Earnings Transcript for RR.L - Q2 Fiscal Year 2023

Isabel Green: Hello, and welcome, everyone, to our 2023 Half Year Results Presentation. I'm Isabel Green, Head of Investor Relations and I'm joined today by our CEO, Tufan Erginbilgic; and also Panos Kakoullis, our CFO. Our presentation today will take around 30 minutes, leaving plenty of time at the end for Tufan and Panos to answer your questions. And welcome to UBS first time we've been here in a while, but there is a microphone in each of your seats, because I need to remind you all that when we get to Q&A, and you're asking questions, please press the button on your microphone and speak directly into it. Moving on before we take -- begin we take note of the safe harbor statements on Slide 2 as always. The results information can be downloaded from our website with the full risks and disclosures. I will now hand over to Tufan.

Tufan Erginbilgic: Thanks, Isabel. Good morning, and welcome. I will start by presenting the highlights of our first half before handing to Panos to cover the financials in detail. I will then talk about transformation progress. We pre-released our results headlines a few days ago. So the key messages of today's presentation should not surprise anyone. First, improved operational delivery is helping us deliver stronger financial results. In Civil Aerospace, OE deliveries and LTSA shop visits rose year-on-year by 26% and 24%, respectively. Our planned time on wing improvements are progressing well. This is one of the six levers that we are pulling to improve LTSA margins. We have applied for certification for the latest Trent 1000 fix, which will more than double the time on wing of that engine. Our order book has grown in all three businesses. Our large engine backlog grew for the first time since 2018, including a large order from Air India in the first half. We also performed the first successful test of UltraFan demonstrator engine. The first time all the technologies have been tested together. This program will position us well for the next generation of aircraft. Technologies from UltraFan will also improve the time on wing of existing engines. In Defense, the AUKUS submarine agreement builds on our already strong pipeline, underpinning the long-term outlook for profitable growth in the business. And demand remains strong in Power Systems. Revenues grew more than 20% in the first half with record level of order cover for 2023 and 2024. Transformation delivered strong initial results and helped us raise the guidance for the full year even though our February guidance already included some expected benefits from transformation without, which it would have been a lot lower. Commercial optimization is driving commercial actions and pricing improvements across all divisions. We are tightly managing costs across the group as revenues have grown and improving the productivity of our operations. We are also making choices and allocating capital at the group level to the most profitable projects. Our transformation program is progressing at pace, but we still have a lot more to do. Our early interventions have had a significant and sustainable benefit on our financial results. This is actually in line with my experience of past transformations. That suggests the rate of improvement is higher in the early stages. Finally our financial results. We delivered a 9.7% margin in the first half of '23 with the improvements driven by Civil Aerospace and Defense. The strong results in the period reflect end market growth and transformation benefits notably from commercial optimization and cost efficiencies. As a result, we are expanding the earnings potential of the business and accelerating financial delivery. They also support the increases to guidance we announced last week. We are transforming Rolls-Royce into a high-performing, competitive, resilient and growing business. Our progress in the first half was delivered despite a challenging environment. Large engine flying hours recovered as expected to 83% of 2019 in the first half of the year. But the supply chain remains challenging particularly in Civil Aerospace, where we have also been impacted by the two supplier fires. Inflation remains high, but we have managed to more than offset the impact at the group level through cost efficiencies and pricing increases. Interest rates are rising. All our debt is currently fixed, but de-leveraging and returning to an investment grade credit rating is a priority. This slide shows some of the metrics that we presented to you in February. All metrics show significant progress versus last year. Operating profit was GBP 673 million in the first half with a margin of 9.7% and Civil Aerospace margin of 12.4%. These margins are the highest delivered in both, the group and Civil Aerospace since the introduction of IFRS 15. This demonstrates expansion of earnings potential and accelerated delivery. Free cash flow in the period was GBP 356 million. This compares to an outflow of GBP 68 million in the first half of 2022. The next TCC to GM i.e. total cash cost to gross margin. This is a measure of the operating leverage of the business and it is resilience. Our TCC/GM ratio was 0.6 in the first half of 2023. This compares to a ratio of 0.8 into '22 and 0.9 in 2019 pre-COVID. We are already making Rolls-Royce much more competitive and fit for the future. Finally our credit rating. This year Moody's and Fitch both, raised their outlook on Rolls-Royce to positive and S&P also raised our rating from double minus -BB minus to BB. Our net debt has fallen from GBP 3.3 billion to GBP 2.8 billion. We are happy with our first half results which show a significant improvement in the underlying performance. What encourages us is that these results demonstrate the interventions that we are making are working. However we still have a lot more to do to continue to expand the potential of the business. With that I would like to hand over to Panos.

