Rolls-Royce Holdings plc · LSE:RR.

Rolls-Royce — Investor Day (June 2014)

98 slides from Rolls-Royce's investor day presentation, Jun 19, 2014

  1. Slide 1: Investor Briefing

    STRICTLY PRIVATE & CONFIDENTIAL Investor Briefing 19 June 2014 Trusted to deliver excellence

  2. Slide 2: Strategy

    STRICTLY PRIVATE & CONFIDENTIAL Strategy John Rishton 19 June 2014 © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express w

  3. Slide 3: Overview of morning

    Overview of morning Strategy Capital allocation & guidance TotalCare® Q&A Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  4. Slide 4: Strategy – evolution, not revolution

    Strategy – evolution, not revolution Place the customer at the heart of the organisation Customer Understand and shape their requirements Relentless focus on delivering our promises Value innovation in everything we do Innovation Ensure competitive technology ahead of product requirements Establish

  5. Slide 5: Consistent long-term delivery

    Consistent long-term delivery Order book (£bn) Revenue (£bn) 71.6 15.5 18.7 5.6 2003 2013 2003 2013 Profit (£bn) 1.8 0.3 Trusted to deliver excellence 2003 2013 Privileged and confidential - prepared at the request of outside counsel

  6. Slide 6: Who we are

    Who we are “ …for use on land or water or in the air.”* Group Rolls-Royce Complex power systems & services group Power Gas turbines Reciprocating engines Nuclear Systems LiftFan, engine controls, propulsion, deck machinery, I&C Services Aftermarket services Divisions Aerospace Marine & Industrial Po

  7. Slide 7: Strong growth and better revenue balance

    Strong growth and better revenue balance 2003: £5.6bn 11% CAGR 2013: £15.5bn Aerospace Aerospace 73% 59% MIPS 41% MIPS 27% Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  8. Slide 8: Strong growth and better profit balance

    Strong growth and better profit balance 2003: £0.4bn 17% 17% CAGR CAGR 2013: £1.8bn Aerospace Aerospace 84% 70% MIPS 30% MIPS 16% Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  9. Slide 9: Balanced revenue by product & type

    Balanced revenue by product & type 2013: £15.5bn Aerospace OE 28% Gas Turbines 66% Reciprocating engines MIPS OE 19% 25% Nuclear 4% Marine Marine equipment 14% Aerospace services MIPS services 11% 31% 16% Trusted to deliver excellence Privileged and confidential - prepared at the request of outside

  10. Slide 10: Growth and balance driven by portfolio approach

    Growth and balance driven by portfolio approach Similar ROCE, complementary profiles Civil gas turbines Reciprocating engines ROCE* 18% - 23% 25% - 30% Investment risk High Low Entry barriers High Medium Net R&D spend ~£1bn ~£150m Capex ~£0.5bn ~£100m Programme launch to EIS 5 – 7 years 3 - 5 years

  11. Slide 11: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  12. Slide 12: Fix the basics: the "4C's"

    Fix the basics: the "4C's" Customer Concentration Cost Cash Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  13. Slide 13: Customer: on time delivery

    Customer On time delivery – trend improving but much more to do On time to customer On time to internal plan 2013 2012 2013 2012 Civil Aerospace 100% 80% 25% 4% Defence Aerospace 93% 88% 39% 7% Marine 95% 55% 77% 30% Trusted to deliver excellence Privileged and confidential - prepared at the request

  14. Slide 14: Concentration: focus on where we add most value

    Concentration Focus on where we add most value When What Why 2014 Energy gas turbine business to Siemens Scale Sold 2013 RTM322 helicopter engine business Non-core 2012 Tidal Generation, Fuel Cells Non-core 2011 - 2014 Tognum Product Bought 2011 - 2013 Various Civil Nuclear businesses Technology 201

  15. Slide 15: Cost

    Cost Area Action Product redesign • 600 engineers • LCC sourcing to 40% by 2020 Structural change • 20% lower footprint by 2020 New manufacturing • New plants hitting targets Plants & technology • 160 new projects via AMRCs • Reduce logistics costs - 20% Logistics & inventory • Continue to improve i

  16. Slide 16: Cash

    Cash Type 2013 Action Drive down from current Capex spend £0.7bn 4.9% revenue to c. 4% in next 3-5 years. R&D spend £0.8bn Ease as % of revenue Continue to drive turn times by reducing buffers, Inventory year-end total £3.3bn improving productivity and increasing manufacturing stability. Trusted to

