Gas and Power Gen have performed well.

Base on our first-half performance and what we see for the rest of the year, we have amended our full year guidance for Energy from an expectation of growth to broadly flat for revenues. We continue to expect some improvements to Energy's profits and group level guidance remains the same.

So turning to our financial strength. We continue to place considerable importance on obtaining a strong investment grade credit rating, and we're pleased to have received an upgrade from Standard & Poor's. A strong credit rating provides assurance to our customers that we are there for the long term and ensures continued access to funding. Our liquidity is strong at GBP 3.15 billion, representing the GBP 869 million of net cash and GBP 2.1 billion of committed facilities with no material maturities over the next few years.

So let's just remind ourselves where we've got to with IAE and Tognum. So IAE first. We completed the sale of our shareholding in June and received a consideration of GBP 1.5 billion of cash. We originally guided for a full year contribution of GBP 140 million of profit, so I expect around 1/2 of that for remainder of 2012. The new joint venture for the next generation of midsized aircraft with Pratt & Whitney and the other IAE partners remains subject to regulatory approval.

Our joint venture acquisition with Tognum is following due legal process. We now expect that process to complete in the first half of 2013, and therefore, we will continue to equity account for our share in 2012. We're already working closely with Tognum to coordinate sale opportunities, but we cannot give any financial guidance while Tognum is still listed. Remember that Tognum reports its H1 2012 results on August 7.

So to wrap up, I'm pleased with the progress we have made in the first half of the year. The group delivered solid growth in underlying revenues and profits and cash flow where we expect it. We continue to invest for future growth. And we are confirming our full-year guidance of the group.

And I think with that, we'll move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Celine Fornaro of Bank of America Merrill Lynch.

Celine Fornaro - BofA Merrill Lynch, Research Division

Now a few questions, if I may, regarding the service performance within the divisions. So in Aerospace, could you just say what was the FX or stripping out the FX contribution on your service growth of 10% there? And the other thing is on the Marine division. What was the service growth achieved, and how should we think about that in terms of the full year contribution?

Mark Morris

I'm not quite sure I fully understood your question. Maybe something I missed when you -- do you refer to FX or do you refer to service contribution?

Celine Fornaro - BofA Merrill Lynch, Research Division

Basically, in the service growth was 10% in Aerospace and those includes or how much is it without an FX, what is the organic number?

Mark Morris

Okay. Well, FX we said this year is going to be broadly neutral. No FX effect. In relation to the aftermarket, as you've said, we've seen a 10% growth and in Defence aftermarket...

Celine Fornaro - BofA Merrill Lynch, Research Division

And that 10% doesn't include an FX?

Mark Morris

No, it doesn't include FX. So what was your other question?

Celine Fornaro - BofA Merrill Lynch, Research Division

The question was in Marine where the services seem to have been affected in H1. So if you could tell us what was the service growth in H1 for Marine and what is the full year outlook for that?

John Rishton

Well, services growth was negative as you can see in the press release. It was down about 6%, the services of Marine. And I think what I would say is there are couple of factors there. First of all, there is some evidence that -- of some deferrals of servicing in the Marine sector and secondly, when servicing is coming in, there's some evidence that instead of a more general servicing, they're being very specific about service requirements so there is slightly less spend on each service element. I think, again, not entirely surprising when you look at the economic environment. But those are, I would suggest, are the main reasons for the decline.

Mark Morris

Again, looking forward in terms of -- for the rest of the year, we're expecting revenues in Marine, including services revenues, to tick up. If you look at the performance in the first half relative to guidance, we've obviously got -- there's an increase in the second half. I think there's 2 elements to that: the OE, and again, given the orderly tons, most of that order intake is already booked, written and contracted, and we're expecting more growth in aftermarket, particularly in Offshore in H2, which is why we're confirming the guidance for Marine.

Celine Fornaro - BofA Merrill Lynch, Research Division

Okay. And just as a follow-up on the Aerospace services, last year, at the H1, you gave a bit of a flavor on the service growth of 10% in Aerospace. If you could just tell us what was the TotalCare growth and what was the time and material growth compared to that 10% number. Was one stronger than the other one?