Panos Kakoullis: Good morning everyone and thank you Tufan. In the first half of 2023 group revenue increased by 28% year-on-year to GBP 7 billion. Revenues increased across all divisions with Civil Aerospace up 38%, Power Systems up 24% and Defense up 15%. Operating profit increased from GBP 125 million to GBP 673 million with a margin of 9.7%. This was driven by continued revenue growth coupled with early transformation benefits, notably cost efficiencies and commercial optimization across the group. The increase in operating profit was driven by three things

Tufan Erginbilgic : Thanks, Panos. In February, we set out the Rolls-Royce proposition based on three pillars

Q – Unidentified Analyst: Good morning. Ross Law [ph] from Morgan Stanley. Firstly, on pricing. Clearly, a key pillar of the transformation plan. Can you maybe give us some context on, how this benefited in the first half and also maybe some color by segment. Secondly, on supply chain where are the bottlenecks currently? You mentioned two fires, but where else are you seeing issues? And lastly, on Power Systems. You also mentioned negative mix. Can you maybe give us some details around the margin delta between for example, marine and power gen? Thank you.

Tufan Erginbilgic: Okay. So, I'll take it in that order. I think pricing question, that is what I tried to give you sort of color there. But effectively, what we did we were very focused with that work stream. And that works, the way you should think about it. It works together with the line management obviously. So they are the same in that sense. But effectively, we thought widebody and LTSA, but also time and material was a focus area because for obvious reasons, we thought potentially is big there. Business aviation was a big focus, because I was very public on that that business aviation we have a great platform, but we haven't commercially leveraged that platform. Therefore, that was an obvious area to focus on. And both on OE level as well as aftermarket by the way. And then the third one, Power Systems pricing. And one word, on that. Yes, first half was weak in Power Systems, but we knew. And frankly, that should tell you how we intervene because when we actually started our program, which was almost as January as you know sort of, it was already first half -- to a great extent, first half pricing or lack of pricing was locked in. And Panos talked about higher costs also in terms of hiring, et cetera. They already hired people were coming in. Therefore, our interventions will play out on both dimensions second half, right? So I think -- and then what we did frankly, we didn't deploy that work stream on Defense. But what we did is -- because the opportunity set was smaller. But what we did is we transferred the learnings pretty quickly and they applied that. Actually Defense numbers include both on OE as well as aftermarket pricing and commercial actions. I hope that gives you a sense on that one. Supply chain question is, I think, I said it frankly industry everybody is talking about it. As you know airframers talking about it. Right now limitation in the industry is supply chain. And we have the same issues. And our issue was a little bit multiplied because of two supplier fires. And that actually -- we talked about £150 million impact. But actually initial impact was going to be a lot more than that when we analyze. But team has done a great job to minimize the impact to £150 million that we are sharing with you. But the gross without interventions actually number was a lot because I've been heavily involved. I did at least five reviews with the team on that. So, therefore, I know pretty well our starting position. But supply chain frankly, unfortunately because of this V-shape, supply chain issues I don't think Civil Aerospace supply chain, gas turbine supply chain will stabilize anytime soon. I definitely expect that definitely next year maybe beyond. But we also see other supply chains. So there are some overlaps, obviously, between Power Systems and Civil and so on. But Power Systems supply chain after COVID had this similar issues of COVID recovery, but it is stabilizing because they didn't have V-shape in that industry they had more like U-shape if you like. So that is stabilizing. Your last point on Power Systems margin, I'm not going to give you specific numbers. But yes marine business margin profile, because your specific question marine versus power gen, marine business power -- margins profile is much better than power gen. And we are actually improving power gen this year even with the numbers you see and second half more, we are actually improving power gen margins. But structurally that margin structure differences like that. There is one question there. I'll come to you David after that.

