Rolls-Royce Holdings plc (RR) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining us today. My name is Ian Davis. I'm Chairman of the Board of Rolls-Royce. Due to the social-distancing measures all of us are being asked to take in the U.K. to protect ourselves and others from COVID-19, we've taken the unprecedented step of not meeting with you face-to-face today. That is one of several changes we've had to make to the Annual General Meeting in order to comply with health guidance and changes required by the stay-at-home measures introduced in the U.K. As the situation becomes clearer over the coming months, we will explore ways in which we can offer you an opportunity to engage in person with your Board. But I hope you will see that we have endeavored to do what we can to give you, our shareholders, an opportunity to engage with us today in what are exceptionally challenging times. I'm joined in the room by Warren East, our Chief Executive, at the required 2 meters distance, of course, who will provide a review of 2019. He'll then talk more about what we are doing to ensure the wellbeing of all our employees and to assist the communities in which we operate to combat COVID. He will also talk about the important and critical steps we are taking to strengthen the operational and financial resilience of our business. In the notice of meeting, we ask you to submit questions in advance and thank you to those who took the time to do that. A number of questions will be covered by both my address and Warren's. And in addition, we have several questions, which we'll address at the end of our presentation. If you have any further questions as a result of this meeting, please do contact the company's registrar, and we will be glad to answer. You can find the relevant details on the Investor Relations page of our website. As I said, we've had to make other changes to the way we conduct the business of the AGM today. And immediately before this broadcast, we held a closed meeting in order to consider the business set out in the notice of meeting. I'm pleased to say that together with all your votes that were received in advance, all resolutions were passed, and the results will be available on our website later today. Immediately after the conclusion of this meeting, we'll hold a general meeting on a single resolution recommending an increase of our borrowing limits in order to give us greater flexibility at this time. We do not have plans to borrow out of this limit. But in a time of uncertainty, we believe it is prudent to create headroom to give management flexibility to act as necessary. Your Board believes that the resolution being proposed at this general meeting is in the best interest of the company and its shareholders as a whole. And the Directors have voted in favor of this resolution. Details of the outcome of that meeting, which will also be closed, will be posted on our website later today as well. Traditionally at this point, I'd introduce you to your Board, but for obvious reasons, they are not physically with me today. I'd like to welcome Dame Angela Strank to your Board. She joined us at the start of this month and will be a member of the Nominations and Governance Committee, the Safety, Ethics and Sustainability Committee and The Science and Technology Committee. Dame Angela is currently Chief Scientist and Head of Downstream Technology at BP and a member of their executive management team, although she will be retiring from BP by the end of this year. During 2019, we announced the appointment of George Culmer as a Nonexecutive Director. He joined at the start of 2020 and is a member of the Nominations and Governance Committee, the Audit Committee and the Safety, Ethics and Sustainability Committee. A Chartered Accountant, George, was until recently Chief Financial Officer at Lloyds Banking Group, and is also the Senior Independent Director at Aviva. During 2019, we were starting to see the departure of Ruth Cairnie as a Nonexecutive Director, following her appointment as Chair of Babcock International Group. Ruth made extraordinary contributions to the Board and to the group, not least in her role as Chairman of the Remuneration Committee. Also in 2019, Brad Singer, a Partner and Chief Operating Officer of ValueAct Capital stepped down as a Nonexecutive Director. Since joining us in 2016, Brad had been an active member of the Board, offering a valued external perspective and helping us to drive progress in our efforts to transform Rolls-Royce. I'm sure all of you will join me in thanking both Ruth and Brad for their contributions over the years. They were also terrific colleagues and friends at the Rolls-Royce. Lewis Booth will have completed 9 years on the Board this month and is stepping down as Chairman of the Audit Committee. However, the Board has approved that he will remain as an independent Nonexecutive Director and as an Audit Committee member, to provide continuity of support to Nick Luff as Nick takes over as Chairman of the Audit Committee. The Board also approved the time extension for Sir Frank Chapman to remain as an independent Nonexecutive Director and as Chairman of The Safety, Ethics and Sustainability Committee, recognizing his significant support for our safety, ethics and sustainability agenda. Sir Frank Chapman would have completed his 9 years on the Board in November this year. I'm pleased to report to you that both Lewis Booth and Sir Frank Chapman will be remaining with us until next year's AGM at the latest. I'll hand over to Warren in a moment, but first, I'd like to make a few introductory remarks. As I said earlier, these are exceptionally challenging times. The COVID pandemic has created a global shock, the full scale of which is still unfolding, especially the longer-term economic consequences on all countries, notably on government, finances and uneconomic growth. All our stakeholders are feeling the effects from customers, partners and suppliers to governments, employees, their families and you, our shareholders. Your Board is receiving regular updates on the measures being taken by management to deal with the impact of the pandemic on Rolls-Royce. The primary impact has, of course, been on our civil aerospace business, which accounts for approximately half of the company. Anyone who raises their eye skywards will see the result of the grounding of airline fleets across the world. In April, the International Air Transport Association warned that global air traffic for 2020 could be 48% below 2019 levels. And as half the revenues we make in civil aerospace comes from engine-flying hours, fewer flights means less cash coming into our business. We, like many executives in the broader aerospace sector, will be working with partners to ensure a successful and orderly restart of the industry. We must mitigate this impact whilst positioning ourselves to the future that will come. We have commenced a number of contingency measures in order to mitigate the impact on our 2020 financial performance, ensuring we can deal with a sudden short-term repercussions of the virus on our business. Warren will outline these measures in further detail in a moment. We appreciate the swift action taken by governments across the world to support businesses, but we must also take difficult decisions ourselves to ensure that we endure this period and emerge strongly on the other side. And that will require support and sacrifices from all our stakeholders. Given the rising level of uncertainty as to how the COVID situation will develop, your Board has decided not to recommend or make final payment to shareholders in respect of the 2019 final year. Your Board believes that in light of the uncertain macroeconomic outlook this is an appropriate and precautionary measure to take at this point as the group seeks to ensure an appropriate level of liquidity in the event of a prolonged reduction in trading activity. I'd like to thank all our shareholders for understanding why this is a prudent step to take at this time. In order to bolster our financial resilience, our employees are seeing a 10% reduction in salaries. While senior management, including the executive team, have accepted a 20% reduction, which is being mirrored by your Board. The remuneration committee meanwhile will make full use of its discretion to amend any future executive awards under the group's long-term incentive plans to avoid any windfall gains caused by general stock market recovery, which is something I think all of us are hoping we will eventually see. The exact shape of the future and to which we will emerge is still the subject of much debate and conjecture. However, it seems likely that this virus and its effect on the global economy will have a lasting impact. The civil aerospace market will need to evolve and adapt in the years to come. And with the support of our stakeholders, we are confident that we can recover and continue to lead the way. During this time, we've derived strength in the diversity of our business units. Our Power Systems business has been less significantly impacted and defence operations have proven resilient to the disruption. You all heard me talk before about culture, about how making sure every employee can be at their best. It's so important to the success of the business. I can honestly say that the behaviors and dedication I have seen exhibited across Rolls-Royce during the last few weeks have made me feel very proud. All of us on the Board would like to thank our people for their dedication, support and effort at all times, but particularly in the current environment. I will now hand over to Warren.