Mark Morris

Okay. Yes. Of course, it wasn't me who gave that update back in H1 in 2011, but I can probably remember what was said. But in relation to H1 this year, and again, as you know, broadly about 2/3 of our aftermarket revenues are on some form of long-term services agreement with the remaining 1/3 on T&M. And if I look to the growth that we see in civil aftermarket at 10% this year, about 3/4 of it has come from aftermarket and about 1/4 of it has come from time and materials. And again, I think this sort of reflects our model, which is the sort of pay-as-you-go on engine flying out and it's all thrust-related whereas, of course, in T&M, the ability for the operator to either defer or reduce the work scope means that you can see a bit more volatility. And again, we're aware that when you look at some of our other peer groups are reporting, you'll see a mixed bag of results there.

Operator

Our next question comes from the line of Ben Fidler at Deutsche Bank.

Benjamin Fidler - Deutsche Bank AG, Research Division

A few questions please. Firstly, just if you can comment on the pricing environment that you've seen in OE in Marine on some of these new orders. It's good that you see the order intake up. But just, yes, wonder what the pricing has done there on a year-over-year basis. The second question was just around the TCP net data [ph]; I noticed up GBP 168 million in the first half. If you can help me just figure out where that full year increase in the TotalCare Package net data [ph] might be headed for 2012. And the final one -- sorry, another one, on commercial aero engine services, was there a significant element, at least, from conversion from ton material into TotalCare in this half or is the 10% growth that we saw sort of true underlying number? It will be helpful just if you're able to comment on that.

John Rishton

Okay. Why don't I just talk a little bit about pricing and then I'll ask Mark to deal with the numbers questions. In terms of pricing, the pricing has been under some pressure in Offshore and in Marine in particular. Again, that's something you would expect in the environment in which we're operating. So we've seen certainly some pricing pressure there, which is why we are working hard. You would expect to reduce our cost and improve our efficiency. Mark, do you want to make some comments about TotalCare and services?

Mark Morris

Yes, certainly. I think in terms of the TotalCare, you're right, Ben. Obviously, the data [ph] has risen and I think that's primarily reflecting the higher uplift in engine deliveries of 15% weighted towards Trent deliveries. And of course, as you all know, a significant higher proportion of new business tends to be on some form of LTSA, and of course, we get the usual effects, the TCA accounting providing services, the timing differences between recognition of income and costs and payments of -- cash payments and receipts. And that's what you're seeing in the front and in terms of it growing there. Again, I think, as we've given full year guidance, it's pretty much in line with that. In relation to services, H1 did not have any significant transfers from time and material to aftermarket -- sorry, to TotalCare-type contracts. So it's the usual phraseology, more underlying, more normal.

Benjamin Fidler - Deutsche Bank AG, Research Division

Okay, that's great. I just need to clarify on that TotalCare. Your comment that the first half is in line with the full year implies presumably we should see a broadly similar level of increase in the second half. Should I read it that way, or have I misunderstood reading between the lines?

Mark Morris

No. I mean, I think we can get -- I mean, we don't sort of divide things, from 1H to the next. I mean, I think just in terms of the full year guidance, I'm not suggesting necessarily the H2 will be the same growth as you'll see in H1. But in terms of the full year, the guidance obviously falls in line.

Operator

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

Nick Cunningham

Two questions, if I may. First on percent, which, as you've guided, produced a very good margin, over 17%. And perhaps considering an excess of the traditional margin that you get out of that division, which has been in the 10% to 13% range, which is normal for the industry, so I was wondering if you could give us a little bit more color on how that's arising so that we can perhaps judge as to the sustainability? Second question, cash flow. You've continued to guide to neutral free cash flow for the year because you're in an investment phase. Question really there is, when you get out of that investment phase, what would normal free cash flow be? In other words, how much of the cash out this year is attributable to the fact that you're in a sort of extraordinary investment phase?

