Hello, and welcome to the Rolls-Royce trading update call. Throughout the call, all participants will be in listening- only mode, and afterwards, there will be a question- and- answer session. Just to remind you, this conference call is being recorded. I'll now hand you over to Isabel Green, Head of Investor Relations. Please go ahead with your meeting. Thank you, Simon, and good morning, everyone. Welcome to our update conference call today. With me are Warren East, CEO, and Panos Kakoullis, CFO. We will begin with a few introductory remarks from Warren and then go on to Q&A. But first, I am required to remind you that we may make forward-looking statements and that actual results could differ from guidance. Thank you. Over to you, Warren. Thank you, Isabel, and thank you everybody for joining us today. As the year draws to a close, I'm pleased to reflect this morning on the progress that's been made across the company this year, as we definitely become a better quality and a more balanced business. Now, despite the ongoing uncertainties related to the COVID-19 pandemic, we continue to deliver on the elements that are within our control, and we're focused on the commitments that we made 12-14 months ago. Turning to those commitments to start with, our restructuring program, launched in May 2020, is now delivering sustainable savings. It's quicker than expected as we reduce costs and deliver a leaner and more efficient company. By the end of the full year this year, we expect to have removed more than 8,500 roles and saved more than GBP 1 billion, and this positions us well for the GBP 1.3 billion target by the end of 2022. Also, trading performance is improving, and that's reflecting the gradual recovery in international flying, combined with a market recovery in Power Systems and ongoing resilience in our Defense business. A net cash inflow was achieved in the third quarter of 2021, reducing our second half outflow. As a result, our full year free cash outflow is expected to be better than the GBP 2 billion previously guided. In addition, around GBP 300 million of original equipment concession outflows are now expected to fall in 2022 rather than 2021 due to the delayed delivery of aircraft for which we've already supplied engines. We're also firmly on course to complete our disposal program, with proceeds totaling around GBP 2 billion, and these disposals include civil nuclear instrumentation and control, ITP Aero, Bergen Engines, and AirTanker Holdings. We plan to use the proceeds from these disposals, together with underlying free cash flow, to reduce net debt. Turning to our businesses now and what's been happening since we last updated you. We're seeing overall better results and better order intake. In Civil Aerospace, large engine flying hours have continued to recover gradually, as helped by certain key travel corridors reopening, and in particular, in early November, the transatlantic routes. Our large engine flying hours are currently around about 50% of 2019 levels. If you put that with the 43% average in the first half of the year, that's approximately 46% year- to- date. Engine flying hours in business aviation remain above the 2019 level. However, the pace of travel recovery remains uneven and, as countries are managing the ongoing challenges of the COVID-19 pandemic, and events of the last 10 days or so bring that to mind. Moving on to our defense business, current trading is in line with our expectations with steady demand from customers. In September, we were delighted to have been chosen for the B-52 replacement engine program, and that's an agreement to power the U.S. fleet of 76 eight-engined aircraft for the next 30 years. It's a significant contract win for Rolls-Royce, and the initial phase of the contract for testing and development has a value of around $500 million, and the total contract is valued at $2.6 billion. In Power Systems, the recovery of customer demand in many of our end markets is driving good growth in order intake. But as a shorter cycle business with higher inventory turnover, Power Systems has more exposure to the current global supply chain disruption than either our Civil Aerospace or Defence business. The significant near-term supply chain pressure that we're seeing right now looks set to continue for some time. Meanwhile, of course, we're focused on supply chain management and procurement practices that are helping to mitigate the impact in 2021. We're closely monitoring that as a business risk for 2022. Elsewhere, in the business, we're making good progress with new markets, successful funding for Rolls-Royce SMR and significant achievements in Rolls-Royce Electrical. Rolls-Royce SMR, small modular nuclear reactors, moved into its second phase with a special purpose vehicle established, support from investors and from the U.K. government. The funds raised so far support the U.K. Generic Design Assessment process for new nuclear power plants and will help identify sites for the manufacture of the power plant modules. In Rolls-Royce Electrical, we're very proud to claim that our Spirit of Innovation aircraft is the world's fastest all-electric aircraft after it recently hit a top speed of 345 miles per hour, which