Thank you, Ian. So as Ian has said and all of us joining online and not in person can see, these are exceptionally challenging times, not just for our business and the industries in which we operate, but for everyone. In this unprecedented period of uncertainty, we have rapidly adapted our business to safeguard its future for all of our stakeholders. We've implemented heightened safety procedures to protect our people who need to be in the workplace, whilst many others are working from home. We're also providing practical assistance to combat the impact of COVID-19 on the countries in which we operate. In the U.K., for instance, we've put some of our manufacturing and supply chain expertise to use in the drive to increase the supply of ventilators for hospitals. In parallel, we have strengthened the financial resilience of the group to ensure that we are well positioned to weather them pandemic. We're working hard to mitigate the near-term disruption caused by COVID. We're making stronger progress than expected on our mitigating actions, giving us confidence that we can now deliver up to GBP 1 billion of savings this year. However, we must also take difficult but necessary decisions to ensure that the group emerges from this period with an appropriate cost base for what will be a smaller commercial aerospace market, which may take several years to recover. I'm proud of the dedication and commitment of all of my colleagues and thankful for the continuing support of our shareholders and other stakeholders during this challenging time. But before we return to COVID-19, the first part of the business of this meeting for me is to report back to you, our shareholders, on the progress of Rolls-Royce in 2019. For those of you on the phone, the slides for my presentation are available on the website, and you can now follow this review of the year on Slides 4 to 8. Starting on Slide 4. We ended 2019 with positive momentum, showing solid progress right across the group, thanks to a good finish to the year following a tough first half. We reported 25% growth in full year underlying operating profit and an encouraging level of free cash flow, over GBP 900 million, driven by higher profits, improved efficiency, and a reduction in inventory as the year progressed. On to Slide 5. In 2019, we delivered a robust trading performance across all the divisions. Civil Aerospace improved its underlying profit significantly with record engine deliveries, good aftermarket performance and improved OE unit losses. In Power Systems, we saw revenues increase despite some tough end markets, with growth in power generation and market share gains in Asia. During the year, we also increased our services penetration, further capitalizing on more than 140,000 MTU engines that we have in use worldwide. Defence performed well throughout the year despite a headwind from the adverse OE mix, another year with a very strong book-to-bill ratio meant another record order intake in Defence of GBP 5.3 billion. Alongside good operational performance, this produced a healthy cash flow. 2019 was a pivotal year for the resolution of our Trent 1000 engine durability challenges. We have made significant progress and have now achieved fixes for 8 out of the 9 issues. However, the engine's durability issues weighed heavily on 2019 in terms of financial cost of returning the fleet to the levels of service that our customers expect and dealing with the unacceptable disruption that we've been causing them. As the year drew to a close, we carried out a detailed technical reevaluation of our progress on the final fix, a new high-pressure turbine blade for the Trent 1000 TEN. Based on this reevaluation and on our test activity, we reset the financial and operational expectations for the engine last November with a revised estimate of the final durability of the engine's high-pressure turbine blades. And this allowed us to provide certainty for our customers and greater clarity for investors. As a result of the Trent 1000 issues, and as announced in November, we recognized a net exceptional charge of the GBP 1.36 billion within our 2019 financial results, contributing to a reported loss of GBP 852 million for the year. We're progressing well with the final new HP Turbine blade and have now started engine testing. Despite everything else that is currently happening, we continue to expect certification of this component in the first half of 2021. We've also now overhauled enough and spare engines and have spare engines such that once fitted, our aircraft on the ground reduces to about 10. And we remain on target to achieve single digits by the end of the second quarter of this year. On to Slide 7. Our restructuring efforts gained momentum in 2019 with run rate cost savings of GBP 269 million, indirect headcount reduction followed the introduction of new processes, taking the cumulative net indirect headcount reduction to almost 3,000 of the 4,600 goal we set back in 2018 for 2020. I was very heartened by the performance and the behaviors that I saw within the business, particularly in the second half of last year. And that gave me increased confidence coming into 2020 that the changes we've been implementing over the past 2 years are indeed creating a tangible and sustainable cultural performance shift within our business. Strategically, we've bolstered our ambitions to be a leader in low-carbon technologies during 2019. We acquired eAircraft, the electric and hybrid electric aerospace propulsion activities of Siemens. And that added new products and a team of specialist electrical designers and engineers to our portfolio as well as a handful of design wins. Late last year, we also unveiled the plane which will seek to break the speed record for an all-electric aircraft as part of our ACCEL program. Power Systems is, of course, already well advanced in the provision of low-carbon energy, such as hybrid propulsion systems for applications, including