Rolls-royce Holdings Plc · LSE:RR.
Rolls-royce — FY2015 Earnings Presentation
66 slides from Rolls-royce's earnings presentation, February 2016
Slide 1: 2015 Full Year Results
| Rolls-Royce 2015 Full Year Results \ ~ \
Slide 2: John Dawson, Director, Investor Relations
John Dawson Director, Investor Relations
Slide 3: Agenda for today
Agenda for today Introductions John Dawson 2015 highlights Warren East Financial review David Smith Strategic priorities and conclusion Warren East 3
Slide 4: Notices and Safety
Notices Mobile Safe phones Safety Harbour 4
Slide 5: Warren East, Chief Executive
Warren East Chief Executive Rolls-Royce
Slide 6: Headline results
Headline results Underlying Revenue Gross Margin Underlying Profit £13.4bn £3,182m £1,432m 1% 10% 12% Operating margin Free cash flow ‘Dividend’ per share 11.2% £179m 7.1p 130 bps 2014: £447m 2014: 14.1p 6
Slide 7: 2015 highlights
2015 highlights CIVIL AEROSPACE Nuclear • Production readiness for Trent XWB programme Marine • Trent 1000 TEN performance on test • Strong order book growth – T900 for Emirates Power – HNA Group Systems DEFENCE AEROSPACE • Good profit performance driven by long-term cost reductions 7
Slide 8: 2015 highlights
2015 highlights POWER SYSTEMS • Resilience despite challenging market conditions MARINE Civil • Swift action on costs and restructuring Aerospace for future competitiveness NUCLEAR • Steady performance despite delivery challenges Defence Aerospace GROUP-WIDE • Strength of contributions to the operat
Slide 9: Reflections on issues emerging in 2015
Reflections on issues emerging in 2015 Consequences of Civil Business integration Aerospace market developments High fixed cost base and volume sensitivity Speed and complexity of decision making TotalCare accounting complexity 9
Slide 10: Personal goals for 2015
Personal goals for 2015 Undertake Identify the Keep focus Improved Set clear thorough clear areas on delivering disclosure priorities for review of for business profitable and 2016 operations improvement growth transparency onwards 10
Slide 11: David Smith, Chief Financial Officer
David Smith Chief Financial Officer
Slide 12: Group highlights of 2015 performance
Group highlights of 2015 performance 2014 2015 Order book £73.7bn £76.4bn Revenue £13,864m £13,354m Profit before tax £1,620m £1,432m Return on sales 12.1% 11.2% Free cash flow £447m £179m Earnings per share 65.4p 58.7p Payment to Shareholders 23.1p 16.4p All figures exclude the Energy business sold
Slide 13: Group revenue 2014 v 2015
Group revenue 2014 v 2015 14,000 -1% -3% 13,500 (363) 267 £ million (414) 13,000 13,864 13,768 13,354 12,500 12,000 FY 2014 OE Services FY 2015 (excl FX) FX FY 2015 All figures exclude the Energy business sold to Siemens in 2014 13
Slide 14: Group profit before tax 2014 v 2015
Group profit before tax 2014 v 2015 1,700 -17% +5% +1% 1,650 1,600 1,550 £ million 1,500 1,450 19 8 58 1,400 1,620 108 2 1,350 11 (83) 1,424 1,432 1,300 (311) 1,347 1,250 1,200 Restruct. R&D credit Change in GM C&A Other FX FY 2015 (guidance IP settlement FY 2015 (excl FX) FY 2014 Net R&D FY 2015 ba
Slide 15: Group profit 2015 v free cash flow
Group profit 2015 v free cash flow 2,500 613 2,000 £ million 1,500 (544) 1,000 (479) 1,432 500 (408) (229) 385 (206) 179 0 UPBT Trading cash Intangibles Other Deprec. & Expenditure Capital (NWC) Pensions* & tax Free cash flow Net Working Amort. Capital flow * Payments to defined benefit post-retirem
Slide 16: Group financial strength
Group financial strength Credit S&P: A/Negative Maturity profile (£ million) rating Moody’s: A3/Stable 2,000 Maintain investment-grade 1,800 rating 1,600 Strong Total liquidity 1,400 liquidity £5 billion 1,200 1,000 Debt Spread to 2026 800 maturities Maturities: • 2016 - £200m bond & 600 €125m EIB l
Slide 17: Shareholder payment