was well over 100 miles per hour faster than the previous record over a prescribed 3 km course. This achievement has also provided us with invaluable insights, though, into aerospace battery systems, which we will of course be applying in other new markets, like urban air mobility. These investments in net zero technologies and the solutions also help us to grasp the tremendous commercial opportunities of the global energy transition, and that sits behind driving our long-term value. It all underpins our strategy of creating a better quality and more balanced business, which can deliver significantly improved returns and cash flow into the future. Now, with that, then enough of a summary. I'll hand back to the moderator, and Panos and I will take your questions. Thank you. Thank you. If you do wish to ask a question, please press zero-one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero-two to cancel. Our first question comes from Céline Fornaro with UBS. Please go ahead. Yes. Good morning. Thank you for taking my questions. I have two, if I may. The first one is, if you could maybe elaborate a little bit more on the cash performance where you flagged some better trading dynamics leading to a slightly better cash flow for this year. So maybe you could provide a little bit more color on what happened there and what is going on and what could be sustainable for 2022, so stepping a little bit away from the concessions debate. My second question would be on the Power Systems performance, where it seems that the message for this year is that you seem to be making or landing where you wanted to land, but a bit of a degree of caution on 2022. Is that more on top line or on profitability? Thank you. Okay, thanks. Panos to you. Hi, Céline. Just thanks, Céline. Just in terms of free cash flow performance for 2021, if you take out the concession point as you've highlighted, we'd guided GBP 2 billion outflow originally. The GBP 300 million moves from this year to next year to make GBP 1.7 billion. What we're saying, it's both a combination of trading performance and the restructuring benefits of that coming through quicker than we'd originally planned for. That's a continuation of the theme that we highlighted in August when we set out the half-year results. It's a little bit better than GBP 1.7 billion is where I'd be looking at. In terms of you asked what that means for FY 2022, which is the flip from of the concessions from one side to the other side of the year end. We'll give guidance on 2022 when we get to our full year results. I think in terms of Power Systems, which was your second point. We're not short of demand on Power Systems. There is a lot coming through. We've got a very strong order book. It is actually fulfilling that demand, where there's effectively, if you look across supply chains across the world, there's just some indigestion as a result of bounce back in demand. In terms of impact this year, think of it in terms of low tens of millions. There is definitely risk that we're highlighting as we go into next year. We'll update you on that as we go into next year, but it's something that we manage very carefully. It's not a demand point, it's more around fulfilling that demand. Thank you. Our next question comes from David Perry with JP Morgan. Please go ahead. Yes. Thank you. One question for Panos, one for Warren, please. Panos, back with the H1 results, you said one of your goals would be to set and achieve medium-term targets. We just had MTU and Safran in the last few weeks give quite detailed guidance all the way through to 2024, 2025. I just wondered how far away or close to you feel Rolls-Royce is in being able to help us with some guidance there. Then the one for Warren, please. It's an ESG question. I'm just curious about the civil nuclear, the SMR opportunity, which looks exciting. I just wondered, is it completely tied to owning whatever the nuclear submarine propulsion business? Can the two technologies ever be separated, or do you have to keep ownership of the military piece to support the SMR opportunity? Thank you. Thanks, David. In terms of your question on medium-term targets, as you just seen from the update here, very focused on delivering on the commitments that we've already made and making sure that we crunch through those and honor the promises. We will give guidance on 2022 as we go into 2022 with those results. The look at the nature of what that guidance might be, I've highlighted before around going broader than just free cash flow to make sure we've got more balanced view on guidance. In terms of looking more at the medium- term, we'll let that develop as we go through next year. We're going through sort of five-year planning processes at the moment a s we go into next year, we'll look at how we roll those out. On your specific one about the submarines, David, well, a couple of observations. We've set this up as a special purpose vehicle. Rolls-Royce currently owns approximately 80% of that and you know, we probably will, as time progresses, get some additional third-party investment in there. You know, I think for the foreseeable future, you will see us continue to own a significant majority of that business. Obviously