  17. Slide 17: Cash: inventory turns

    Cash Inventory turns improving but more to do 2013 2012 Civil 3.4 3.0 Defence 4.6 3.4 Marine 3.6 3.4 Group 3.4 3.0 Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  18. Slide 18: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  19. Slide 19: Culture

    Culture Importance of culture: “Culture eats strategy for breakfast” Innovation Cost Ethics Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  20. Slide 20: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  21. Slide 21: Wide body aircraft deliveries to 2023

    Wide body aircraft deliveries to 2023 Over 4,000 deliveries vs. over 2,000 in last decade Annual Boeing and Airbus aircraft units 500 450 400 350 300 250 200 150 100 50 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Jefferies. Trusted to deliver excellence Privileged and confidential -

  22. Slide 22: Projected Trent deliveries to 2023

    Projected Trent deliveries to 2023 Over 4,000 deliveries vs. over 1,600 in last decade 700 600 Annual Trent deliveries 500 400 300 200 100 - 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  23. Slide 23: Rolls-Royce wide body installed thrust

    Rolls-Royce wide body installed thrust More than doubles in next decade 2023 RB211– 6% lbs million lbs 700 Trent 700 – 24% Trent 1000 – 17% XWB – 34% 600 thrust 500 2013 RB211 – 32% thrust million Trent XWB Net cumulative 400 Trent 700 – 32% installed Trent 1000 – 3% Trent 1000 XWB – 0% Trent 900 30

  24. Slide 24: Future products

    Future products Continuous improvement essential to remain competitive Trent XWB Advance UltraFan™ World’s most efficient engine New engine core architecture >1600 sold >20% better fuel burn >25% better fuel burn Composite fan system New engine core architecture Geared design 84k variant EIS Q4 Adva

  25. Slide 25: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  26. Slide 26: Narrow body deliveries to 2023

    Narrow body deliveries to 2023 71% market units, 48% market value 1,200 Annual Boeing and Airbus aircraft units 1,000 800 Benefits • Customer intimacy 600 • Technology • Volume • Large market 400 200 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Jefferies Trusted to deliver excellence

  27. Slide 27: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  28. Slide 28: Low speed recips characteristics

    Low speed recips characteristics rpm 50 - 300 Power (MW) 3 - 85 Weight (tonnes) 50 – 2400 Length (m) 4 – 24 Fuel type Diesel (HFO), gas Competitors MAN Diesel, MHI Typical uses Large merchant vessels Trusted to deliver excellence Privileged and confidential - prepared at the request of outside couns

  29. Slide 29: High speed recips characteristics

    High speed recips characteristics rpm 1000 – 2500+ Power (MW) <1 – 10 Weight (tonnes) <1 - 40 Length (m) <1 - 8 Fuel type Diesel (distillate), gas Competitors Caterpillar, Cummins, Yanmar, GE Jenbacher, Volvo Penta, Weichai Typical uses Marine leisure craft, naval, construction, rail, mining, standb

  30. Slide 30: Medium speed recips characteristics

    Medium speed recips characteristics rpm 300 – 1000 Power (MW) 1 – 25 Weight (tonnes) 18 – 350 Length (m) 3 – 14 Fuel type Diesel (distillate, residual/HFO), gas Competitors Wärtsilä, MAN Diesel, Caterpillar, Hyundai, Niigata Typical uses Offshore, small-medium merchant, distributed PG • Extensive us

  31. Slide 31: Medium speed market

    Medium speed market Growing marine and land power forecast Market growth drivers: 5 • GDP • Population growth Annual OE market size- £bn +3.2% CAGR 4 Global financial crisis • Emerging markets power generation demand 3 • Environmental legislation • Oil price 2 • Gas price / availability • £35bn mark

  32. Slide 32: Portfolio pull through

    Portfolio pull through Each product gives access to others Propulsion Power electrics, systems automation & control Engines Complex deck machinery Vessel design • Early customer engagement • Access systems integration opportunities • Portfolio helps pull-through of other equipment Trusted to deliver

  33. Slide 33: Marine revenue by product type

    Marine revenue strong in by product type 2013: £2.0bn* - strong in marine equipment Marine equipment 87% Gas turbines 6% Medium speed reciprocating engines 7% * pro-forma excluding Submarines revenue to be reported in Energy & Nuclear from FY14 Trusted to deliver excellence Privileged and confidenti