trains and yachts. During 2019, we signed customer contracts and framework agreements for hybrid solutions for both those markets. We're increasingly taking our expertise in power generation and integrating it with power management systems, renewable energy sources and battery technology. This will create microgrids that can deliver cleaner decentralized energy. Since October, we've been operating our own micro grid at Friedrichshafen. And during 2019, we received the first customer orders. Early in 2020, we further enhanced our capabilities in this area with the acquisition of a majority holding in power storage specialist, Qinous. We also completed the sale of Commercial Marine and agreed the sale of our North America Civil Nuclear business in 2019. For those of you on the phone now, I'm moving on to Slide 9. And at the time of our full year results at the end of February, the impact of COVID-19 was still evident predominantly in China. And we said it was a macro risk to our business but took the decision to provide guidance excluding COVID for 2020. This would provide a benchmark for the year ahead, upon which investors could build their models before considering their own assumptions of the impact of the disease. Since then, as we all know, there is almost no part of the world that has not been impacted. And the scale of the measures being brought in by governments to slow the spread of the virus is unprecedented. By the time we reported our results, we had a detail of the impact on flying hours into and out of and within China. In March, however, we started to see flight restrictions being implemented in many more countries. And come April, airlines were grounding large proportions of their fleets. As a result, in early April, we withdrew our financial guidance for 2020. Due to the unprecedented reduction in air traffic caused by COVID, we're anticipating a significant net cash outflow during the second quarter, and it remains too early to guide on the likely outcome for the full year. Slide 10. In terms of the impact seen so far, Civil Aerospace widebody engine-flying hours were approximately 40% lower in the first 4 months of the year. This reflected a fall of 90% in April as airlines right around the world have temporarily grounded large proportions of their fleets. As a result of this lower level of activity, we're now enacting a significant reduction in the volume of service visits in our maintenance, repair and overhaul shops compared with our original plans. And consequently, now we expect MRO volumes in 2020 to be moderately below 2019 levels. Additionally, our airframer customers have reduced aircraft production rates. And as a result, we now expect to deliver about 250 engines in 2020, down from our previous guidance of 450 announced in February. During this time, we do derive strength from the diversity of our business units, with almost half our sales coming from non-Civil Aerospace place end markets. Our Defence business continues to perform robustly. However, the impact of social distancing and elevated absence levels is presenting some operational challenges, particularly for some of our suppliers. We're closely monitoring our supply chain. We're taking actions, where possible, to mitigate the impact on our own productivity. Since our trading update in April, Power Systems has experienced a deterioration in demand due to the impact of COVID-19 on economic activity in our end markets. And in particular, we've seen our industrial end markets heavily impacted, especially mining and oil and gas. Service activity is also lower and several yacht production facilities have temporarily closed. Delays to construction projects has affected PowerGen demand also. However, as we look ahead, we anticipate a trend for higher data traffic to result in increased demand for mission-critical backup power for data centers. As a result, Power Systems' financial performance for 2020 is likely to be materially lower than it was in 2019, although we do still expect it to contribute positively to group profit and cash flows for the full year. Slide 19 for -- Slide 11, sorry, for those of you on the phone. Throughout this outbreak, our top priority has been to do everything we can do to safeguard the lives and livelihoods of our people and to play our part in helping our customers, partners and communities. Proactive measures remain in place at all our facilities to help keep our people safe and minimize operational disruption, and they're aligned with local and national guidelines. These include remote working practices alongside workplace measures such as social distancing, enhanced hygiene procedures and modified shift patterns in our manufacturing facilities. This enables us to continue to serve our customers in these difficult times. We're supporting our communities with whatever practical help we can offer. In the U.K., we're very proud to be a member of the VentilatorChallengeUK consortium, which is producing additional ventilators for the NHS. Our role is to lead the development and execution of a parallel supply chain to feed assembly lines for the Smiths paraPAC300 ventilator. In a little more than 1 month, we've established a new supply chain to deliver over 3.5 million parts with a team that includes project managers, manufacturing engineers, buyers, quality controllers, who've worked right around the clock. These parts are being delivered to production lines in the U.K. who are ramping up production of ventilators and will soon be producing at least 1,500 units a week. Across Rolls-Royce, teams are using their skills in manufacturing techniques, including things like 3D printing to produce personal protective equipment, including over 10,000 face shields to help protect the local health care staff. One team in the U.K., working with medics and engineers at the technology manufacturing center, developed, tested and put into operation a shield to protect frontline staff