Nick Cunningham: Nick Cunningham, Agency Partners. Obviously, you have substantially beaten expectations so the least both in the half and in guidance. And that as you said is despite the fact that the external inputs are not really changed in terms of what you're expecting. So, obviously, a large component of that is cost and pricing. First question is what's the risk that you're getting the inflationary benefits in your pricing before you suffer the adverse impacts of inflation in your cost? So is there a danger that you're going to end up giving back some of this gross margin benefit that you've seen so far? Second question, you've been generating a lot of cash despite inventory increases. So you're, obviously, carrying I presume much more inventory than you think it should be. Is it possible to put any kind of quantity on that inventory? And finally normally even in a good year, Rolls-Royce uses a lot of cash in the first half I mean, typically hundreds of millions and then gets a lot more than that back in the second half. This year is completely different than that. Is that a structural change? Should we expect that to be the case going forward, or would there something special happen in 2023 to shift that balance? Thank you.

Tufan Erginbilgic: There are three questions. I'm going to let Panos answer the second one around working capital. But let me tackle the inflation question. I don't think so because actually in a way what is going on here is we already got big inflation impact in our numbers if you think about it from last year onwards. And then this year, we continue to see that. The way to think about it -- now this is I'm giving you a 30000 feet view. The way you may want to think about these results you are absolutely right commercial actions and cost efficiency self-help drivers here. The way you should -- we effectively neutralize with our cost efficiencies, neutralize inflation impact, and we actually all the pricing actions not only pricing because commercial actions multi. I'll give you a commercial action example right, beyond pricing. I think pricing everybody understands. But in our LTSA balance we talk about sort of -- Panos talk about debt that we actually provided for. Basically that's the debt we've written off because we company thought we would never get it back COVID and so on and so forth. Therefore, everybody focused on what we do. I'm not denying what we do is not important very important, but how we do is equally important because I've been involved in as I said all the onerous contracts. But on this one I wasn't. But the tone you said you create what team did they look for opportunities. They start, yes, I'm going to go and negotiate this because I know if they call Tufan probably he is going to defend me. Suddenly these things come through. And that is £100 million right? It's not a small change. That's £100 million we never had frankly. I mean reality is we written off by definition. We never had. So therefore when you think about I call commercial optimization everybody says he's talking about pricing including pricing, but I am thinking about commercial actions because in business aviation we are doing customer segmentation. And that is creating value. So you need to think about commercial actions wider than that. So I think -- your last question then I'm going to pass it over to Panos for working capital. So there are -- in our business there are some structural reasons why first half second half play out. But there are some reasons that we make it that way. So what we tried to do this year, tried to push on some of those things you will say why Tufan? Because it actually reduces the risk profile of your delivery. That's why that was a focus area. We didn't do anything sort of -- but we effectively whatever in our power that in normal sustainable business improvement sense we can do because I cannot overemphasize all our improvements here sustainable improvements. That is what we are interested because this is initial results we want to continue to build on it. So over to you.

Panos Kakoullis: Yes. I'd probably add one little thing to the first answer as well. Just from a profit perspective LTSA margin recognition is based on forecasting your future costs. So that will have though your inflation concern would be built into those future costs. So that's the basis of that being recognized that's built in. In terms of your cash point, yes, you're right. The cash performance in the first half was driven by that increase in operating profit across Civil and Defense as we highlighted. The LTSA balance increase again, as we highlighted together with those commercial optimization actions that are in there that drove some of the areas that Tufan was covering. It was offset by £600 million negative outflow on working capital. Then when you work through it you'll see inventory went up £600 million. We expected it to go up in the first half, partly as a result of that seasonality, because Power Systems is heavily second half weighted in terms of unwind of inventory. Civil Aerospace, we've got more shop visits and more OE deliveries in the second half, again, some of that seasonality, but also some of that impact of supply chain is bumping up. We do expect an unwind but think of that as an unwind from H2 -- H1 into H2 not from year-to-year.

Tufan Erginbilgic: David?

David Perry : David Perry from JPMorgan. Of course, so many questions. I know I'm going to have to decide, which are the most important.

Tufan Erginbilgic: I appreciate that.