Shareholder payment 2014 2015 2016 2014 cash: £406m Interim Final 2015 cash: 9.0p 14.1p £421m Interim Final 2016 cash: 9.27p 7.10p £301m 50% lower than prior year Interim Final 4.64p tbc “We recognise the importance of a healthy ‘dividend’ to our shareholders. Subject to short-term cash needs, we in
Slide 18: Foreign exchange: transactional
Foreign exchange: transactional GBPUSD: $29 billion EURUSD: $3 billion Objectives of hedge book provides hedge book; €/$1.35 FX hedging policy ~5 years’ cover ~3 years’ cover • Hedge book • Reduce volatility caused by average rate is FX movements $/£1.59 • Set maximum and minimum levels of FX cover
Slide 19: Civil Aerospace revenue
Civil Aerospace revenue 7,200 +3% -2% Drivers 7,100 • Growth in aftermarket revenues 7,000 offset lower OE sales • Maintained level of widebody £ million 6,900 (105) deliveries 6,800 7,038 • Weaker corporate / V2500 volumes 6,700 6,933 6,837 (117) 318 6,600 6,500 OE (excl FX) FX FY 2014 Services FY
Slide 20: Civil Aerospace original equipment revenue mix
Civil Aerospace original equipment (OE) revenue mix Change at 2014 constant FX FX 2015 yr-on-yr £m of whole £m change £m £m of whole OE 3,463 51% (117) (3)% (88) 3,258 48% Large Engine: 1,766 26% (191) (11)% (5) 1,570 23% linked and other Large Engine: 392 6% 114 29% (2) 504 7% unlinked installed Co
Slide 21: Civil Aerospace aftermarket revenue mix
Civil Aerospace aftermarket (AM) revenue mix Change at 2014 constant FX FX 2015 yr-on-yr £m of whole £m change £m £m of whole AM 3,374 49% 318 9% (17) 3,675 52% Large Engine 2,029 30% 336 17% 6 2,371 34% Corporate 383 6% 50 13% (8) 425 6% Regional 427 6% (61) (14)% (6) 360 5% V2500 535 7% (7) (1)% (
Slide 22: Civil Aerospace gross margin
Civil Aerospace gross margin 2,200 Drivers £(139)m 2,000 • Lower proportion of linked Trent 700 £ million 1,800 £72m engines 1,600 (16) • Contract risk assessment 1,400 (117) 84 methodology refined, plus lifecycle 1,675 (279) 189 1,536 cost improvements 1,200 1,000 • Trent 1000: reversal of CARs Tre
Slide 23: Civil Aerospace profit
Civil Aerospace profit 1,000 Drivers • Lower overall gross margins 900 Flat +1% • Higher net R&D costs £ million 75 8 5 • XWB 84k entering service impacts 800 (139) R&D capitalisation and amortisation 942 (14) • Reduced restructuring costs 700 (65) 807 812 600 Net R&D Change in GM C&A Other FY 2014
Slide 24: Civil Aerospace trading cash flow
Civil Aerospace trading cash flow £m 2014 2015 Variance Underlying profit before financing 942 812 (130) Depreciation, amortisation and impairment 381 410 29 Sub-total 1,323 1,222 (101) CARs additions (86) (161) (75) Property, plant, equipment and other intangibles (748) (502) 246 Other timing diffe
Slide 25: Civil Aerospace revenue outlook
Civil Aerospace revenue outlook £m 2015 2016 Original Equipment 3,258 Large engine: linked and other 1,570 Large engine: unlinked installed 504 Corporate 903 V2500 281 Aftermarket* 3,486 Large engine* 2,182 Corporate 425 Regional 360 V2500 519 Total Revenue* 6,744 * Adjusted for £189m methodology ch
Slide 26: Civil Aerospace 2016 headwinds
Civil Aerospace 2016 headwinds • Trent 700 volume and price reductions £m • Disappointing market outlook for Trent 700 ~250 corporate jets and regional aftermarket Large engine aftermarket ~50-80 • Rolls-Royce particularly impacted by Large engine other ~50-70 specific exposures Corporate jets ~75 –
Slide 27: Civil Aerospace trading cash flow outlook
Civil Aerospace trading cash flow outlook £m 2015 2016 Underlying profit before financing 812 Depreciation, amortisation and impairment 410 Sub-total 1,222 i.e. adverse CARs additions (161) variance to PY Property, plant, equipment and other intangibles (502) Other timing differences* (75) Trading c
Slide 28: Defence Aerospace revenue
