Rolls-Royce Holdings plc · LSE:RR.
Rolls-Royce — FY2016 Earnings Presentation
56 slides from Rolls-Royce's earnings presentation, February 2017
Slide 1: 2016 Full Year Results
| Rolls-Royce 2016 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 Highlights Warren East Financial review David Smith Transformation and business outlook 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: Agreements with investigating authorities
Agreements with investigating authorities “ “ Behaviour uncovered…is completely unacceptable and we apologise unreservedly… unworthy of everything which Rolls-Royce stands for. Warren East, CEO Since 2013: significant actions to improve ethics/ABC culture & processes “ Rolls-Royce is no longer the c
Slide 7: Results summary
Results summary Underlying Revenue Gross Margin Underlying PBT £13.8bn £2,823m £813m 2% 18% 49% Operating margin Free cash flow ‘Dividend’ per share 6.6% £100m 11.7p 480 bps 2015: £179m 2015: 16.4p * Percentage change at constant currency 7
Slide 8: 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 8
Slide 9: Adding pace and simplicity to reinforce engineering excellence
Adding pace and simplicity to reinforce engineering excellence Engineering excellence Digital product definition £1.3bn gross spend on R&D Optimisation of processes, methods, tools and organisation required to engineer our products £937m net spend improvement in Significant proportion focused on n
Slide 10: Good progress embedding operational excellence improvements
Good progress embedding operational excellence improvements Operational excellence £225m invested in new capital 27% e.g. Trent 1000 equipment in 2016 assembly lead • £1.4bn invested since 2011 time improvement improvement in lead-time at Singapore Aerospace footprint reduction on with further ~15
Slide 11: Improving the quality of our aftermarket revenues is a key priority
Improving the quality of our aftermarket revenues is a key priority Leverage our installed base Significant value opportunity Acquisition of ITP • Partner on TP400 and EJ200 • Partner on Trent 1000, Trent • ~50% of revenue is services • Principal driver of growth in gross margin and cash over next 1
Slide 12: Transformation programme ahead of expectations
Transformation programme ahead of expectations 2016 2017 2018 ~£130m ~£200m ~£200m pa run rate into 2017 run rate into 2018 run rate into 2019 onwards ~£30-60m year on year incremental ~£80-110m saving in 2018 ~£60m year on year incremental year on year saving in 2017 saving in 2016 12
Slide 13: Civil Aerospace 2016 scorecard
Civil Aerospace 2016 scorecard Highlights “ “ Overcome clear headwinds to meet customer commitments and deliver a steady result. Results ahead of expectations Growing aftermarket share Profit* In-prod Trent engines Out-of-prod engines Overall growth Revenue* Op Margin flat 60% 5.2% at £7.1bn
Slide 14: Trent XWB
Trent XWB -84 Only engine powering the Airbus A350-900; entered service in 2015 Deliveries Installed base 2016 invoiced deliveries to customer 2016 closing installed 109% 340% >50% from 56 to 117 2014 2015 2016 2017 2018 38 to 130 2014 2015 2016 2017 2018 2016 engine assembly lead time 2016 av
Slide 15: Trent
Trent 700 Powering the Airbus A330ceo; Trent 700 entered service in 1995 Deliveries A330ceo installed base 2016 invoiced deliveries to customer 2016 closing installed 37% 7% >30% 88 v 140 2014 2015 2016 2017 2018 1,444 to 1,538 2014 2015 2016 2017 2018 2016 engine assembly lead time 2016 profi
Slide 16: Defence Aerospace 2016 scorecard
Defence Aerospace 2016 scorecard Highlights “ “ Better than expected year despite investments for future growth and TP400 charges. Another solid year Strengthened service support Revenue* Profit* Op Margin Service revenue % of total • Renewed major C-130J 1% 8% 17.4% at £2.2bn to £384m from 19.3
Slide 17: Power Systems 2016 scorecard