David Perry : So can -- let me choose these three. First of all, the EBITDA guide. You've given us the year for the group and you've given us Civil Aero at double H1 800. It doesn't imply a particularly good performance for the rest of the group. It's 400 to 600 in aggregate for the rest of the group, which is either equal to last year or well down on last year. So just at a high level can you comment on that please? The second question is the free cash flow guidance for the year to me looks quite low given the LTSA inflow. Are you assuming a very big outflow in other working capital ex LTSA? So you just speak to that. And then, I guess, the third one would be if I just pick up what Panos just said, which is LTSA profit is based on a forecast of future profits. And your comment, Tufan, about the rate of progress at the beginning of your program is much faster than later. How much of the journey on the Civil Aero margin improvement have we just seen already this year or in the first six months? I mean should I take a 9% margin this year and now dream of 20%, or am I thinking it's 9% but a lot of the goodness has happened and is just a bit more to go?

Tufan Erginbilgic : Thanks David. As usual good questions. So, first of all, operating profit guidance your first question I think is £1.2 billion to £1.4 billion. Yes I can totally see why it may come across sort of conservative. I think let me reiterate what we said in that write-out, we said Civil will have similar operating profit second half. And that should tell you frankly, first half benefits when I look at it they are all sustainable benefits. And second half frankly, similar profile. I cannot see there anything that I would say, this is one-off. So that is how you should hold Civil. I think that will play into your last question as well. And then we said in Defense, we expect operating profit lower second half and Power Systems the other way around. Then you look at the environment, we have lots of uncertainties in the environment, especially supply chain challenges and uncertainties. And because supply chain challenges frankly, they -- because of this V-shape that we talked about was bad, but it was actually coupled by some other world events like interest rate increases and funds flow getting tightened to the supply chain some of the companies. When you are in V-shape trying to expand your capacity funds flow sort of tightened I'm talking about smaller companies right, that is actually creating lots of issue. So we effectively in our guidance reflected some of the risk profile of external environment. So if I move to your free cash flow point, I'll say a few things but I might Panos to say what he would like. But is how I hold it. I think take our operating profit guidance which is around £400 million better than our previous guidance give or take £100 million of it comes from onerous and catch-up. So that means £300 million coming from operating profit and another £200 million cash coming from LTSA. So £500 million upside then we highlighted two items there which are new they weren't in our February guidance. One is we said supplier fire impact is now £150 million not £100 million. And second thing is this new legal judgment. Frankly, we are going to appeal that. That is -- I think it is public I can tell you that's the Collins court case which goes back to I don't know how many years, but it's not a new court case but the judgment came in July. So -- and we provided that for in income, but obviously not in cash. So that is -- that's creating. So that is your £350 million. So if you look at our increase £200 million to £300 million in cash the difference is we are a little bit more conservative on working capital release than we were in February. I hope it sort of math works there for you.

Panos Kakoullis: The only thing I'd add to that the Collins provision that you referred to was made in prior years. So it's not in -- it doesn't hit this year's profit.

Tufan Erginbilgic: Yeah. That's what I -- we provided in previous years because frankly to the team obviously I'm new. But to the team this wasn't a surprise. Anyway. And your margin improvement, I mean this is one of those questions you when I won't answer but a good question nevertheless. So I think -- what I said is true I think. I really -- because when you're around 250 miles an hour, so you don't think about it every day. But I went back one week and one sort of everything must coming together, I said okay let me see how it compares with my previous experience. And two experiences I can tell you almost identical, almost identical. I know you got surprised why these results. In that sense I'm not. And the thing that rate of improvement is really high early on. And I talk about why that is the case because you analyze the business and you may obvious interventions. When I say obvious, I don't mean easy because if it was easy, somebody else would have done it. But obvious interventions based on your analysis and then that creates that sustainable which is all good because sustainably you are getting to a new level. But from there I really caution you guys to extrapolate it on a linear basis or anything like that rate of improvement will be different at different stages. So last thing I'm going to say David, I think when we come in November obviously with strategy review outcomes, we will then talk about midterm targets. But I should say one other thing because some of you were still probably thinking this is too good to be true. But one other data points always help in this kind of conversations right? One data -- two data points for you when we talk about operating profit margin. One is 12.4 and 9.7 both of them actually the best on record since IFRS 15 change. And if you make IFRS' 15 change adjustments to the history you may actually find most likely that they are also the best on record, when the flying hours still 80%. So why am I saying that is one data point should tell you how much self-help improvements there. But second data point is equally important and David you will relate to this. Almost a year ago, Rolls-Royce set a midterm target of single digit for Civil Aerospace, probably they were thinking that is 2025, 2026 in terms of years when you say midterm at that time. We obviously overachieved that by a margin. So those are two data points tells you rate of improvement is high and it is self-help because when they set those targets I'm sure they assume full recovery on the flying hours and so on and so forth right? So I think that should tell you the self-help improvement here. But never forget about my caution that rate of improvement will be different going forward.