from a technology point of view, this is a low technology risk venture because we're taking six decades of experience in submarines and applying it to a new market space. You know, there's considerable strength in that. Also from a technology point of view, these are very long development cycles, and one of the challenges we have is you have a bunch of engineers who are doing the development phase, and then you go into the sort of productization phase and then the support phase. And the design engineers that you have haven't got necessarily another program to work on. So it's quite handy to have a couple of different markets to keep that expertise in-house. Having said that, you know, SMRs, by the time we get into the early 2030s, you know, if the particularly the off-grid opportunities that we've talked about to generate hydrogen, green, proper zero carbon hydrogen, and proper zero carbon synthetic fuel. If they materialize, then of course, the size of this business could completely dwarf the size of Rolls-Royce today. You know, that will be for another generation of management to work out how to structure that at the time. Thank you. Our next question comes from George Zhao with Bernstein. Please go ahead. Hi. Yeah, good morning, everyone. I guess first question, how are you evaluating when China could reopen its borders to traffic? Because that's a huge part of what 2022 could look like. Second question is, on the B-52 win, please talk about how that's going to impact the cash flow over the next few years. Thanks. Okay. Well, let me start with China. There are plenty of commentators out there. You know, we listen to exactly the same intelligence that you do. We sometimes have meetings with, you know, ambassadors and those sorts of people. Frankly, we don't get a lot of extra intelligence that way. China's been dealing with the pandemic in a very binary fashion, you know, full on, full off, and we can see that behavior in the domestic routes that we power in China as well, where, you know, it's very volatile. You know, one minute the route's completely open, and we're back at 2019 levels of engine flying hours. The next minute it's, you know, full off. The international bit, you know, our intelligence is that this will be a long way out, probably towards the end of 2022. Who knows? As I say, we've seen healthy recovery in our domestic position in China. Obviously there's cargo and China's continued to put on flights for cargo. You know, our international related China stuff is at around 30% of 2019 levels, while domestic has been much higher. You know, it's not completely on-off, but it's you know very much daily change from the Chinese authorities. We don't really know when the international one is going to fully open up. Sorry, on B-52? Sorry. B-52. It's a development phase at the moment, and you know, engine supply will happen, I believe in the sort of period from about 2028, 2029 through to 2038 or so. You know, we have a contract at the moment for the development phase. I said that's about $500 m illion over that period. You can do the arithmetic and lay that across the next five years. Okay, thanks. Our next question comes from Nick Cunningham with Agency Partners. Please go ahead. Thanks. Good morning, gentlemen. Yeah, a couple of questions. On Defence, I think you're indicating sort of flattish, which is in line with what you said back in March, if I remember rightly. You did a very strong first half. That would obviously imply a weaker second half. Is there any significance to that or is that just some detailed timing issues that don't mean anything for going forward? Then on the rebate question on 787, I think you said you expected GBP 300 million of rebates to be paid in the second half. I presume that was your expectation as of August. If we look at the total outstanding, if you like, total customer cash you're carrying that you expect to pay back to them, it involves a lot of supposition on our part to try and get to an estimate. I get to about GBP 1 billion. Is that in the right sort of ballpark or is that horribly wrong? Thank you. Do you remember what the first question was? Defense. Yeah, sorry. Defence. Yeah. I think you're right. Defence was stronger in the first half than we'd originally anticipated, and it is purely a timing thing, Nick. We had a higher proportion of sales of spares in the first half, and that tends to sort of happen more second half in other years. We had a skew compared to our plan. We end up full year where we expected to be, just first half, second half, switched a little bit in terms of phasing. Thank you. You know, on the concessions, you know, we're being pretty explicit about GBP 300 million worth of concessions slipping from one side to the other. You know, most of the concessions are related to the 787 program. You know, we've had a bit of concession flow this year on the final deliveries for A380s. But apart from that, it's now going forward pretty much all related to Boeing 787 deliveries. Obviously, we're somewhat at the mercy of Boeing's production plans. Thank you. Just to sort of narrow it down a bit, of the, I think, roughly 105 that Boeing has in inventory, is your portion of that sort of proportionate