Defence Aerospace revenue 2,200 Drivers 2,100 -5% +3% • Lower original equipment volumes for helicopters and trainers £ million 2,000 • Lower volumes on helicopter and (45) spares (56) 67 1,900 2,069 2,035 • Offset by higher revenues related to 1,968 long term service agreements for 1,800 combat air
Slide 29: Defence Aerospace gross margin
Defence Aerospace gross margin 650 Drivers • Higher one-off margin improvements around existing long term service 600 agreements (LTSA) £ million − Changed flying patterns 550 − Improved cost on combat (28) platforms 567 (28) 47 558 • Adverse margin on transport contracts 500 FY 2014 GM FY 2015 GM R
Slide 30: Defence Aerospace profit
Defence Aerospace profit 400 Drivers +4% • Increased R&D on next-gen 3 12 technology £ million • Lower restructuring costs after 350 (9) major 2014 downsizing (7) 393 381 366 (20) 48 +3% 300 FY 2015 (excl FX) C&A FY 2014 UPBT Change in GM Other FY 2015 UPBT Restruct. Net R&D FX 30
Slide 31: Defence Aerospace outlook
Defence Aerospace outlook • Positive long term outlook – Strong incumbent position – Growth in development for availability based contracts – Increase in R&D – Operational restructuring • Continued pricing pressure on extended service contracts • Lower near-term free cash flow but strong long-term o
Slide 32: Power Systems revenue
Power Systems revenue 2,800 Drivers 2,700 (97) 25 • Non-repeat of significant 2014 2,600 government projects (263) £ million 2,500 • Weaker oil & gas markets 2,400 2,720 • Agricultural OEM / luxury yacht -3% 2,648 -10% 2,300 stronger 2,200 2,385 • Significant -10% FX impact due to £/€ 2,100 • Order
Slide 33: Power Systems gross margin
Power Systems gross margin 750 Drivers (41) • Volume impact (20) 24 • 2014 specific warranty issue £ million 700 • Margin mix: naval vs. agricultural £(37)m 742 650 705 600 FY 2014 Volume Warranty Trading FY 2015 GM margin GM 33
Slide 34: Power Systems profit
Power Systems profit 260 Drivers 240 • Gross margin main impact (37) • FX impact: -9% £ million 220 3 3 3 (9) 253 (22) 200 Flat 216 180 -9% 194 160 FY 2015 UPBT FY 2014 UPBT Change in GM C&A Other FY 2015 (excl Restruct. Net R&D FX FX) 34
Slide 35: Power Systems outlook
Power Systems outlook • Outlook steady • Key markets: healthy order book 35
Slide 36: Marine revenue
Marine revenue 1,800 -19% -10% -7% Drivers 1,700 • Order book declined to below £1.1bn 1,600 • Challenging offshore market £ million • Minimal order intake/ deferred 1,500 (204) contracts / servicing 1,709 1,400 (65) • Naval / merchant progress 1,440 • Material -7% FX impact: NOK 1,300 (116) 1,324 1
Slide 37: Marine gross margin
Marine gross margin 450 £(139)m Drivers • Market-driven pricing pressure 400 • Financial charges: £ million 350 − Offshore customer contract/other (67) 425 provision 300 − Non-repeat of 2014 product quality (30) 30 (72) 286 250 Non-repeat 2014 charge FY 2014 GM FY 2015 GM Trading margin Volume 2015
Slide 38: Marine profit
Marine profit 150 -94% +5% Drivers (139) • Significant reduction in gross margin • Indirect headcount benefit to C&A £ million 100 • Higher restructuring costs 138 50 27 (2) (16) 7 8 15 0 Restruct. FY 2015 (excl FX) Net R&D FY 2014 UPBT Change in GM C&A FY 2015 UPBT FX 38
Slide 39: Marine outlook
Marine outlook • Continuing uncertainty in offshore markets • Focus on repositioning & cost base • Increase targeted R&D • Focus on Asia region • £75-100 million lower profit (before restructuring benefits) 39
Slide 40: Nuclear
Nuclear* Underlying revenues +9% Underlying profit slightly up • OE revenues +12% • Benefitted from £19m tax credit from • Services +7% joining R&D Credits scheme Gross margin lower Outlook • Submarine servicing • Remains steady • £10m nil-margin submarine project * Revenue, gross margin and profit
Slide 41: Technical factors for 2016