  34. Slide 34: Fix the Basics – “4C’s”

    Our 5 priorities Fix the Basics – “4C’s” Bedrock Culture Wide body civil GTs Narrow body civil GTs Investment choices Medium-speed recips Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  35. Slide 35: Summary

    Summary Serv Strong position in growth markets Concentrating on what we know Significant opportunities Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  36. Slide 36: Financial framework

    Financial framework Mark Morris - CFO 19 June 2014 © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent o

  37. Slide 37: Agenda

    Agenda • Linking strategy to our financial decision framework • Capital allocation drivers • Future guidance framework Trusted to deliver excellence

  38. Slide 38: Strategy: evolution not revolution

    Strategy: evolution not revolution Measured steps to improvement Our strategy Delivering shareholder value  Execute on organic growth programmes Customer  Exit non-core and underperforming assets  Drive financial performance (the 4C’s) Innovation  Integrate RR Power Systems (Tognum)  Clear stra

  39. Slide 39: Our decision framework

    Our decision framework Where we invest How we invest Strategic framework Financial framework Growth markets The balancing act Growth metrics  Revenue growth  RoS  EPS Strategic vs. financial Technology Products Capital efficiency Routes to market Short-term vs. long-term  ROCE  ROIC Growth vs.

  40. Slide 40: Importance of credit rating

    Importance of credit rating Considerations  Long cycle capital intensive business  Long term contracts  Provide confidence to customers and governments  Access to long term finance (debt capital markets) Criteria  Maintain an investment grade credit rating  Normal target range: A- to A+ throug

  41. Slide 41: Disciplined approach to capital allocation

    Disciplined approach to capital allocation Investing for growth Net R&D spend Capex and R&D Spend  Currently 4.9%  Ease as a % of revenue as business grows Sustainable Dividend Policy Capex spend  3% - 5% of revenue through cycle Disciplined M&A Policy  Driving to 4% Returns of Capital MaintainT

  42. Slide 42: Disciplined approach to capital allocation

    Disciplined approach to capital allocation Investing for growth Capex and R&D Spend  Progressive dividend policy in line with underlying growth Sustainable Dividend Policy  Returned £1.65 billion to shareholders over last 5 years  C Shares maintained for tax efficiency and return flexibility Disc

  43. Slide 43: Disciplined approach to capital allocation

    Disciplined approach to capital allocation M&A focus and criteria Capex and R&D Spend Likely areas of focus Criteria  Composites  Strategic fit Sustainable Dividend Policy  Ceramics  Synergies quantified and committed to  Gearboxes  Target ROIC > WACC within 3 years  Medium speed  IRR to exc

  44. Slide 44: Disciplined approach to capital allocation

    Disciplined approach to capital allocation Maintaining balance sheet flexibility and efficiency Capex and R&D Spend Sustainable Dividend Policy  Strong and efficient balance sheet Disciplined M&A Policy  Net Debt/EBITDA <=1.5x through cycle  Surplus capital to be returned to shareholders  £1 bil

  45. Slide 45: Disciplined approach to capital allocation

    Disciplined approach to capital allocation In summary Capex 3%–5% through the cycle; driving to 4% Capex and R&D Spend Net R&D 5%; will ease over time Progressive dividend policy in line with underlying growth Sustainable Dividend Policy Focus areas for medium term M&A Disciplined M&A Policy Target

  46. Slide 46: Future guidance framework

    Future guidance framework What we will give Medium term In year Next year outlook (3-5 years) Revenue Revenue Revenue Group PBT PBT RoS Cash flow FCF Cash flow Revenue Segments PBFCT Civil RoS Capex R&D spend/charge Civil peak TCA debtor Other Civil TCA net debtor + REC and year FX Tax rate Trusted

  47. Slide 47: Future guidance framework

    Future guidance framework How we will give Medium term In year Next year outlook (3-5 years) Banded range of Banded range of Banded range of Group figures figures figures or %s (Xm to Ym etc.) (Xm to Ym etc.) Banded range of % Banded range of % Segments (X% to Y%) (X% to Y%) Approximate figures Appr

  48. Slide 48: Future guidance framework

    Future guidance framework When we will give Medium term In year Next year outlook (3-5 years) February Prelims - - May IMS - - July Interims - - November IMS (Annual Budget cycle) (Annual 10 year planning cycle) Trusted to deliver excellence