Power Systems 2016 scorecard Highlights “ “ Outperformed mixed markets and peer group to deliver solid overall revenue and profit. Another solid year Outperformed mixed markets Revenue* Profit* Op Margin Power Generation, Industrial, Marine 1% 14% 7.2% at £2.7bn to £191m from 8.1% markets po
Slide 18: Marine 2016 scorecard
Marine 2016 scorecard Highlights “ “ Driven a strong transformation and innovation agenda despite very weak offshore oil and gas markets. Results reflect weak markets Markets remain subdued Revenue* Profit* Op Margin 4,500 300 Clarksons - Number of vessels by contract year 24% 280% -2.4% Offshor
Slide 19: Nuclear 2016 scorecard
Nuclear 2016 scorecard Highlights “ “ Worked hard to overcome delivery challenges in submarines while developing new civil growth opportunities Progress on long-term projects Developing the business Revenue* Profit* Op Margin Submarines 11% 37% 5.8% at £777m to £45m from 10.2% • Good progress de
Slide 20: Year of steady progress
Year of steady progress • Performed ahead of expectations • Significant changes to management – Strengthened individual accountability – Greater focus on cash and cost measures across the business • Over £1.5bn invested to support long term growth while maintaining the ‘dividend’ and resolving legac
Slide 21: 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 21
Slide 22: David Smith, Chief Financial Officer
David Smith Chief Financial Officer
Slide 23: Underlying revenue and profit
Underlying revenue and profit Underlying profit before Underlying revenue* financing* £m % change £m % change Civil Aerospace 7,067 - 367 -60% Defence Aerospace 2,209 1% 384 -8% Power Systems 2,655 -1% 191 -14% Marine 1,114 -24% (27) -280% Nuclear 777 11% 45 -37% Other & eliminations (39) n/a (45) n
Slide 24: Civil Aerospace: original equipment revenue mix
Civil Aerospace Original equipment revenue mix Change at 2015 constant FX FX 2016 of yr-on-yr of £m whole £m change £m £m whole Large Engine: 1,570 23% 32 2% 2 1,604 23% linked and other Large Engine: 504 7% 237 47% 1 742 10% unlinked installed Business Jet 903 14% -228 -25% 82 757 11% V2500 281 4%
Slide 25: Civil Aerospace: aftermarket revenue mix
Civil Aerospace Aftermarket revenue mix Change at constant 2015 FX FX 2016 yr-on-yr £m of whole £m change £m £m of whole Large Engine 2,371 34% -84 -4% 2 2,289 32% Business Jet 425 6% -13 -3% 40 452 6% Regional 360 5% -52 -14% 34 342 5% V2500 519 7% 108 21% 0 627 9% Total AM 3,675 52% -41 -1% 76 3,7
Slide 26: Civil Aerospace gross margin
Civil Aerospace Gross margin 1,800 • OE: reduced Trent 700 volumes and £(397)m 1,600 profitability, programme costs (5) 1,400 £(132)m • Services: headwinds on out-of- production legacy fleet £ million 1,200 (248) 53 (65) 19 • Net £90m adjustments vs £222m in 1,000 (189) 35 1,526 (74) 77 2015 include
Slide 27: Civil Aerospace profit
Civil Aerospace Profit 1,000 • Lower overall gross margins from known headwinds 800 • Higher employee incentive costs £(89)m +5% • £ million 600 Higher R&D spend on key programmes 400 812 (397) (43) (34) (4) (8) 41 200 367 326 0 Change in GM C&A Other FX 2015 UPBFCT Restruct. 2016 UPBFCT Net R&D 201
Slide 28: Civil Aerospace trading cash flow
Civil Aerospace Trading cash flow £m 2015 2016 Variance Underlying profit before financing 812 367 (445) Depreciation, amortisation and impairment 410 491 81 Sub-total 1,222 858 (364) CARs additions (161) (208) (47) Property, plant, equipment and other intangibles (502) (739) (237) Other timing diff
Slide 29: TotalCare Net Debtor and CARs
TotalCare Net Debtor and CARs £432m Additions £208m TotalCare Net debtor Capitalised £230m Aftermarket Rights £2.44bn (CARs) £2.21bn £169m £574m £405m Cash flows, £(292)m adjustments or £(39)m £90m amortisation 29
Slide 30: Defence Aerospace revenue
Defence Aerospace Revenue 2,300 +1% +8% • Higher OE volumes: 2,200 − TP400 − Adour (Saudi Arabia) 2,100 £ million 2,000 22 (5) 157 • Services stable: 2,209 − Lower spare parts volumes 1,900 2,035 2,052 − Higher Eurofighter Typhoon & 1,800 C130J volumes 1,700 OE 2015 FX 2016 FY 2016 (excl FX) Service