from frequent exposure to aerosolized COVID-19, all in just 1 week. And these fast-make prototype activities were supported with funding from Innovate UK. As a leading promoter of science, technology, engineering and mathematics, or STEM, activities designed to inspire the future generation, we are also playing our part in helping the many people who need to keep children excited and learning during these trying times. We've made a wide range of materials available on our website. These include things like lesson plans linked to the U.K.'s national curriculum on flight, electricity, recycling and green energy. These materials all use our all-electric ACCEL aircraft program as their starting point. We also have indoor learning activities available through our partnership with the Scout Association. Just last week, we published content from our digital academy offering our world-class digital training program to help people and businesses around the world learn new digital skills. Of course, it's available on our website range from bite-sized, hour-long sessions to fully certify training programs. Our R2 Data Labs team, meanwhile, has assembled a group of leading companies to collaborate on the Emergent Alliance. A selection of data analytics experts will combine traditional economic, business, travel and retail data sets with behavior and sentiment data and so as to provide insights that will support the global recovery from the pandemic. Turning now to Slide 12. COVID-19 has caused significant disruption to the global aerospace industry with an unprecedented reduction in air traffic. And in order to mitigate the impact on our 2020 financial performance, we immediately implemented a number of contingency measures. In response to the change in outlook resulting from the global spread of COVID-19 and to ensure cash headroom in the event of a prolonged reduction in trading activity, we took a precautionary decision in March to draw fully on our GBP 2.5 billion revolving credit facility. An additional revolving credit facility of GBP 1.5 billion was also secured in April to bolster the group's liquidity position. This has now been increased to GBP 1.9 billion following the completion of discussions with a larger group of banks. Notwithstanding our financial and liquidity position, as Ian said earlier, the Board decided that in the light of uncertain macro outlook, it would no longer recommend a final shareholder payment of 7.1p per share in respect to 2019. Now I understand this will be a disappointment to many of you, but it is the prudent thing to do. We've made better-than-anticipated progress with our self-help specific mitigation activities to further reduce our cash expenditure. We now expect to generate a cash flow benefit of up to GBP 1 billion this year. We're achieving this by minimizing discretionary costs, such as noncritical capital and expense capital projects, consulting and professional fees, ceasing all nonessential travel and postponing external recruitment. We've also introduced reduced working hours and removed overtime. We're reducing salary costs across our global workforce by 10% this year, subject to local legal requirements. Our senior managers, including the executive team, have taken an additional 10% pay cut. There has also been a corresponding reduction in fees for Nonexecutive Directors of the Board. We've taken a number of immediate actions to adapt to the current market conditions, and we've reduced volume expectations, both original equipment production and maintenance, repair and overhaul activity. These include working with our supply chain to reduce direct procurement as well as placing over 4,000 of our own employees in the U.K. on furlough. We've pledged to ensure that they receive no less than 80% of their salary. And we will make up any difference beyond the government caps. Looking ahead, the severity of the disruption caused by COVID is expected to lead to a smaller commercial aerospace market, which may take several years to recover. And as a result, we're actively pursuing changes to our business, particularly in Civil Aerospace, to better align to the medium-term market conditions. We're committed to working with our trade union and the employee representatives as well as our customers and suppliers as we adjust to the new outlook and establish a more appropriate cost base in order to secure our future for all stakeholders. We've promised to give our people further details of the impact of the current situation, on the size of our workforce before the end of the month, and we'll consult with affected employees in due course. Finally, on Slide 13 now. Our strategic choices over the last few years, including streamlining our portfolio, investing in our management systems and building a culture of agility have helped us to respond quickly to COVID with the actions to mitigate the immediate impact. There's a lot of speculation about the exact shape of this recovery from the pandemic. And obviously, we've worked through a number of scenarios, but I firmly believe that flying is a societal good and will be one of the drivers of any global economic recovery. And once that recovery begins, the shape of our portfolio, the synergies between our different divisions will leave us well placed to capitalize on the long-term potential of our markets. I firmly believe that the world on the other side of this pandemic will be even more focused on the provision of lower carbon, more sustainable power. And this plays very well to our strengths and our strategy. The transition to low-carbon power was always going to be an opportunity that we could seize through increasingly efficient engines and our world-class innovation, becoming a disruptor in new markets. Now those opportunities may come even sooner than we originally anticipated. We must, and we will emerge from this period ready to pioneer the power that matters. Thank you. I'll now hand back to Ian.