  49. Slide 49: Summary

    Summary • Clear on our strategy • Clear on our priorities • Disciplined approach to capital allocation • More guidance going forward Trusted to deliver excellence

  50. Slide 50: Break

    STRICTLY PRIVATE & CONFIDENTIAL Break © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce

  51. Slide 51: TotalCare®

    ® TotalCare Tony Wood 19 June 2014 © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce pl

  52. Slide 52: Agenda

    Agenda 1. TotalCare® • Business model • Programme life cycle • Embedded value – risk transfer and growth • Managing TotalCare® – revenue and cost drivers 2. Accounting for TotalCare® • Commercial arrangements and accounting principles • Accounting mechanics • Portfolio dynamics Trusted to deliver ex

  53. Slide 53: Group business model

    Group business model Complex power systems, long service lives, strong positions in growing markets Aerospace Marine & Industrial Power Systems Civil Aerospace Defence Aerospace Marine Energy & Nuclear Power Systems 4% 39% 40% 29% 54% 46% 46% 50% 61% 60% 71% • 47% of FY13 total revenue (£7.3bn) from

  54. Slide 54: Typical programme life cycle

    Typical programme life cycle Services revenue is at least 4 times net OE selling price Annual sales Services OE 1 5 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 Years Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  55. Slide 55: Typical programme life cycle

    Typical programme life cycle Value from both TotalCare® and Time & Materials TotalCare® solutions Annual sales Services Services revenue Time & Materials OE solutions OE 1 5 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 Years Trusted to deliver excellence Privileged and confidenti

  56. Slide 56: Embedded services value driven by thrust

    Embedded services value driven by thrust Installed thrust doubles by 2023* 900 800 700 m/lbs of installed thrust 600 500 Exit of IAE JV 400 300 200 100 0 1988 1992 1996 2000 2004 2008 2012 2016 2020 2023 Narrow body Corporate/Regional Trent RB211 *Excludes Narrow body Trusted to deliver excellence P

  57. Slide 57: Global Service Capability

    Global Service Capability Support Centres Service Delivery Centres Operations and Data Centres Business Centres On-Wing Care Centres Field Support Offices Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  58. Slide 58: Deep knowledge of our engines as OEM

    Deep knowledge of our engines as OEM As Designed In Service Service Validation experience As Validated Feedback Feedback Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  59. Slide 59: Airline perspective

    Airline perspective Selecting the appropriate support model • Line maintenance • Initial provisioning • Spare engines • Lease engines • Rotable assets • Powerplant engineering • Engine overhaul • Maintenance logistics • Fuel burn optimisation Balancing risk, capability & cost Trusted to deliver exce

  60. Slide 60: TotalCare® – value from risk management

    TotalCare® – value from risk management 60 Predictable engine service costs through risk transfer to Rolls-Royce TotalCare® Time & Materials Engine overhaul P X Engine reliability improvements P X Engine Health Monitoring P Basic Fleet management P X Warranty P Basic Guarantees P P Trusted to delive

  61. Slide 61: Revenue drivers

    Revenue drivers TotalCare® revenue generation = hours flown x rate per hour Hours flown • Global RPK growth • ~4000 hrs per engine p.a. • Minimum utilisation Rate per hour • Customer mission and service level • Operational price matrix (de-rate and stage length) Trusted to deliver excellence Privile

  62. Slide 62: Cost drivers

    Cost drivers TotalCare® lifecycle costs = number of shop visits x cost per shop visit Number of shop visits • Time on wing • Hours flown • Mission type Cost per shop visit • Workscope • Parts re-used, repaired, replaced • Overhaul labour Trusted to deliver excellence Privileged and confidential - pr

  63. Slide 63: Time on wing – engine life

    Time on wing – engine life Deep design knowledge enables optimisation of engine life 100% Probability of engine removal Individual component lives 0% Time on wing Average life (4-6 years) Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  64. Slide 64: Time on wing – engine life

    Time on wing – engine life Deep design knowledge enables optimisation of engine life 100% Probability of engine removal Whole engine life on wing 0% Time on wing Average life (4-6 years) Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  65. Slide 65: Time on wing – engine life

    Time on wing – engine life Deep design knowledge enables optimisation of engine life 100% Probability of engine removal Improved component life 0% Time on wing Average life (4-6 years) Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  66. Slide 66: Time on wing – engine life

    Time on wing – engine life Delivered improvements since EIS 1994 1996 Trent 700 Trent 800 x2 x2 Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  67. Slide 67: Cost focus