Slide 31: Defence Aerospace gross margin
Defence Aerospace Gross margin 650 • Adverse product mix £(49)m • Continued costs on TP400 programme 600 • £ million LTSA improvements similar to FY15 at £82m 4 − Cost savings on EJ200 (22) 550 (Typhoon) contract, including 579 incentive award (26) (5) 530 500 Trading margin TP400 2015 GM Volume LTS
Slide 32: Defence Aerospace profit
Defence Aerospace Profit 450 £(33)m +6% • Lower R&D phasing • Ansty closure costs lower • Lower US severance costs 400 £ million • FX impact from major US operations (4) 24 350 393 18 384 (49) (3) 5 360 300 Change in GM Other C&A FY 2016 (excl FX) 2015 UPBFCT Restruct. Net R&D 2016 UPBFCT FX 32
Slide 33: Power Systems revenue
Power Systems Revenue 2,800 • Stable revenues: 2,600 − Positive: powergen, industrial 2,400 (9) (16) 295 − Weaker: commodities, marine 2,200 £ million • Services impacted by marine weakness 2,000 2,655 • Significant +12% FX 1,800 2,385 2,360 1,600 1,400 1,200 -1% +12% 1,000 OE 2015 2016 FX Services
Slide 34: Power Systems gross margin
Power Systems Gross margin 750 • Adverse product mix £(28)m • Partially mitigated by positive 700 transformation improvements £ million 650 (7) (21) 600 656 628 550 2015 GM Volume Trading 2016 GM* margin * 2016 GM @ 2015 FX 34
Slide 35: Power Systems profit
Power Systems Profit 200 • Greater focus within R&D on 180 core product lines 160 (28) 24 (9) 5 4 1 140 £ million 120 100 194 191 167 80 60 40 20 +12 £(27)m % 0 2015 UPBFCT 2016 UPBFCT Net R&D associates Change in GM C&A FY 2016 (excl Restruct. FX JV and FX) 35
Slide 36: Marine Summary
Marine Summary Revenue Gross margin • Underlying revenue of £1.1bn; 24% lower • £44m lower (+170bps) • Continued weakness in offshore • Cost reduction actions • Lower warranty and contract charges Profit • Net loss of £27m. Restructuring & impairment • December 2016: announcement of further restruct
Slide 37: Nuclear Summary
Nuclear Summary Revenue Gross margin • Underlying revenue increased by 11% • 80bp lower • Growth largely within Submarines • Greater weighting to • Civil: projects in France and Finland lower margin submarine projects Profit • £45m, or £38m excluding R&D credit • Additional costs to support higher v
Slide 38: Underlying to reported result
Underlying to reported result Earnings per £m share Underlying profit before finance charges and tax 915 Net finance charges (102) Tax (261) Underlying result 552 30.1p Spot rate adjustment to underlying results 419 Impairment (219) Financial Penalties (671) Exceptional restructuring (129) Pension r
Slide 39: Group profit to free cash flow
Group profit to free cash flow 2016 1,700 (55) 1,200 £ million (570) 700 720 813 200 (631) 47 324 (224) 100 (300) UPBT Deprec. & Net working Capital Intangibles Other* Trading Pensions** Free cash amort. capital expenditure cash flow & tax flow (NWC) * includes movements in provisions, joint venture
Slide 40: Group financial strength
Group financial strength Credit S&P: BBB+/Stable Maturity profile (£ million) rating Moody’s: A3/Stable 2,400 Maintain investment-grade rating 2,200 Strong 2,000 Total liquidity liquidity £5 billion 1,800 RCF increased £500m 1,600 1,400 Debt Net debt £225m 1,200 maturities Spread to 2026 Maturities:
Slide 41: Payment of 7.1 pence per share
Payment of 7.1 pence per share in line with February 2016 policy 2015 2016 2017 2015 cash: £421m Interim Final 2016 cash: 9.27p 7.1p £301m Interim Final 2017 cash: 4.6p + 7.1p = ~£215m Interim Final TBC TBC “ We recognise the importance of a healthy ‘dividend’ to our shareholders. Subject to short-t
Slide 42: US$ Hedge book
US$ Hedge book • Average achieved rate year-on-year reduced approx. 2.5 cents • Net group underlying benefit of £20m, after balance sheet effects – movement in achieved rate also affects working capital balances of hedged cash flows • Do not expect to make any material net additions to the hedge boo
Slide 43: Business outlook for 2017