Technical factors for 2016 Guidance at constant 2015 foreign exchange 2015 2016 Guidance Finance Charges £94m* £90m-£110m Tax rate 24.5% c.26% Capital expenditure £494m £500m-£550m (Property, plant, and equipment) 4% of revenue £831m Net R&D spend >£800m 6% of revenue Free cash flow £179m £(100)m-£(
Slide 42: Conclusions
Conclusions Full year results in line with Strong balance sheet our expectations provides financial flexibility Transformation plans in Outlook unchanged place to deliver sustainable savings 42
Slide 43: Warren East, Chief Executive
Warren East Chief Executive Rolls-Royce
Slide 44: Strategic clarity
Strategic clarity We are a Power Systems business… VISION STRATEGIC FOCUS “… to be the market leader in high “… focus on differentiated, mission performance power systems where critical power systems markets with our engineering expertise, global high barriers to entry where we can reach and deep in
Slide 45: Personal goals for 2016
Personal goals for 2016 With a focus on pace and simplicity… Strengthen our focus Deliver a strong start Start rebuilding trust on engineering and to our transformation and confidence in our operational excellence programme long-term growth and leveraging our prospects installed base 45
Slide 46: Engineering excellence
Engineering excellence Pace, simplicity and flexibility Advanced Manufacturing Research Centres • Developed with other companies and key universities Advanced Blade Casting Facility in Rotherham • Opened at the beginning of 2015 • This new facility is co-located with the AMR centre set up with the U
Slide 47: Operational excellence
Operational excellence Focus drives meaningful reductions in unit engine costs Supply Chain Product Cost Index e.g. Wide chord fan blade 1.8% 6% reduction in unit costs • External product cost index 3% • Significant increase in automation – Reduced dependency on limited • Internal costs 1% n
Slide 48: Operational excellence: significant productivity improvements
Operational excellence Significant productivity improvements 700 600 80+% 500 Annual Trent deliveries Growth in production 400 300 On track for 20+% 200 reduction by 2020 11% Reduction in m2 100 footprint to date - 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Strengthen our focus
Slide 49: Leveraging our installed base
Leveraging our installed base Aerospace initiatives to extend our offering Changing dynamics as we mature … Significant growth in installed base… Response… reorganising New structure focused on flexibility 2005 2015 2025 and competition… Installed engine count Installed engine count Installed engine
Slide 50: Transformation
Transformation Strong project management and governance Transformation team… Strong governance over all programmes – old and new Enduring process simplification and cost reductions Updating and strengthening key performance indicators Strengthen our focus on Deliver a strong start to our Start rebui
Slide 51: Transformation: legacy programmes proceeding well
Transformation Legacy programmes proceeding well Incremental changes (as announced) Aerospace 2015 2016 2017 Net improvement £0m £80m £0m Headcount reduction 2,200* 400 – Marine 2015 2016 2017 Net improvement £(10)m £35m £40m Headcount reduction 600 400 – Strengthen our focus on Deliver a strong sta
Slide 52: Power Systems' major improvement programme
Transformation Power Systems’ major improvement programme 2015 2016 2017 2018 1 3 Strategic Streamlining Implementation direction & sizing 2 Performance push 4 Building future competitiveness • Started in Q4 2015 • Initial focus on… • 15 individual workstreams phased over – Direction and sizing/reso
Slide 53: £150-200m cost saving programme
Transformation £150-200m cost saving programme Senior management Further management Dealing with headcount reduction headcount reductions change and ambiguity 20% of top two layers to be announced in H1 Improved Initial benefits identified Approval management processes information • Identified cost