George Zhao: George Zhao from Bernstein. First one on the collection of the overdue debt. Is that mainly behind you, or how much more of the opportunity from that is still ahead of you? And second on the increased pricing in Civil Aero. Is the contribution more from new contracts or revisiting older contracts? You mentioned the 12% T&M price increase. Is that comparable for the LTSAs? And how much portion of the LTSA contracts have been able to -- have you been able to renegotiate?

Tufan Erginbilgic: I'll let Panos to answer the overdue question. On your pricing question, I think frankly it is coming from everywhere a little bit. But time and material is important in this, because we always talk about LTSA contracts et cetera. When I say time and material some of you may be thinking, but 80% to 90% of your stuff is LTSA contracts, how do you actually make that much impact by time and material price increase? Remember almost 50% -- these are rough figures. Almost 50% of our LTSA contracts actually LLPs in a way unbundled therefore the customer pays for them separately. When you make a price increase 12% half of with the shop visit increase, because time and material obviously more shop visits more need for that that actually makes an impact. So that's how you should hold it in your mind. Obviously, it is both profit and cash in that case unlike sort of LTSA improvement. So it is everywhere frankly. We also increased our onerous contract and catch-up numbers as you know from February guidance roughly £100 million I'm rounding. So that's how you should think about it. Overdues?

Panos Kakoullis: Overdues, we talked about this at the February announcement. There was a collection of some overdues in last year's numbers in the second half. We said there was more to come. Some of that came through in the first half but there is still more to come. And there is -- there are some elements that even won't even recognize this overdue as Tufan highlighted earlier on where we previously provided around some minimum utilization that we didn't think, we would get that is now being built and will be collected.

Tufan Erginbilgic: Thank you. There is one.

Chloe Lemarie: Thank you. Chloe Lemarie from Jefferies. The first one, I was going to ask about what surprised you in the pace of transformation. But based on your prior answers, I'm going to ask you what actually delivered in line with what you expected but pretty fast compared to our -- I guess expectations? Whether the willingness of customers to come back to the table and renegotiate contracts? Was it the actual leverage that you could get on some of the transformation plan or just the cost -- other cost savings benefits? The second question I had was on the LTSA invoicing. We're now in H1 well above the 2019 levels, £2.3 billion compared to I think around £1.7 billion. So could you explain what drives that significant improvement when we just -- we're still below the 2019 volumes, or maybe going forward how should we think of the pound amount for incremental flight hours?

