Rolls-Royce Holdings plc · LSE:RR.
Rolls-Royce — H1 2016 Earnings Presentation
59 slides from Rolls-Royce's earnings presentation, 2016
Slide 1: 2016 Half Year Results
| Rolls-Royce 2016 Half 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 Highlights Warren East Financial review David Smith Transformation and business outlook Warren East 3
Slide 4: Notices
Notices Mobile Safe phones Safety Harbour 4
Slide 5: Warren East, Chief Executive
Warren East Chief Executive Rolls-Royce
Slide 6: Goals for 2016
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 6
Slide 7: Group first half 2016 highlights
Group First half 2016 highlights FIRST HALF BROADLY IN LINE WITH EXPECTATIONS • Ahead on profit and cash but driven by timing ON TRACK TO MEET FULL YEAR EXPECTATIONS • Continued mixed market conditions Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and o
Slide 8: Civil Aerospace first half 2016 highlights
Civil Aerospace First half 2016 highlights CIVIL AEROSPACE Nuclear • Key engineering programmes Marine Trent 1000 TEN receives EASA certification Power Systems Defence Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation programm
Slide 9: Civil Aerospace first half 2016 highlights
Civil Aerospace First half 2016 highlights CIVIL AEROSPACE Nuclear • Key engineering programmes Marine • Manufacturing ramp up # of large engines delivered Power Systems Defence 100+ 100+ 103 61 Q1 Q2 Q3 Q4 Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering
Slide 10: Civil Aerospace first half 2016 highlights
Civil Aerospace First half 2016 highlights CIVIL AEROSPACE Nuclear • Key engineering programmes Marine • Manufacturing ramp up • Long-term demand remains positive Power Growth in Revenue Passenger Kilometres Systems Air traffic more than doubled in the last 15 years, and should double again in the n
Slide 11: Civil Aerospace first half 2016 highlights
Civil Aerospace First half 2016 highlights CIVIL AEROSPACE Nuclear • Key engineering programmes Marine • Manufacturing ramp up • Long-term demand remains positive • Significant demands on engineering Power resources Systems Defence Strengthen our focus on Deliver a strong start to our Start rebuildi
Slide 12: Defence first half 2016 highlights
Defence First half 2016 highlights Nuclear DEFENCE AEROSPACE • Steady first half • OE volumes remain good Marine • Positive outlook for the second half Civil Long term… Aerospace • Aftermarket services key to future Power Systems success • Making good progress capturing value from installed base wit
Slide 13: Power Systems, Marine and Nuclear
Power Systems, Marine and Nuclear First Half 2016 POWER SYSTEMS • R&D investment on new higher volume, common core engine platforms MARINE Civil • Good progress delivering restructuring Aerospace plans – key to future profitability • Creating a more balanced business with good growth opportunities N
Slide 14: Transformation well under way
Transformation well under way Organisational hardware Organisational software Right people, Primarily fixed right conversations, costs right time Improved Governance of management systems and Senior level information Pace & processes Simplicity Corporate and Dealing with change and Culture and ambig
Slide 15: On track to deliver £150-200m annualised cost savings by end-2017
On track to deliver £150-200m annualised cost savings by end-2017 £m 2016 2017 2018 Nov 2015 Transformation Programme Initial phase c. 50 c. 50 0 Next steps 20-40 30-60 Incremental benefits c. 50 c.70-90 30-60 Cumulative savings c. 50 c.120-140 150-200 Strengthen our focus on engineering and operati
Slide 16: Organisational hardware changes already yielding 'software' benefits
Organisational hardware changes already yielding ‘software’ benefits 50%+ reduction in senior leadership group Stronger individual accountability Significant simplification of 20%reduction in management ‘committee’ structures and related time burden on management More efficient financial
Slide 17: Goals for 2016
