1. What do you mean by 'growing pains'?
Across the Group, we are incurring the pains from preparing for major unit volume growth for the first time in our history. To do this, we need to put in place the facilities, tooling and people before that growth, so that necessarily means higher fixed costs before we get the revenue growth. As volumes start to come through, we become more efficient as those costs are spread over more units and we get better at reducing our costs.
2. Why are you so confident that your H2 performance will be realised?
We have a high level of OE cover across the Group, with good visibility of services revenue in our Aerospace businesses and plans in place to reduce cost.
OE coverage is 95% in Aerospace and 85% in MIPS.
Services coverage is around 80% in Aerospace, and MIPS is seeing an improvement in the run-rate volumes, with additional confidence provided by the pick-up expected in oil & gas and mining end markets.
3. What are you doing on cost? When will cash generation substantially improve?
We are driving cost reduction across the Group:
In Civil Aerospace, we have 600 engineers tasked to reducing cost as their primary objective; 400 on OE and 200 on services. The highly regulated nature of the aerospace industry means that it will take both time and tenacity to drive cost out of the business and we are still not where we need to be. We are building newer, more efficient facilities and capacity that will support a doubling of production of Trent engines. We are moving production away from high cost countries, and we are consolidating our supply chain. These actions will deliver benefits over time.
In Defence Aerospace, we are re-sizing the cost base to offset the reduction in volume.
In Marine, we have announced our intention to close facilities in the UK (Portsmouth) and in South Korea (Busan), and are in consultation regarding the restructuring of plants in Norway (Brattvaag) and USA (Pascagoula). We will increase LCC sourcing from the 28% as at the end of 2013 in order to be more competitive on cost.
In Nuclear & Energy and in Power Systems, we will look at how best to integrate the businesses and manage cost following the sale of Energy to Siemens and the acquisition of Daimler's 50% share in RRPS.
In broad terms, you should expect the Group's cash generation to materially improve about a year or two after we reach peak production. Today, that appears to be around 2017-18, but the phasing of OE volumes through our facilities can change this timing. Other things can of course also change the timing of the cashflow inflection point such as investment in major new programmes, and we'll update you as we go along.
4. The Civil order book is still at over £58bn – how much risk is there that those orders could be cancelled?
The size of our Civil Aerospace order book gives excellent visibility of future revenue streams.
Strong order intake over the last few years is a result of the drive towards newer, more fuel efficient air travel, which is driving fleet replacement in developed regions.
In Emerging Markets, there is a burgeoning middle class that is increasing demand for air travel and resulting fleet expansion. The geographical spread of our order book also gives us comfort – we are not exposed to a single region.
Currently order backlogs stretch over many years, any cancellation or deferral can be backfilled by customers later in the schedule who wish to take advantage.
5. You've said you expect R&D to ease at best as a percentage of revenue. Does that change with the A330neo? How would an A380neo affect R&D?
Remember that R&D spending is mostly people and this is not a resource that we can grow quickly; R&D is usually fairly stable and grows roughly in line with inflation. Our forecasts include some R&D that has not yet been allocated to specific projects, so we have some flexibility included for future projects. Major new programs could change our R&D expectations but mostly this is about how we allocate our people resource.
6. Retirements of RB211s are offsetting growth in the Trent fleet. Are the RB211 retirements and parkings going as you expected?
Yes. The 757 fleets (RB211-535) continue to see good utilisation and robust overhauls. We expect a slow and gradual decrease in utilisation and a steady shift from passenger to freighter services.
The 747 and 767 fleets (RB211-524) are a smaller part of our RB-211 fleet and utilisation here continues to decline.
7. Can your Defence business still grow? Is it still affected by sequestration?
There are many uncertainties today in Defence. We don't give multi-year guidance, but we do expect budget pressures to continue. In 2013 we substantially completed a number of contracts, notably to the Royal Saudi Air Force (EJ200) and India (Adour).
We continue to focus on reducing our costs in order to remain competitive and deliver greater value to customers.
We have a very broad portfolio of 16,000 engines on 24 engine programs, so we are not overly reliant on any one program. However, there are still risks to OE, aftermarket and funding of new technologies, which is reflected in our guidance for 2014.
8. Yet again you downgraded guidance for your Marine business at H1 2014 – why is this still a business that you want to be in? Why are Medium Speed recips so important?
It is certainly disappointing to downgrade, but the long-term prospects for this business remain outstanding.
This is a very attractive business and one where we are well placed, with ship design & integration capabilities, core strengths in non-engine equipment, and relationships across marine & industrial markets.
We have a world-class product portfolio of medium speed and high speed recips engines that allows us to leverage of the other portfolio products, such as deck machinery, thrusters, propulsion systems, positioning systems etc. that made up around 87% of Marine revenue last year (excl. Submarines). Together with design capability, we can create a ‘virtuous circle' of pull through of sales of OE that then allows up to use our services network to capture spare parts and other services sales.
Engines have very strong pull-through, so strengthening our medium speed engine capability will allow us to offer products to many more customers. Remember that while barriers to entry are lower than in Aerospace, they are still very high and these are still very complex power systems. ROCE is comparable between our MIPS & Aerospace businesses.
9. How are you progressing with the envisioned revenue synergies in Power Systems?
It's still early days in our working partnership, but we are already at a stage where we have announced orders in China and Brazil for UT ship designs integrating MTU gensets. Furthermore, Tognum has enabled the first large contract for Bergen diesels for a power plant in Indonesia.
10. Do you have an update on the SFO investigation and DoJ discussions?
We continue to cooperate with the investigating authorities and have repeatedly made clear that we will not tolerate misconduct of any sort. In January 2013 we appointed Lord Gold, one of the Country's most respected litigators, to review our ethical and compliance procedures and to report to the Ethics Committee of the Board. This review in still in progress.