Tufan Erginbilgic: Okay. Two good questions. So I think -- I mean one -- I'll specifically answer that question. But one thing I really want you guys to think about how these three divisions -- and some of you are saying Power Systems is sort of disappointing or whatever your wording is. Effectively, this is -- these results are not one thing. Don't look for a silver bullet, okay? And that's my experience. And that makes these things more powerful, because you mobilize the whole organization with a clear purpose, with a clear framework and then interesting things happen. And that is the stage we are at, right? Therefore it is -- I'm saying to you we haven't deployed commercial optimization work stream in Defense. Frankly they know what they did. They call the commercial optimization team. And we didn't do it. One reason we didn't do it, price was smaller. The other reason was confidentiality. Frankly you need to get loss of clearance to go in there. And we didn't have time. We were in rush. But they call the commercial optimization. They sat down with them then they went and took OE and after tough OE and aftermarket actions. So that's how you should care. But specifically, I always talk about six levers right? I talk about in my script. Therefore, our LTSA improvements will not always come from because customers are coming forward. But I can tell you this. Those six levers are there and we will derive them in a very rigorous way okay number one. Number two, we are partner to customers. If you think about partnership, because you may be thinking why are they even entertaining you, right? Because there isn't one I can tell you which didn't agree to establish a joint workforce. There isn't even one OEM or aftermarket sort of airline, I should say. And you may think what is going on here? Thinking about what we do. We are a long-term partner more than airframers are, right, because you sell the plane at least for that transaction you have done. You sell the plane our engagement is still another 15 to 20 years on that plane, right? We are a true partner up. If my true partner comes to me and says this is really one sided contract Tufan. So you got two options you call us not a partner and transactional then I deal with you next 15 years on that basis or you come to the table we resolve this. We create win-win then we build on it together and create even a much better future. That actually brings people to the table, right? That is the sort of -- your second question LTSA and Panos please jump in. But here is how I hold it. We gave you a rule of thumb in the past. We won't give you another one. Do you know why? For two reasons. Because we are in transition and industry is in transition. What do I mean by that? Industry in transition, because new engines like XWB coming, without any doubt they are better engines fuel efficient, et cetera but they cost more. Therefore they are priced differently on EFH level right? Therefore mix changes your EFH rate is going up. We are in transition, because we are taking commercial actions and pricing actions that is also increasing that. So therefore we won't give you a rule of thumb because it is going to be a moving target. One thing you should expect it will continue to go up, because of those two factors right? Per rate -- per unit will continue to go up. There’s one question there.

Ian Douglas: Thank you, yes. Trying to working the microphone, I’ve tried to use many times before. Ian Douglas-Pennant at UBS. So just continuing on that answer you were just giving I guess on pricing. To what extent do you need to go back and have conversations with Airbus themselves? To what extent is that kind of base contract that you've built on need to be negotiating in some way? And secondly on cost reduction. In Civil business at least the commercial and admin and R&D costs declined in absolute terms in H1. How did you achieve this in such a short timeframe? You have a heavy unionized workforce. I mean is there just no travel going on? Is it stuff as basic as that or like how do you even do that?

Tufan Erginbilgic: Okay. Very good. On Airbus I won't comment on individual conversations. You shouldn't expect that to happen. But I would say Airbus is a great partner. And, obviously, we have had long and good relationship and that will continue going forward. I think on cost efficiencies it is sort of what we did obviously industry is in the recovery right i.e. you are scaling up sort of more OE more shop visits and so on. Therefore, you want to invest -- if you look at our first half capital spend is higher than first half last year. I think Panos shared that. Why is that? Because we are investing in that recovery right? Because R&D and capital we will do the right things for the company for sustainable growth of the company. So and we are increasing first half towards first half because actually when recovery is going, we didn't want any of our machinery to fall apart while sort of scaling up sort of that was the reason. But for the same reason, we also increased direct labor but our eye has been on productivity improvements when that happens. Therefore no cost reduction there, but then indirect labor and indirect headcount we and the activity choices I talk about indirect sort of -- let me talk about both of them separately. I think indirect by definition that's not your variable cost right? So, but some companies don't manage that rigorously. And frankly Rolls-Royce has been in that journey. That's why I made the comments I made about Power Systems. So and but I think when you rigorously manage that and we put a system in place really system in place for indirect headcount and cost management. And that actually made sure that we did the right things but we didn't do unnecessary things. Second thing is when I talk about granular strategy some people are saying this guy is talking textbook language. It's not textbook language. It is my experience. I didn't learn strategy in textbooks, but I did it by doing. So I think when you are that clear with strategy you are not here you are here. You can make activity choices because you are here, right? You can make activity choices. It tells you what you will do what you want to. So combination of both has been driving. Obviously activity choice you make it that activity is gone because I don't like options management in business. If you don't have choices you don't have a strategy. So I don't know if it answers your question but that's what I would say.