    Cost focus Driving value through cost reduction Improved inspection criteria - Life extension Engine Health Monitoring - Deeper understanding of performance Repair technology - Better component re-use Trusted to deliver excellence Privileged and confidential - prepared at the request of outside coun

  68. Slide 68: Summary

    Summary • Growing installed base, long services lives, growing markets • Services at least 4 times net OE revenue through life • Installed thrust doubles over the next decade • Best placed as OEM to take on risk and extract value via TotalCare® • Deep design knowledge enables optimisation of engine

  69. Slide 69: TotalCare Accounting

    ® TotalCare Accounting Mark Morris 19 June 2014 © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of R

  70. Slide 70: Agenda

    Agenda 1. TotalCare® • Business model • Programme life cycle • Embedded value – risk transfer and growth • Managing TotalCare® – revenue and cost drivers 2. Accounting for TotalCare® • Commercial arrangements and accounting principles • Accounting mechanics • Portfolio dynamics Trusted to deliver ex

  71. Slide 71: Our commercial arrangements

    Our commercial arrangements OE commercial terms are agreed with one of 3 parties: 1. Airline 2. Lessor 3. Airframer Aftermarket commercial terms are agreed with the Airline, either as: • Time & Materials (“T&M”); or • TotalCare® Trusted to deliver excellence

  72. Slide 72: Linking commercial arrangements to accounting

    Linking commercial arrangements to accounting For all OE Contracts… Aftermarket OE Lessor Airline No Airframer Contractual Is there a TotalCare® agreement? T&M Aftermarket Rights Yes *formerly known as Recoverable Engine Costs (REC) Trusted to deliver excellence

  73. Slide 73: Linking commercial arrangements to accounting

    Linking commercial arrangements to accounting For all OE Contracts… Aftermarket OE Lessor Airline No Airframer Contractual Is there a TotalCare® agreement? T&M Aftermarket Rights Yes Lessor Was the TotalCare® agreement No Airframer Unlinked Contractual negotiated with the same TotalCare® Aftermarket

  74. Slide 74: Linking commercial arrangements to accounting

    Linking commercial arrangements to accounting For all OE Contracts… Aftermarket OE Lessor Airline No Airframer Contractual Is there a TotalCare® agreement? T&M Aftermarket Rights Yes Lessor Was the TotalCare® agreement No Airframer negotiated with the same counterparty as the OE? Unlinked Contractua

  75. Slide 75: Linking commercial arrangements to accounting

    Linking commercial arrangements to accounting For all OE Contracts… Aftermarket OE Lessor Airline No Airframer Contractual Is there a TotalCare® agreement? T&M Aftermarket Rights Yes Lessor Was the TotalCare® agreement No Airframer negotiated with the same counterparty as the OE? Unlinked Contractua

  76. Slide 76: Contractual Aftermarket Rights

    Contractual Aftermarket Rights Engine - $5m Unit cost Net selling Cash received $4m price Customer Intangible Aftermarket rights $1m asset Trusted to deliver excellence

  77. Slide 77: Unlinked TotalCare®

    Unlinked TotalCare® Aftermarket OE Lessor Was the TotalCare® agreement No Airframer negotiated with the same Unlinked Contractual counterparty as the OE? TotalCare® Aftermarket Yes contract Rights Were the TotalCare® agreement No Airline and the OE negotiated as a IAS18 IAS 38 single package? Cannot

  78. Slide 78: Unlinked TotalCare®: single engine example

    Unlinked TotalCare® Single engine example Flying Example Length Revenue Cost Margin hours Contract expectations 10 years 40,000 $10m ($6m) $4m Rate per flying hour $/hr $250 ($150) $100 At end Year 1 1 year 4,000 Revenue $1m Cost accrued ($0.6m) Margin $0.4m Trusted to deliver excellence

  79. Slide 79: Unlinked TotalCare®: cash vs. margin recognised

    Unlinked TotalCare® Cash vs. margin recognised $m Trusted to deliver excellence

  80. Slide 80: Unlinked TotalCare®: net cash vs. margin recognised

    Unlinked TotalCare® Net cash vs. margin recognised TotalCare® creditor $m TotalCare® debtor Trusted to deliver excellence

  81. Slide 81: Linked TotalCare®

    Linked TotalCare® Aftermarket OE Were the TotalCare® agreement TotalCare® and OE linked and the OE negotiated as a contract accounting single package? IAS 11 Satisfies IAS11 criteria for accounting as a single contract • Negotiated as a single package • Closely interrelated – part of a single projec