Business outlook for 2017 Civil • Large engine ramp-up; higher OE revenues but adverse mix • Aftermarket stable overall, but mix changes • Business aviation OE expected to weaken further • Further improvement in lifecycle costs • Trading cash flow steady after better 2016 43
Slide 44: Civil Aerospace revenue outlook
Civil Aerospace revenue outlook (current accounting basis) £m 2015 2016 2017 2018 2019 2020 2021 Original Equipment (OE) 3,258 3,357 Large engine: linked and other 1,570 1,604 Large engine: unlinked installed 504 742 Business Jet 903 757 V2500 281 254 - - - Aftermarket (AM)* 3,486 3,710 Large engine
Slide 45: Civil Aerospace trading cash flow outlook
Civil Aerospace trading cash flow outlook (current accounting) £m 2015 2016 2017 2018 2019 2020 2021 Underlying profit before financing 812 367 Depreciation, amortisation and 410 491 impairment Sub-total 1,222 858 Contractual Aftermarket Rights (CARs) (161) (208) additions Property, plant, equipment
Slide 46: Business outlook for 2017
Business outlook for 2017 Civil Defence • Large engine ramp-up; higher OE revenues but adverse mix • Steady revenue • Aftermarket stable overall, but mix changes • Margin pressure from • Business aviation OE expected to weaken further investments and lower • Further improvement in lifecycle costs co
Slide 47: Technical factors for 2017
Technical factors for 2017 • 2017 FX impact if rates remain unchanged from end-2016 − Underlying revenues: +£400m; underlying profit before tax: +£50m Guidance at constant 2016 foreign exchange 2016 2017 Guidance Finance Charges £102m £100-110m Tax rate 32% c.25-30% Capital expenditure £626m £600-65
Slide 48: Financial summary
Financial summary • Good end to year and delivered on expectations • Plenty remains to be done – significant execution challenge • Outlook biased to positive across the five businesses • Strong focus on embedding transformation benefits • Priority to deliver long-term cost efficiencies and improving
Slide 49: Warren East, Chief Executive
Warren East Chief Executive Rolls-Royce
Slide 50: Updating our strategic priorities
Updating our strategic priorities 1 2 Long-term Update industry and competitive technology advantage & trends market attractiveness assessment Strategic priorities 4 3 Investment needs Further and balance transformative sheet capacity actions on cost timeframes and efficiency 50
Slide 51: Emerging business model
Emerging business model Frontier Technology Sustainable Dynamic business Engineering Emerging Business Model Performance that Compelling drives attractive customer investor returns propositions 51
Slide 52: Priorities for 2017
Priorities for 2017 Strengthen our Deliver good Rebuild trust and Complete focus on progress on confidence in our strategic update; engineering, transformation long-term growth outline clear goals operational and commitments prospects and priorities for aftermarket Rolls-Royce excellence …with a foc
Slide 53: Summary
Summary 2016 2017 • Met expectations for profit and free • Operational focus on ramp-up, delivery cash flow performance, new product introductions • No major trading issues arising during and embedding transformation second half of the year • Modest performance improvements overall; cash flow simila
Slide 54: Q&A
Strengthen our Deliver good Rebuild trust and Complete focus on progress on confidence in our strategic update; engineering, transformation long-term growth outline clear goals operational and commitments prospects and priorities for aftermarket Rolls-Royce excellence Q&A Warren East, Chief Executiv
Slide 55: Investor Relations contacts
Investor Relations Contacts John Dawson Jacinta Francis Director – Investor Relations Programme Coordinator – Investor Relations Tel: +44(0)207 227 9087 Tel: +44(0)207 227 9237 jcdawson@rolls-royce.com jacinta.francis@rolls-royce.com Helen Harman Assistant Director – Investor Relations Tel: +44(0)20
Slide 56: 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