John Rishton

Nick, thanks for your questions. Let me make a couple of comments and ask Mark if he wants to add anything. In terms of Defence, as you rightly say, we had, I would describe, a very strong margin in the first half -- I'm sort of hesitating at using the words exceptionally strong, but certainly a very strong margin in the first half. If you look at the guidance that we have given you, I think that that will lead you to believe that 17% is not a margin that we would anticipate, not would continue in the future of this year. We would expect to see it returning to more normal levels. So if you just do the math in terms of the guidance, I think that's the conclusion you get. So 17%, which was a terrific performance from the guys in Defence is very strong and reflects the mix of business, the cost reductions that we've put in place, et cetera, et cetera. In terms of cash flow, we've been investing for some time and we continue to invest to support the future growth. And you'll see in the press release a number of examples of capital expenditure. And again, you're familiar with that list, whether it's new facilities, new machinery, et cetera. You're also familiar because you know as well that when we open new facilities and expanding growth, we inevitably end up with more inventory than we would do if we were in a steady state. So the fact that we opened Seletar, our facilities in Singapore earlier this year. But we're not producing anything from those at the moment, doesn't mean to say that there is no inventory, and there clearly is. We are going through tests. We've got engines out there, Trent 900 engines in the assembly plant, we've got fan blades in the fan blade plants. So we have been increasing inventory as a consequence of that. We've also continued to spend significant amounts of money in terms of research and development as we continue to invest for the future. You know all of those elements. In terms of what a normalized situation would be, I mean as frequently the case, it's difficult for me to sort of create a picture for you of --I'm trying to picture myself about what I would want normal to be because I quite like having all these growth opportunities and I hope that they continue into the future. So let me answer from a slightly different perspective. We are clear that we need to improve our cash performance, and certainly, the areas that we will be concentrating on really are around working capital, and within that is primarily inventory and inventory term performance. And Mike Terrett is here with us today and Mark Morris and myself and many others in the rest of the business spending a significant amount of time on that, trying to manage the balance between what we need in new facilities to test those out, how do we manage out inventory and complex supply chains to make sure that we deliver to our customers. As I've said, we've improved our performance. You've seen -- just taking Civil, we've increased the number of deliveries by 15% in the first half. So significant changes going on in within the business; how we can continue to meet our customers' requirements while at the same time improving our efficiencies. So it's a complex equation, but one that we are fully focused on. So I haven't answered your question as you would expect. That is, you would expect me not to answer your question. But what I am saying is that we clearly recognize the significant opportunities in terms of improving our cash performance, particularly from working capital, and within that, particularly from inventory. But these things take time and we need to manage it carefully because of the items that I've spoken about. Mark, do you want to add anything to that?

Mark Morris

No. I mean, only on Defence margins. And I think as we've guided to modest growth, both in revenues and profits, you can see that we're not wanting you to get run away on return on sales, that full year is going to be more towards the mid-teen range rather than where we are at the moment. So I guess -- I mean, on cash, I think sort of John has really covered it, I mean it's not as if it's going to change overnight and next year all of a sudden we're just going to be looking at CapEx that's sort of in line with depreciation or something. We continue to invest in a growth cycle. You can see the order book. We've got production and we've got a doubling of our Trent production over the next 5 years or so. And of course, we continue to open up new factories and so these will give us those operational benefits and ensure that we can deliver the capacity. So it's -- along with a number of opportunities that I think John just described.

Nick Cunningham

Can I just follow up briefly? If you were to benchmark your peers in terms of inventory turn, where do you think you ought to be, because we might be able to use that to try and perhaps model where, if you like, a normal level of working capital would be.

John Rishton

Yes, I'm happy to help you with your model, as you're all aware. Clearly, you're aware of this. Our inventory turn performance compared to GE as an example is far worse, and are a number is I think I've seen before. There are a number of what I would describe as structural reasons for that and a number of reasons that are bad out performance. Structural reasons may be the fact that GE has huge volumes of the CFM engines, which certainly always help inventory turns. But they have managed their inventory, I would say, more effectively than us in a number of ways and we're trying to learn from that, and we will improve it. So we think we've got considerable scope to improve our inventory turn rate. But it will take some time because I want to make sure that we don't get the balance wrong between satisfying our customers, managing the launch of new facilities while trying to drive inventory turn rate up.