  82. Slide 82: Linked TotalCare®: single engine example

    Linked TotalCare® Single engine example Example TotalCare® OE Linked $m (say 10 years) Revenue 10 8 18 Less concessions (6) - (6) Net revenue 4 8 12 Cost (5) (4) (9) Cash (1) 4 3 Overall margin % 25% Trusted to deliver excellence

  83. Slide 83: Linked TotalCare®: single engine example

    Linked TotalCare® Single engine example Example TotalCare® OE Linked $m (say 10 years) Cash net revenue 4.0 8.0 12.0 Margin adjustment 2.7 (2.7) - Net revenue 6.7 5.3 12.0 Cost (5.0) (4.0) (9.0) Profit recognised 1.7 1.3 3 Overall margin % 25% 25% 25% Cash flow (1.0) 4.0 3.0 Profit vs. cash 2.7 (2.7

  84. Slide 84: Linked TotalCare®: cash vs. margin recognised

    Linked TotalCare® Cash vs. margin recognised $m Trusted to deliver excellence

  85. Slide 85: Linked TotalCare®: net cash vs. margin recognised

    Linked TotalCare® Net cash vs. margin recognised $m TotalCare® debtor created Trusted to deliver excellence

  86. Slide 86: What can change the forecast margin?

    What can change the forecast margin? • Stage length Revenue forecast • Utilisation • Time between shop visits – time on wing Cost and reliability • Cost at each shop visit forecast • “Estimation Risk” – best estimate of cost • Counterparty risk – credit rating Asset recoverability • Fleet fit • “Val

  87. Slide 87: Process overview

    Process overview Reviewed every six Update revenue and cost months forecasts Revised forecast contract Impact current year margin margin percentage Impact prior years’ margin (current year catch-up) Impact future years’ margins Trusted to deliver excellence

  88. Slide 88: TotalCare® accounting summary

    TotalCare® accounting summary • Unlinked TotalCare®: • Recognise revenue and accrue costs in line with flying hours • Linked TotalCare®: • Recognise revenue in line with engine delivery and flying hours • Accrue Aftermarket costs in line with flying hours • Equalised margin percentage across OE and

  89. Slide 89: Linked TotalCare® programme

    Linked TotalCare® programme OE and aftermarket profit Trusted to deliver excellence

  90. Slide 90: Linked TotalCare® programme

    Linked TotalCare® programme Net cash vs. margin recognised Debtor position Debtor position decreasing increasing Peak net debtor Trusted to deliver excellence

  91. Slide 91: Unlinked TotalCare® programme

    Unlinked TotalCare® programme Net cash vs. margin recognised Creditor position increasing Creditor position decreasing Trusted to deliver excellence

  92. Slide 92: Drivers of the TotalCare® net debtor

    Drivers of the TotalCare® net debtor Debtor rises due to : Debtor falls due to : • Linked OE deliveries • Flying hour receipts • As shop visits take place • When contract outlook • When contract outlook improves i.e. lower forecast worsens i.e. higher forecast costs improved overall costs profitabil

  93. Slide 93: Projected Trent deliveries to 2023

    Projected Trent deliveries to 2023 Over 4,000 deliveries vs. over 1,600 in last decade 700 600 Annual Trent deliveries 500 400 300 200 100 - 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Trusted to deliver excellence 93

  94. Slide 94: Status of TotalCare® contracts

    Status of TotalCare® contracts Trusted to deliver excellence

  95. Slide 95: Accounting for TotalCare®

    Accounting for TotalCare® Earnings are ahead of cash whilst OE is growing Significant embedded value in the aftermarket Strong focus on cost reduction and improving reliability to drive margins and realise the embedded value. Accounting follows the substance of the commercial arrangements – treatmen

  96. Slide 96: Summary

    ... Summary Serv Strong position in growth markets Concentrating on what we know Significant opportunities Trusted to deliver excellence Privileged and confidential - prepared at the request of outside counsel

  97. Slide 97: Q&A

    STRICTLY PRIVATE & CONFIDENTIAL Q&A © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce p

  98. Slide 98: Trusted to deliver excellence

    STRICTLY PRIVATE & CONFIDENTIAL © 2014 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce plc.

Rolls-Royce Holdings — Investor Day (June 2014) on 6ix