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 17
Slide 18: David Smith, Chief Financial Officer
David Smith Chief Financial Officer
Slide 19: Results summary
Results summary Underlying Revenue Gross Margin Underlying PBT £6.1bn £1,033m £104m 5% 26% 80% Operating margin Free cash flow ‘Dividend’ per share 2.6% £(399)m 4.6p 500 bps H1 2015: £(576)m H1 2015: 9.27p Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engin
Slide 20: Shareholder payment halved in line with February policy
Shareholder payment halved in line with February policy 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 4.6p tbc “We recognise the importance of a healthy ‘dividend’ to our shareholders. Subj
Slide 21: Balance sheet
Balance sheet Strong liquidity position – total liquidity ~£4.5 billion Revolving credit facilities increased by £0.5 billion in H1 2016 Total Liquidity (£ billion) Debt Maturities (£ billion) 6 3 4 2 2 1 0 0 FY 2013 FY 2014 FY 2015 H1 2016 2016 2018 2020 2022 2024 2026 Drawn Undrawn ‘A’ credit rati
Slide 22: Group revenue H1 2016 v H1 2015
Group revenue H1 2016 v H1 2015 7,000 6,000 (146) (150) 183 5,000 £ million 4,000 -5% +3% 3,000 6,256 6,143 5,960 2,000 1,000 0 H1 15 OE Services H1 16 (excl FX) FX H1 16 Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation progr
Slide 23: Group profit before tax H1 2016 v H1 2015
Group profit before tax H1 2016 v H1 2015 500 -80% +4% 450 400 350 £ million 300 250 439 200 150 39 (35) 16 100 (22) 12 3 (348) 50 88 104 0 H1 15 Change in C&A Net R&D Restruct. Finance Other H1 16 (excl FX H1 16 GM charges FX) Strengthen our focus on Deliver a strong start to our Start rebuilding t
Slide 24: Group profit to free cash flow H1 2016
Group profit to free cash flow H1 2016 500 400 300 200 (235) £ million 100 104 335 0 (100) (307) (327) (200) (399) (300) (400) (232) 8 (72) (500) UPBT Deprec. & Net Working Capital Intangibles Other Trading Pensions* & FCF Amort. Capital Expenditure (additions) cash flow tax (NWC) Strengthen our foc
Slide 25: Foreign exchange: transactional hedge book
Foreign exchange Transactional GBPUSD: $29 billion EURUSD: $3 billion Objectives of •hedge $35book billion GBP:USD provides hedge hedge book; €/$1.35 FX hedging policy bookcover ~5 years’ provides ~6~3years’ cover years’ cover • Reduce volatility caused by •• Hedge Hedge book book average rate is FX
Slide 26: Foreign exchange: other effects
Foreign exchange Other effects Translation benefit for ~£600m benefit to revenue full year* ~£60m benefit to PBT Civil long-term planning added £2.1bn to order book rate change added £35m to Civil profit Mark-to-market impact on reduced reported PBT hedge book by £2.2bn Strengthen our focus on
Slide 27: Civil Aerospace revenue
Civil Aerospace Revenue • Reduced Trent 700 linked engines 3,000 (79) (80) 45 • Weaker business jet volumes -5% 1% • Increased volumes of Trent 2,000 900/1000/XWB £ million 3,285 3,126 3,171 • Double digit flying hour growth on 1,000 our in-production Trent fleet • Reduced aftermarket revenues from
Slide 28: Civil Aerospace original equipment revenue mix
Civil Aerospace Original equipment revenue mix Change at H1 2015 constant FX FX H1 2016 yr-on-yr £m of whole £m change £m £m of whole OE 1,516 46% (79) (5)% 24 1,461 46% Large Engine: 637 19% 19 3% 1 657 21% linked and other Large Engine: 298 9% 13 4% 1 312 10% unlinked installed Business Aviation 4
Slide 29: Civil Aerospace aftermarket revenue mix
Civil Aerospace Aftermarket revenue mix Change at H1 2015 constant FX FX H1 2016 yr-on-yr £m of whole £m change £m £m of whole AM 1,769 54% (80) (5)% 21 1,710 54% Large Engine 1,094 33% (66) (6)% 3 1,031 33% Business Aviation 219 7% (2) (1)% 10 227 7% Regional 191 6% (32) (17)% 8 167 5% V2500 265 8%
Slide 30: Civil Aerospace gross margin
Civil Aerospace Gross margin 700 • Reduced Trent 700 volumes and 600 profitability (28) £ million 500 • Aftermarket headwinds on out-of- 400 (144) production legacy fleet (66) 300 628 (64) 10 35 14 • Net £(23)m adjustments vs £(71)m £48m in H1’15 200 385 100 £(243)m 0 L-T FX PR** Lifecycle costs Ope