Isabel Green: We're pushing it a little bit on time and we are -- but I do have some fairly couple of questions online probably more than questions we've got time to answer. But if I might just take two of them as the -- to answer if I may ask you if I may Tufan. The first one comes from Phil Buller, Berenberg. It's a two-part question I'm afraid. So I'll probably talk the question for maybe longer than the answer. But the first one thank you for the comments on philosophy including the focus on quality of earnings not just cash. Philosophically do you believe earnings are as important as cash or as a function of each other for Rolls-Royce as they are typically for other industrials? And related to that how should we think about the LTIP frameworks. Is it cumulative cash concept likely to be deemphasized in favor of clean earnings? He also asks -- we talk about being well positioned for the next-gen aircraft with UltraFan. Rolls-Royce has always been well -positioned from a technology standpoint. The issue has always been extracting positive returns on the technology. So is it a must to do? And how do you think about the payback period you would be happy with on a new platform? And I'm sorry the question probably too longer than the answer.

Tufan Erginbilgic: No -- there are three questions there I think let's deal with it. So first earnings versus cash. Frankly, I'm a guy. I want all of the above. So I think that's what I would say. I think and even in Rolls-Royce I know our accounting sort of makes it a little bit timing-wise different. But even in Rolls-Royce I think both earnings and cash are important. So -- and they are actually a function of each other in a way. Therefore I'm not going to say I like this more than that. But obviously for any company cash generation is critical. I mean at the end that is -- earnings is a proxy of your cash generation if you like. And therefore they should go hand-in-hand. But obviously cash generation has to be there as sort of -- if you really push me I said, oh I want both of them. But if you really push me I think I will go for cash because that's effectively the value creation. LTIP I'm not going to comment on it right now. As you know we are at the stage that our remuneration policy is expiring. So there is a work that Board leads obviously Remuneration Committee leads on the new remuneration policy and it's not right for me to comment at this point in time. And UltraFan there are -- even within UltraFan there are multiple questions there. But I would say the following. I think first of all UltraFan team has done a very good job. And it is a technology demonstrator. You need to think about that way okay? And it has two purposes. One is to position us well for the next generation of engines and it does exactly that. Second purpose is -- but I'm going to come back to the first purpose. Second purpose is actually because we test the technologies there we are going to use them right now especially on time-on-wing improvements in the -- for the existing engines. And we have a very systematic program to improve time on wing for all the engines we have. I talk about Trent 1000 today. But all the engines in the next four years frankly we are going to get all the engines to what I call their destination level. That's our program. So -- but if I go back to first purpose, UltraFan it is built if you have seen it in fact in my first slide there is a picture nice Tiffany colors. By the way that's part of IP. So -- but that is a big engine. So -- intentionally because we will scale down to wide body even to narrow body. It is scalable. And that's how you should hold it in terms of profitability, absolutely. I'm not going to give you a payback period right now, because next-generation aircraft is not going to happen before 2030 and we need airframers obviously to go there first. But I will say this, we won't do anything not profitable. I will say that categorically.

Isabel Green: And just one last question I'm going to squeeze in, because it's come up on from a number of questions have come in but it actually is, Ben Heelan at Bank of America who I'll read out which is asking with the cash flow improving materially, how are we thinking about the timeline of getting to investment grade and adding on for a couple of the other investors online if we've got any plans to reintroduce the dividend this year and our preference for dividends versus buybacks if you have any comments on those, please?

Tufan Erginbilgic: Okay. Good question, Ben. So I think we said it, in February I think we want to get to investment grade at pace. And given the progress we are making I think, I believe that will be reality. We will get there at pace. I don't want to give a time, because as you know, you hit the investment-grade metrics then rating agencies need to get there. So therefore, our first task is to hit the metrics. And we are making excellent progress towards that. And therefore, I won't give timing but it is our first priority which goes into the second question dividend. And frankly our first priority is to get the investment grade. After that yes we would like to reestablish dividend absolutely. Dividends versus buybacks we are now doing some work on the -- frankly until you get to investment grade it's a little bit sort of not important point. But once we get the investment grade it is a important point what kind of capital structure we want. And what's the cash framework for the company. We are already doing that work, as we speak. And obviously that will play into whether it is buybacks, dividends et cetera. It is too early Ben, to comment on anything like that.

Isabel Green: Thank you. We'll call it there, because I know we have other meetings to start at 10

Tufan Erginbilgic: Thank you. Thanks for coming.