Operator

Our next question is from Rupinder Vig of Morgan Stanley.

Rupinder S. Vig - Morgan Stanley, Research Division

Just got 2 questions, please. One, perhaps just about unit cost reduction. And Mark, you mentioned a few times during the presentation, there had been a benefit coming through. Can you just give us an idea, given Mike is also there, in terms of what's being done, what the scale of the improvement might have been, perhaps in Civil plus also the other bits and pieces of the business. And then just a question on Energy, perhaps for John. You mentioned right at the very beginning that obviously you're improving performance in Energy is a key focus. You've obviously done the fuel cell agreement, which you talked about. But what else might we expect over the next few months? What's the time line for further progress in this division?

John Rishton

Okay. Let me start with Energy and then I know Mike is keen to talk about unit costs; he is anyway when I talk to him. In terms of Energy, I've said a couple of times, it's quite clear if you look at the segment results and you look at them over a number of years that the financial performance there is unacceptable, so we need to address that. As with all these things, whilst it is clear that we need to address it, the time it takes to address it and the complexity of doing that is always going to take a little longer than most people expect. I'm delighted that we've formed this joint venture with LG. I think LG bring with them some terrific skills, capabilities and knowledge. And we look forward to working with them and the progress of that in the short term has been up and running has been pretty good. So I think that, that is a fairly clear answer to the future as far as Rolls is concerned as to fuel cells. You're also aware that I've made comments about time that we need to address that and we're making some progress on that, but I'm not going to discuss that in detail today. But I'm hopeful that we'll have something to say about that by the end of this year. In terms of Power Generation and the other elements of Energy, the Oil & Gas section, the comments that I've made about there in the past is that we need to address a number of issues there regarding some of our product performance cost rose to market. Those, again, take a little longer than some people would like. We are working on those, but I'm not going to get into any commitments in terms of time frames on that. I can assure you that it has our full attention. It is something that we have been looking at, are looking at and will continue to look at to make sure that we have a solution, to make sure that the financial results in that segment are consistent with the rest of the group. The other area that we have -- yes, that we're committing to is Civil Nuclear. And as I've described in the past, Civil Nuclear is a fledgling business. Its performance in the first half in terms of IMC wasn't where we would have liked it for a variety of very specific timing reasons and it will improve in the second half. But it's small business where we're investing for the future. We're making good progress there in terms of the agreements that we have with the prime contractors, Areva, Westinghouse and Rosenergoatom, for example. So I'm comfortable that we're in a good place in terms of Civil Nuclear and that there are good growth opportunities there that are profitable. We've made clear decision on fuel cells. We will be addressing the other elements of Energy to make sure that, overall, we get a satisfactory financial performance. But it will take a while. Mike, do you want to talk a little bit about unit cost?

Mike J. Terrett

Yes, first thing, I'll talk generally about unit cost and productivity and investments. As with John's comments on inventory, these are very long-term things that we ship and I've been saying this to you for a number of years now, that it's a long-term process in operations. Our aim has always been and continues to be to drive productivity to at least eat inflation or beat it. The reason we don't speak in specifics on unit cost numbers is that we have such a complex mix now across different sectors and different product mixes inside gas turbines. So we'll only talk generically and say that we're pleased with the progress we're making on that long-term battle. And the things that we're doing are working. But to give you a sense of why it's complex picture. This year we're going into full production from essentially a flight test program into full production on the Trent 1000. So that's obviously from a learning curve. The same is happening on the BR725, which has, again, gone from flight testing to full production. With that, we have obviously the learning curve that we're working our way through. But on the other hand, new products have the full benefit of all of the productivity and investments we've made on manufacturing techniques. So you've got 2 trends. We're in the middle of a flight test program. We started with the flying test bed, we're building the flight test engines, A350. So those had also gone through our facilities; very large, 9-ton engines in amongst of volume engines. Facilities that we've invested, and you know about these, in America, in the U.K. and Singapore. They are going from empty sheds into full production. And those are in our cost base, but not yet in our revenue. So in that complex mix, we don't give an average number. But we are seeing the benefits in those facilities of putting in modern manufacturing techniques, modern control processes. And over time, they will allow us to capitalize on the volume, which also, obviously, offsets all our fixed costs. So it's an encouraging trend, but I think we will not be giving a 1-point guidance on those numbers.