to your normal market share, sort of 35%-40%? Yeah. I would take that as a good rule of thumb. I mean, don't forget that a concession on an individual aircraft is not a sort of fixed price because we have a fixed price that is agreed at list price with Boeing. The actual concession for an individual aircraft that gets delivered will depend on the commercial arrangement that we reach with that airline. As long as you work with fairly sort of big numbers of aircraft, you're all right. As the numbers of aircraft get smaller, then I'm afraid you just have to listen to the numbers that we disclose. Thank you. Understood. I remind you that if you do wish to ask a question, please press zero-one on your telephone keypad. Our next question comes from Harry Breach with Stifel. Please go ahead. Yes. Good morning, everyone. Can you hear me? Yeah. Yeah, great. Morning, Warren. Morning, Panos. Thanks for taking my question. Can I just ask maybe sort of a couple of slightly more technical ones? Just first of all, you might remember about a year ago, you guys gave us the sort of rule of thumb number of a GBP 30 million delta for every 1% change in engine flying hours versus the 2019 baseline. Is that still a sort of good working assumption for us to be using going forward? And secondly, just thinking a bit about the time and material side at Civil, I suppose what I'd say, looking at the broad market, it looks as if shop visit activity sort of across all the aero-engine companies has been picking up fairly strongly in the third and fourth quarter. Can you give us some feeling about how T&M revenues activity are picking up for you in the second half of this year? Thank you. Do you want to do the rule of thumb? Yeah. The rule of thumb as you've called it, that we talked about just over a year ago, it's an okay approximation, and it was done at a point in time, given the engine programs and where they were at that particular point in time. Going forward, it's not a bad thing to use. It's not one that I overly use within the business, but not a bad thing to keep in mind. On the shop visits and the time and materials, well, you know, our proportion of time and materials activity hasn't sort of particularly changed. I think what you really want to think about is the shop visit activity. There has been generally around the world a pickup in shop visit activity as aviation generally has grown back. Of course, don't forget, a lot of that is seen by our competitors and others in the sector is around short-haul travel. You know, we're very focused on our fleet, which is primarily focused on long-haul travel. You know, right now we can anticipate a significant pickup in shop visit activity. This is one of the things that we have to manage in a fairly agile way, because as we said in the introductory remarks, the recovery is, you know, it's not linear, it will be bumpy. There are steps forward and steps backward, and, you know, emergence of variants and things is a step backward, but the underlying trend is all forward. So that underlying trend will drive shop visits. That is driving an underlying significant step up in the load on our factories to build components for next year. You know, in the detail on a week-by-week basis, we'll be looking at, you know, the actual demand for components from shop visits, whether that's paid on a time and materials basis or on a Long-Term Service Agreement basis, you know, as far as we're concerned, the difficult bit is managing that load on our factories as the shop visit ramp comes towards us. Ours is going to be behind the rest of the industry because we're not servicing short-haul aircraft. If I just sort of joined your two points together as well, when you think about the rule of thumb, it's not. Don't think of it as 100% because if we've got lower engine flying hours, which means there's lower cash inflow from that means most likely, and it's what we saw this year, shop visits get pushed out. That cash outflow from shop visits moves out in addition to the inflow from lower engine flying hours. Great. Thank you both. Okay, thank you. Our next question comes from Christophe Menard with Deutsche Bank. Please go ahead. Yes, good morning. Thanks for taking my questions. I have quick questions. The first one on B-52, more specifically on free cash flow. Should we expect a prepayment in the coming years, or is it really we should think about it as the tranches and think prepayment in 2028 or 2027 before the first deliveries of engines? On the SMR, did you actually dispose of a 20% stake and receive GBP 145 million in cash, or is it me misunderstanding? I f that was cash, did you receive it in 2021, or is it for 2022? The last point is on ITP. You haven't mentioned any retained cash that could you could have. Could you give us a range of what you could retain when the transaction closes? Thank you. Yeah. Let me pick up each of those. On B-52, on prepayments, clearly that's commercially sensitive. We will factor that into guidance as we go forward. As Warren has said, that is likely to be in the more medium- term, the impacts of that, than the short term. SMR, effectively the way the transaction works, you are right, there is a disposal of 20%. Don't