Well, thanks, Warren. Traditionally, at this point, I would ask the questions from the floor. But this time, we requested that shareholders send us their questions in advance. And thank you to those of you that did. I'll now read out those questions for the benefits of everyone watching and listening in, and Warren or I will address them.The first question is from Mr. [ Ablaster ]. It is, the current severe decline in civil aircraft utilization helps emphasize the importance of the B-52 reengineering program for the U.S. Air Force. Mr. East mentions this in his strategic report review on Page 8 of the annual report. Does he yet have any further news on this very important opportunity for the group? Warren?

Yes, of course. So the U.S. Air Force is continuing to progress the reengineering of its fleet of B-52s with a new in-production commercial off-the-shelf engine. And we anticipate that a request for proposal will be issued very shortly in the coming weeks and a selection decision made by early 2021. And we will compete with our F130 engine, a variant of the commercial BR725 engine. Should we win, we will manufacture, assemble and test the F130 engines in our newly modernized facilities at Indianapolis. We consider the F130 to be a perfect fit for B-52. It's the right size, the right thrust and fuel efficiency, and it's a modern design with high reliability and a proven service record. Thanks, Ian.

The next question is from Mr. [ Neil, ] who ask, to what extent does the Adour T-45, powering the Goshawk U.S. Navy pilot training aircraft figure in the company's accounts today? In the 1970s to 1980s, I worked on the T-45 program in Darby, Bristol and Long Beach, ending up as Project Program Manager. I believe that T-45 is still going strong and contributing to Rolls-Royce's income, is this so?