Slide 31: Civil Aerospace profit
Civil Aerospace Profit 275 • Lower overall gross margins (243) • Higher C&A incentives accrual • Lower R&D driven by £ million 175 +7% +4% capitalisation 248 • Lower restructuring charges 75 • H1-H2 phasing 21 9 (2) (12) 10 22 31 (25) UPBFCT C&A UPBFCT Change in GM Other Restruct. Net R&D H1 16 (exc
Slide 32: Civil Aerospace outlook
Civil Aerospace Outlook • Continue to face headwinds in H2 • Expect a stronger performance overall in line with expectations • Headwinds mitigated through increased deliveries, including profitable spare engines • Positive results from our dedicated focus on improving lifecycle costs Strengthen our
Slide 33: Defence
Defence Underlying revenues (1)% Underlying profit lower • OE revenues +8% • Driven by gross margin • Services (6)% • Lower restructuring costs Gross margin lower Outlook • Adverse change in OE product mix • Supported by engine deliveries • TP400 programme • Additional actions underway to offset T
Slide 34: Power Systems
Power Systems Underlying revenues (3)% Underlying profit lower • OE revenues (3)% • Driven by lower gross margin • Services (2)% • R&D reduced by 6% Gross margin lower Outlook • Adverse product mix • Order book resilience in key sectors • Lower volumes • H2 - cautious but positive outlook Strengthen
Slide 35: Marine
Marine Underlying revenues (25)% Underlying profit lower • OE revenues (30)% • Driven by lower gross margin • Services (17)% Gross margin lower Outlook • Lower volumes • Ongoing rationalisation • Partly offset by non-repeat of 2015 • Uncertain marketplace contract provision • Further cancellation ri
Slide 36: Nuclear
Nuclear Underlying revenues +14% Underlying profit lower • OE revenues +27% • R&D tax credit of £3m • Services +7% • Indirect programme costs and performance incentives Gross margin lower Outlook • Adverse product mix • Focused on improving delivery • Technical challenges performance Strengthen our
Slide 37: 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 ~£900m 6% of revenue Free cash flow £179m £(100)m-£(
Slide 38: Accounting under IFRS 15: background
Accounting under IFRS 15: background • 2 years to introduction: effective from 2018, with 2017 restated • Introduces new accounting principles for revenue recognition • Currently only tentative conclusions • Consulting with other companies in the aerospace and defence sector • Adoption of IFRS 15 do
Slide 39: Likely key changes
Likely key changes • No longer recognise contractual aftermarket rights (CARs) • Linked accounting will no longer be applied • Revenue will be recognised on an input basis OE revenues and costs Recognise at time of sale TotalCare services Higher margin over life of contract Catch-up adjustments
Slide 40: Implications for reporting
Implications for reporting Balance Sheet P&L Restatement of Prior Year financials OE gross margin • TotalCare debtor arising on concession • Adjustment to concession deferral on deferral subject to transition adjustment new sales • CARs balance subject to transition • End of CARs on unlinked adjustm
Slide 41: Financial summary
Financial summary • Underlying performance in line with full year expectations • Good progress mitigating key market-driven issues • Strong cash performance • In-year modest benefits from foreign exchange weakness • Steady H1 order intake positions businesses well for remainder of year Strengthen ou
Slide 42: Warren East, Chief Executive
Warren East Chief Executive Rolls-Royce
Slide 43: Goals for 2016
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 43
Slide 44: Many opportunities for improvement in each of our focus priorities
Many opportunities for improvement in each of our focus priorities • Focused on high performance power systems Engineering • Leverage engineering excellence to build market excellence share and long-life installed base • Manufacturing transformation to drive higher margins Operational • Sustainably