think of it as an M&A transaction because it's effectively disposal of 20% to bring in funding into that particular business. It's not used for anything else other than going into that business. The profile of that cash comes in over the next few years to match the actual funding requirements for the business as it develops the technology and starts to build out. On ITP, the retained cash point, clearly that's something that we've not disclosed at this stage because it is commercially sensitive, and it is subject to negotiation where we end up. There is a floor to it, though, but I'm not going to disclose that now. Thank you very much. Our next question comes from Wasi Rizvi with Redburn. Please go ahead. Hi. Thanks for taking my question. Just a couple. One of them, if we could just think about free cash flow for next year because you talked about the GBP 300 million swing for next year, but then I guess restructuring's going better and the engine flying hour recovery, who knows? As we sit here today, are you thinking that we are probably still positive next year and what we need to think about regards to what could change that? The second one was just on Power Systems to better understand the supply chain issues you've talked about. If you could kind of pinpoint maybe what the pinch points are, whether it's more transport, whether it's more, component availability, so we just know which, what to look at and what to look for an easing in to get more comfortable on Power Systems heading into next year. Yes. Okay. Let me take that then. On the free cash flow for next year, I mean, yes, we're clearly signaling this GBP 300 million of concessions slipping from year to year, which, you know, means we've got a GBP 300 million headwind for next year. Also we have a sort of bumpy recovery and in terms of gradual recovery, and I think, you know, engine flying hours, you know, they'll be what they will be. You know, as we mentioned at the half year, you know, the uptick that the industry looked for and hoped for in the first half of this year did not materialize for the Northern Hemisphere summer period. We're going into 2022 at a lower level than we'd previously expected. Those are all headwinds. That said, you know, we still expect to be and plan to be, and, you know, we're pushing with the things that we can control to be in positive cash territory for next year. When we get to our full year results in February, we'll give exact guidance. Remember the context. You know, last year, GBP 4.2 billion of cash outflow. This year it's going to be better than GBP 2 billion. It's going to be better than GBP 1.7 billion. Next year it's going to be positive territory. There's a fairly well-defined trajectory there on free cash flow. Now, your second question was about specifics on Power Systems. Look, these are the sort of supply chain challenges that, you know, virtually every other company on the planet is seeing. Good examples in our business would be where we supply a system with a reciprocating engine and, say, a generator set and some control electronics, and the supplier for the control electronics just can't get the semiconductors. Semiconductors is a big part of, you know, those sorts of products. You know, meanwhile, we've got an engine and a generator that we've sourced, and, you know, we can't deliver the whole product. That's the type of supply chain challenge that we're seeing. It's not really a freight issue. It's more a component supply issue. That's what we'll be managing closely as we go through next year. Got it, that's helpful. Thanks. Okay. Right. Well, with that, apparently we have no further questions. So let me just sort of summarize with this morning's messages. Our financial performance is improving. We're seeing healthy demand in our Power Systems business. The order book is strong and up. We're seeing a gradual recovery in aviation, in our civil business. Business aviation is doing well above 2019 levels. Gradual recovery in the commercial space. We're seeing new opportunities coming through on top of continued resilient performance in our defense business. We're delivering on the commitments that we made around the time of the rights issue. We're ahead of plan with our restructuring program, which is obviously putting us, or giving us great operational gearing for when as the top line recovers with recovering markets. We're on plan in terms of our disposal plan with transactions announced to generate around GBP 2 billion of cash, and we expect those to close during 2022. We're seeing improving cash flow as well, as I just described. We're concentrating on controlling the things that we can control, and that's enabling us to deal with volatility in the pace of recovery in aviation. It's enabling us to deal with the supply chain issues that we face. We're focusing our investments looking forward on the huge business opportunity in the energy transition, which will drive significant growth for the future. That's where we are now. We'll be back in 8-10 weeks, whenever it is, with our full year results, and wish you a good festive season. Thank you. This now concludes our teleconference. Thank you all for participating. You may now disconnect your lines.