Firstly, I'd like to thank you, Mr. [ Neil, ] and all your colleagues for the work put into the program. The enduring returns that we see from military programs over an extended period of time are one of the core characteristics of our Defence business. We continue to service and support the Adour engines, known as the F405 in the U.S., that power the U.S. Navy T-45 training fleet based at 2 military training sites in the Southern U.S., and this does indeed continue to provide us with a steady flow of service revenue into our Defence business. So thank you again.

Turning to a question from Mr. Atkinson. When UltraFan engine goes into service, do you anticipate that it will be a niche product? Or will it have such a wide application that it will threaten the continued existence of other manufacturers? Again, Warren.

Yes, of course. UltraFan, as many of you know, is a demonstrator program for a whole suite of new technologies. It's not simply one single new engine. Those individual technologies will give us competitive advantages as well as options. Exactly how we use them and when we use them is not something, for obvious competitive reasons, that I'm going to talk about today. I'd also add that UltraFan is an important step towards lower carbon power. The architecture behind it is even more efficient than the Trent XWB, which, as I'm sure many of you know, is the world's most efficient, civil, large gas turbine engine in service today. Thank you.

I have 3 questions from Hermes Investment Management. The first is when will Rolls-Royce publish company-specific metrics and targets for its key product areas that reflect the longer-term ambition for its role in the low-carbon transition and against which stakeholders can evaluate progress and impact? Warren, you want to take this one?

Sure. As part of our broader review of our sustainability strategy, we're reviewing sustainability targets this year with a particular view to replace those which expire at the end of 2020. We're proud to already have a leading target to reach net 0 emissions from our own operations and facilities by 2030. We're also committed to playing a leading role in enabling the vital sectors in which we operate to get to net 0 emissions by 2050. One of our key tasks is to articulate more clearly what this means, what the potential pathway, where we will -- the potential pathway that we'll take to reach net 0 emissions by 2050, including considering potential future targets. And we will provide more on this when we've completed the work.

The second question is, will the company commit to advance climate disclosures over the next 2 reporting cycles with the aim that by 2022, it achieves material alignment with the intention of the TCFD and as per the 5-year implementation aim of the task force's recommendations. Warren?

Yes. We've taken steps to enhance our climate-related reporting over the past few years and to bring it in line with TCFD recommendations. This includes strengthening our related governance, including climate scenarios into our strategic planning processes and reviewing our treatment of climate-related risk. A further step in strengthening our reporting will be the consideration of product-related climate targets in relation to the above. Thank you for that question.