Slide 54: Rebuilding trust: enhancing disclosure and transparency
Rebuilding trust Enhancing disclosure and transparency Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation programme confidence in our long-term excellence and leveraging our growth prospects installed base 54
Slide 55: Clear programme of milestones for 2016
Rebuilding trust Clear programme of milestones for 2016 Investigate & Scope Detail & Implement Review & Refine Now FY & Q2 Q4 • Analyse • Plans & Priorities • Implementation update • Prioritise • Costings/Timescales • Progress on Financials • Engage Team • KPIs/Measures of Success • Progress vs plan
Slide 56: Fuelling long-term growth critical to our success
Fuelling long-term growth critical to our success Successful product innovation • Address emerging customer needs • Drive growth in installed base which in turn drives profitability and cash • Scale efficiencies in the aftermarket help drive higher achieved returns on sales Order book reflects signi
Slide 57: Growth opportunities exist across the portfolio
Growth opportunities exist across the portfolio Strong mix of business 2020 • Over 80% in attractive growth markets High ~70% • Over 75% in with strong competitive advantages Competitive Position Competitive advantage strengthened by investments • 2/3rds of group will benefit from transformation pro
Slide 58: Power Systems and Marine focused on driving profitable growth
Power Systems and Marine focused on driving profitable growth… Product Restructuring, Provide Development, modernisation, systems, intelligent value-added lean manufacturing, applications, products and Drive cost increased throughput, pull-through sales services competitiveness geographic refocus St
Slide 59: Civil Aerospace: widebody installed thrust growth
Civil Aerospace: widebody installed thrust growth Installed thrust drives aftermarket revenue growth 600 500 400 300 200 100 0 1990 1995 2000 2005 2010 2015 2020 2024 Trent XWB Trent 1000 + 7000 Other Trents RB211s Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engi
Slide 60: Aerospace cash flows will come from scale in the aftermarket
Aerospace cash flows will come from scale in the aftermarket Portfolio today… In 5 years… In 10 years… Cash generating Cash generating Cash generating Trent XWB-84 Trent 700 Trent Trent 700 XWB-84 Trent Trent Trent 7000 Trent 900 RB211-535 900 RB211-535 XWB-97 Trent Trent RB211-535 7000 800 Trent Tr
Slide 61: Legacy Issues
Legacy Issues Co-operating with Significant actions to Zero tolerance to authorities including improve ethics/ABC misconduct UK & US culture & processes Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation programme confidence in
Slide 62: Summary
Summary 2015 Challenging 2016 • Met most expectations for revenue • Transition effects in Civil Aerospace and profit and Marine • No major trading issues arising during • Steady cash flow outlook second half of the year Clear Strategic priorities to focus Growth expectations activities in 2016 and o
Slide 63: Q&A
Strengthen our focus on Deliver a strong start to Start rebuilding trust engineering and our transformation and confidence in our operational excellence programme long-term growth and leveraging our prospects installed base Q&A Warren East, Chief Executive David Smith, Chief Financial Officer …with
Slide 64: Investor Relations
Investor Relations Contacts John Dawson Georgina Broome Director – Investor Relations Investor Relations Analyst Tel: +44(0)207 227 9087 Tel: +44(0)207 227 9141 [email protected] [email protected] Helen Harman Jacinta Francis Assistant Director – Investor Relations Programme Coo
Slide 65: Investor iPad App
Investor iPad App Available as a free download from iTunes 65
Slide 66: Safe harbour statement
Safe harbour statement This announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with re