Slide 45: Many opportunities for improvement in each of our focus priorities
Many opportunities for improvement in each of our focus priorities Engineering excellence Operational excellence Leverage our installed base Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation programme confidence in our long-te
Slide 46: Opportunities for improvement: engineering excellence
Opportunities for improvement in each of our focus priorities Engineering Digital Product excellence Definition e.g. digital product definition • Standardised digital definition… Optimisation of processes, methods, tools and organisation required to engineer our products − enables efficient product
Slide 47: Opportunities for improvement: operational excellence
Opportunities for improvement in each of our focus priorities Operational Reduce lead excellence times e.g. Trent 1000 OE lead time • Use of lean principles to eliminate waste improvement at Singapore • Introduction of new technology to reduce cycle time improvement in lead-time 24% • Engagement o
Slide 48: Power Systems drive to maximise value from lean REMAN process
Power Systems drive to maximise value from lean REMAN process Operational Reduce lead excellence times e.g. Power System’s REMAN • Restructured towards a lean flow line v operations lean flow line ‘box’ or cellular approach • Systems and supply chain developed to improvement in lead-time 35% suppo
Slide 49: Maturing Trent fleet set to drive increasing aircraft transitions
Maturing Trent fleet set to drive increasing number of aircraft transitions Maximise Leverage our value from time in installed base service 160 140 Population of aircraft Trent installed base - quantity of that may transition 120 100 Trent XWB-84k aircraft Trent 900 80 Trent 800 60 Trent 700 Trent 5
Slide 50: Dedicated resources to ensure increased focus on aircraft transitions
Dedicated resources to ensure an increased focus on aircraft transitions Maximise Leverage our value from time in installed base service • Increase in Trent aircraft in transition inevitable driven by maturing fleet • Dedicated team in place, evolving our increase in successful 160% services to me
Slide 51: Our Digital strategy harnesses best practice to add value to key customers
Our Digital strategy harnesses best practice to add value to key customers Leverage our Digital installed base 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 o
Slide 52: Singapore Airlines partnership
Singapore Airlines partnership Leverage our Digital installed base • Builds on leading Microsoft cloud and IoT platforms • Drive benefits in fuel usage, route mgt and service support • Applications in Marine fleet management as well as supporting Ship Intelligence projects Strengthen our focus on De
Slide 53: Acquisition of ITP is an opportunity to consolidate aftermarket value
Acquisition of ITP is an opportunity to consolidate aftermarket value Leverage our Reduce margin installed base leakage • Partner on TP400 and EJ200 > 10% • Leading RRSP on key Civil growth platforms, including Trent 1000, Trent 7000 and Trent XWB increase in Engine Flying Hour revenues retained fro
Slide 54: Legacy Issues
Legacy Issues Co-operating with Significant actions to Zero tolerance to authorities including improve ethics/ABC culture misconduct UK & US & processes Strengthen our focus on Deliver a strong start to our Start rebuilding trust and engineering and operational transformation programme confidence in
Slide 55: Second half priorities
Second half priorities 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 • Deliver on customer commitments across all business
Slide 56: 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 57: 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 jcdawson@rolls-royce.com georgina.broome@rolls-royce.com Helen Harman Jacinta Francis Assistant Director – Investor Relations Programme Coo
Slide 58: Investor iPad App
Investor iPad App Available as a free download from iTunes 58
Slide 59: 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