Thanks, Warren. And I'd like to add a comment that it is reassuring to see that the desire for demonstrable action on climate change remains high on the agenda despite the immediate pressures of COVID-19 today. I was pleased to receive the statement from Hermes accompanying these questions submitted on behalf of the Climate Action 100+ investor coalition. This recognized the continued commitment Rolls-Royce has demonstrated in building the company's position and the school of thought on the necessary transition to a low-carbon economy. This is a topic I believe to be of the utmost importance. And so the last of 3 questions from Hermes is, will the Remuneration Committee seek to include a climate metric or metrics in the variable pay plans of executive team. If so, what would the metrics be? And by when would the committee seek for these to be included? Let me answer this one. The remuneration policy is being left deliberately open for the addition of further targets, with a particular expectation that we may introduce ESG-related targets in the future, particularly ones related to climate, in line with the sustainability review mentioned earlier. Our next question is from Ms. [ Nazari ]. What is the time line on which the company is planning to convert all its aircraft into all-electric aircraft, given that a similar situation to the COVID-19 pandemic is bound to happen again if we do not take action quickly enough regarding the climate crisis. Warren, would you like to take this?

Yes, of course. Despite the immediate pressures of the COVID-19 crisis, the climate emergency hasn't waned. And we remain committed to playing a leading role in enabling the vital sectors in which we operate to get to net 0 emissions by 2050. There's no doubt that this must be a core part of the post-COVID recovery of aviation, in particular, but there won't be one single solution that will get us there. We must have a combination of technologies, including further improving engine efficiency and other measures such as the increased use of sustainable lower carbon fuels to achieve that. Electrification will play an important part, particularly in the smaller end of the market. And here we expect to attempt to break the world's speed record with a fully electric single seater plane this year, and we expect to introduce our first certified propulsion unit for 2- to 4-seater aircraft to the market by 2023, the technologies that we're developing for these smaller aircraft and then we scaled up and applied over time into larger aircraft, particularly regional. And at the larger end of the market, particularly for widebody long-haul flights, we don't yet see a viable technological pathway for fully electric flight. But we do anticipate there will be more electric planes, perhaps with some form of hybrid technology, but more likely using fuel sources that are not fossil fuel based. And these technologies will take time to bring to market and must be supported by the right policy environment that ensures that they really are sustainable and don't compromise product safety. We remain confident in our ultimate goals that aviation can be compatible with a net 0 carbon future by 2050. Thank you for that question.

Now to a question from Ms. [ Brand ] from CCLA Investment Management on behalf of the coalition of investors with assets under management of approximately GBP 2.2 trillion. While we fully appreciate the extraordinary pressures that you are under at present, we would urge you to address the threat posed by COVID-19 to the mental health of your workforce and the risk it poses to the overall sustainability of your business. We are encouraging businesses to develop a specific mental health action plan during COVID-19 for all your employees and would welcome hearing your approach. Thank you for this question. I'll take this on myself. I think all of us have, to some extent, been feeling the strain that these unprecedented times. It's particularly hard to those while self-isolating or spending an extensive amount of time within their homes and away from colleagues, friends and family. This is a very necessary precaution, but it does not make it any easier. Your Board is acutely aware of the impact of the virus on people's mental health. We've been regularly updating [Audio Gap] by management on the advice and resources being offered through internal communications to our people. We also have mechanisms in place, which enable us to keep in touch with our people on furlough. Ultimately, however, it is a job of all our managers to make sure they remain close to their teams, that they emphasize with those who are feeling anxious right now and that for one of a better phrase, they keep everyone's morale up. As just one example, I know Warren has been made a personal video every week to make sure he can connect with as many people as possible and provide as much reassurance as he can. The next question is from Mr. Hamilton, who asks, in view of the fact that inequality is widely recognized as one of the greatest evils in the U.K., is it not time that the remuneration of directors and senior staff is substantially reduced? Well, Mr. Hamilton, the remuneration committee maintains a very close watch on levels of executive pay in order to ensure that we can attract and retain the people that we need. You'll see on pages 14 and 15 of the annual report, the very clear links between our key performance indicators and remuneration. As you will also see in the report of the committee from Page 85, we've always taken a careful approach to executive reward. After the third year running, the committee has not proposed any changes in quantum for existing Executive Directors. I'll return to this topic with the next question, which comes from Mr. [ Shepherd ], who asked, the company has recently said it is anticipating losing a lot of orders in the face of possible reduction in travel and, therefore, a reduction in the need for aircraft. As a consequence, it has been -- it has warned as likely to be redundancies. Presumably, the members of the Board will be reduced pro rata, and all of them will be very happy considering their need to receive the full amount of our remuneration expenses. Perhaps already, they are only taking 80% of their remuneration and expenses to show sympathy with those who have been furloughed. Thank you for the question. As we said in the trading update in April, we have already reduced the salaries of our senior management, including the executive team by 20%. There's been a corresponding reduction in fees for Nonexecutive Directors. The penultimate question comes from Mr. [ Cunnington ], who says, you will not need me to tell you that the impact of COVID-19 on the airline industry is devastating. All areas will have to take their share of the pain. But what concerns me is that the capability of the company to design, develop and certificate a comprehensive large engine will be lost forever. It must already be diminished. It is this engineering competence that is only possessed by the 3 large aero engine companies. However, what concerns me is that there is no one on the Board who really understands how the commercial airline industry works. So I urge you to find somebody who can fulfill that role on the Board and not only listen to them, but be mindful that for the long term, engineering capability will be key to a successful future, not just technology. Thank you for the question. Your Board is very mindful of understanding the needs of the airline industry, and we receive regular insights from the leadership within our Civil Aerospace business, which retains incredibly close size not only with the airframers, but within the airline industry as a whole. As to your broader point, we're also very mindful of the need to protect Rolls-Royce's ability to innovate. And the Board has extensive experience of engineering as well as technology and indeed as well in the aerospace sector as well, contrary to what you claim. Several of our members on the Board are chartered engineers. And together, we collectively have many decades of experience, perhaps more than some us who care to admit, within companies engaged in high-value manufacturing, advanced engineering, safety critical technology as well as airlines. I believe your Board is very well-qualified and versed in both engineering and technology. Last question comes from Mr. Barton. As it's been very impressive how skills and capabilities are being used to benefit society with ventilators, face masks and the like, given this ability to step up and do something different successfully in a crisis, what are your thoughts around repurposing some of our people and facilities currently involved in this civil aero work to enter a new line of business for Rolls-Royce in an area of post-COVID that will have a demand. Perhaps medical equipment or electrical power. This could be a temporary venture to bridge a slump in air travel. And if it proves really successful, it could be continued with also. Warren, do you want to take those on?