Operator

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

Robert Stallard - RBC Capital Markets, LLC, Research Division

First of all, a question on the aerospace aftermarket again. I was wondering if you could tell us how discussions with your customers over the last 6 months have been going on the time and materials side and whether you've seen any sign that they could even be deferring or destocking spare parts?

Mark Morris

Well, I think in the previous couple of [indiscernible]. I mean, when we look at the growth in all our aftermarket, the fact that 3/4 came from TCA and 1/4 came from time and material, certainly in this half, relative to 2/3-1/3 split would suggest that -- I mean, there can be a number of factors in terms of how many particular overhauls we scheduled. But there is no doubt that out in the market, there is a mixed response from different airlines in terms of what they're doing. In terms of either deferrals or lower spec overhauls. But I think it comes as no surprise that airlines are looking to preserve cash where they can.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Has this materially changed over the last 3 months?

Mark Morris

Off the top of my head, I couldn't tell you. I mean, I don't think, just looking it -- and again, you can't draw any conclusions just from 3 months worth of data on T&M.

John Rishton

What I would say is I continue to be particularly pleased that we have focused on and continued to focus on our a TotalCare packages rather than time and materials. And I think that if you were to line up the services, for example, on Civil, in terms of the performance that we've had versus what you're seeing with some people who are primarily on time and materials, I think you'll see the answer to your question.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Yes, yes. And then secondly, on the Trent 1000, I was wondering if you could comment on the issue over ANA with the gearbox whether it has any impact on your delivery schedule or R&D costs?

John Rishton

Yes, clearly, disappointing that we caused the ANA an issue, but we and they are primarily focused on safety, which is exactly where it should be and we found a component in the gearbox was wearing a little more quickly than we thought it should. So I think the summary is they put 5 aircraft on the ground, 4 of those aircraft are now back in the air and I believe the fifth one will be up again soon. Clearly, that causes some changes in our production. But in terms of financial consequences, they're not material.

Operator

Our next question is from the line of David Perry of Goldman Sachs.

David H. Perry - Goldman Sachs Group Inc., Research Division

Maybe it's one more for Mike. I was just wondering, Mike, can you help me scale the size of the facilities in Singapore and Brazil? How many employees are in each and just whether you've got any medium-term plans to have more such sites in, should we said, developing markets, please?

Mike J. Terrett

Okay. Well, first of all, just to take that last point. Well, clearly, where the customers is important in both those locations, but also we need a [indiscernible] as well. So that -- those factors drive where and when we decide to have facilities. So we need both. So future decision will be based on capacity needs and also a whole range of strategic choices as to whether that influence our location of the facilities. Broadly speaking, there'll be 1,000 employees in the Seletar site when up and running fully. And we're in the recruitment process, as I speak, and we're building up quite nicely there. I don't have a precise number to hand in Brazil, but it's substantially smaller than that. It's in the sort of 100, I think, that sort of territory. And we're clearly nowhere near having that number of employees yet because we're building the plant. It's -- hopefully, that market will be good and strong for us in Brazil. And there's certainly a lot of opportunity in there in the Offshore, and we'll see how the market develops.

Operator

Our next question is from the line of Finbar Sheehy at Sanford Bernstein.

Finbar T. Sheehy - Sanford C. Bernstein & Co., LLC., Research Division

Back to Marine for a minute. You've been working to expand your waterfront presence around the world. Can you give us an update on where that is and whether it's a significant contributor at this stage of the order, is that you're seeing?