Yes, with pleasure. Interestingly, a few weeks ago, I visited the team working in Darby to support our work on ventilators. And obviously, I was maintaining the appropriate social distance, but I was particularly impressed by the entrepreneurial spirit shown by the team. It's very unlikely that on the other side of the pandemic, Rolls-Royce will be going into the medical devices business. However, the behaviors that I saw on display, the agile way in which the people were problem-solving and the collaboration with multiple teams are exactly what we've been driving for across the company and are exactly what will help us get through this challenging period. This isn't a crisis of our making, but it's a crisis that we do face, and I've been very impressed with the way that colleagues across the group are tackling it. In reality, it's almost certainly the darkest hour for our whole company since the 1970s. Thanks to much hard work from all of our people, including some of the difficult changes we've made over the last few years, we are a much stronger company today than we were then. COVID-19 pandemic has shown that we derive strength from the diversity of our group. Rolls-Royce stands upon 3 legs, not just one. Our Defence and Power Systems businesses have always had close links with our Civil Aerospace business. Defence has benefited from civil's work in gas turbines and has civil products in use with defence customers, such as the MT30 naval gas turbine engine. Power Systems has learned a lot from civil about data collection and creating aftermarket services. And civil and defence have both been able to learn from Power Systems' experience in hybrid electrical systems. Power Systems has hybrid electrical products in service with customers right now and is learning valuable lessons that can be drawn upon that from -- for the rest of the group. On the other side of this pandemic, the world will have the need for vital power that we produce. And I firmly believe that the call for that vital power to be lower carbon will be strong. And this plays to our strengths and strategy. And we've emerged from troubled times before to achieve incredible things, and we will definitely do so again. Thank you.

Thanks, Warren. There are no more questions to address. So I'd like to draw this meeting to a close. Thank you all for joining us today. All of us on your Board are sorry that we've not been able to meet in person as we usually do at this time of year. As I said earlier, as the situation becomes clearer over the coming months, we will explore ways in which we can offer you an opportunity to engage in person with us, perhaps in the autumn. In the meantime, thank you for your continued support and stay safe in these unprecedented times.