John Rishton

Yes, as we already said, we've been expanding the number of service centers that we have around the world. If I remember correctly in the first half, it was not much significant change in that. There wasn't any change in that. We will continue to grow our service network. Just going off at a slight tangent on that, one of the things that we're looking at as part of that is the relationship now that we have with Tognum, which has, again, as you would expect, a significant number of services albeit with -- in terms of different arrangements in terms of ownership, but how do we look at the total network in the future. In terms of importance, again, as we've touched on the reason that we're opening these service centers is that the Marine is different to Civil Aerospace. It generally needs physical presence if you're going to do the overhaul and the physical presence where the ships are because no one is going to take them halfway around the world to get them -- to get to repair and overhaul. So it's important that we have service centers where the ships are, and as the centers of gravity of where the ships are shipped, then we need to make sure that we reflect that in our network. So we will continue to expand. It is a very important element of our offering and it will become an increasingly important element of our offering in the future.

Mark Morris

And as I indicated, I think you can expect some improved performance in aftermarkets in the second half in order for us to get to our guidance that we've given.

Operator

Does that answer your question?

Finbar T. Sheehy - Sanford C. Bernstein & Co., LLC., Research Division

Just to come back to the order flow. Is it the network of service centers a significant contributor? Do you expect it to be to the order flow or is that more OE focused when you report backlog?

Mark Morris

Yes, in terms of lead times, let's just recalibrate ourselves. I mean, generally on OE, you're looking around 9 to 18 months in the Marine business. And on spares, I mean, it can be anything from sort of 24 hours to normally 3 months to something longer if it's a major item. So it will cycle its way through the order book and it will be whatever it is at that point in the cycle when we strike the balance sheet date. But -- so the answer is, yes. It does contribute whether it's a significant contributor. I mean clearly, it generally is driven more by OE just because of the short lead times of aftermarket. And again, Marine, just remember that -- and again, I think you've got this in the back of your data pack. The amount of business that is actually on some -- of LTSA is actually quite low [in general related to Naval business, so its predominantly T&M. And again I think, as John alluded to, that T&M is subject to people deferring and lowering [indiscernible] if they're looking to preserve cash.

Operator

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

Sandy Morris - Jefferies & Company, Inc., Research Division

Trying to phrase this as a question rather than a statement, but Civil Aerospace clearly had a very strong first half despite headwinds from R&D and/or contributions. I mean, Mike sort of rounded it off, but I guess my take is we probably did very well on A330, so a long-established program. And we were quite punchy, much punchier than I expected on BizJet. I mean, as we go on into the second half, go off in the newer programs [indiscernible], does the mix slightly weaken for us? Sorry, I'm in my glass half empty-sort of mood at the moment

John Rishton

Well, if you need to get another kind of glass, Sandy, I'd tell you. I can't believe you'd be so pessimistic. We saw a good increase in deliveries in the first half as you can see from the numbers at 15%, significant increase in wide-body deliveries and an increase in corporate jets as well. If you look at the volume for the large Trent, the volume is clearly -- the Trent 700 or the A330 and that really doesn't change significantly in the second half, certainly as far as I'm concerned, because the Trent 900 is relatively low volumes anyway and the Trent 1000 is still in early stages of ramp-up with relative low volumes.

In terms of corporate jets, as you say, that was significant volume. But as Mike started speaking about the -- getting into the production of the 725 engine, we would expect that to ramp up and continue to ramp up in the second half and into next year as well. So that should be -- it's important for us in the future. So if I look at the total mix in terms of engines, large and small, I wouldn't expect a significant change from Half 1 to Half 2.

Simon Goodson

Okay. Thanks very much, everyone. We're going to finish there. I'm sure that we've got more questions, but we'll have to take those up via the IR. So thanks to John, Mark and Mike. And thanks to everybody else for listening.

John Rishton

Thanks very much.

Mark Morris

Thank you.

Mike J. Terrett

Thank you.

Operator

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

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