Rolls-Royce Holdings plc · LSE:RR.
Rolls-Royce — H1 2018 Earnings Presentation
53 slides from Rolls-Royce's earnings presentation, Aug 2, 2018
Slide 1: 2018 Half Year Results
2018 Half Year Results 2 August 2018 2018 Half Year Results © Rolls-Royce
Slide 2: Jennifer Ramsey, Head of Investor Relations
Jennifer Ramsey Head of Investor Relations 2018 Half Year Results © Rolls-Royce
Slide 3: Agenda for today
Agenda for today Introductions Jennifer Ramsey Highlights Warren East Financial Review Stephen Daintith Business outlook Warren East 3 2018 Half Year Results © Rolls-Royce
Slide 4: Safety Notices
Safety Safe Mobile Harbour Phones Notices 2018 Half Year Results © Rolls-Royce
Slide 5: Highlights
Highlights Warren East Chief Executive 2018 Half Year Results © Rolls-Royce
Slide 6: Results summary
Underlying core revenue Underlying core gross Results profit summary £6.7bn 16 %* £870m 12 %* “Good progress in a breakthrough year” Underlying core PBT Underlying core operating margin £81m £182m* 2.2% 300bps* Full Year 2018 now Core free cash flow ‘Dividend’ per share expected to be in the upper h
Slide 7: 2018 Half Year overview
2018 Half Year Civil Aerospace overview Large engine production up; installed fleet growth; OE loss reduced; new engines launched; continued to manage in- service engine issues Power Systems Continued strong growth across almost all end markets Defence Strong cash performance with healthy H2 p
Slide 8: Trent 1000 update
Unacceptable level of customer disruption Trent 1000 Closely working with affected airlines update Operational Expected cash Trent 1000 P&L update cost profile* treatment Peak Aircraft on 2018 around £450m £554m exceptional Ground (AOG) 2019 around £450m charge for passed “abnormal” cost
Slide 9: Structure to enable change
Structure to enable change “Creating the conditions for the businesses to solve the problems themselves” Much smaller Significantly Civil light-weight Aerospace reduced central Head Office costs Empowered businesses, more Power Defence control of own costs Systems Shared vision and clear accou
Slide 10: Restructuring progress
Established Group Business Restructuring Services, to bring together 2,000 employees as a multi- progress function service delivery organisation Established an Innovation Hub to create genuine competitive advantage Executive team face-to-face discussions with thousands of employees to help set
Slide 11: Progress in Civil Aerospace
Progress in Growth Ramp up Trent 7000 Civil 20% 24% A330neo growth in growth in “Our strong position received EASA large engine large engine certification on new widebody invoiced flying deliveries; aircraft is hours progress on OE losses underpinning substantial growth” Pearl 15 New technology Firs
Slide 12: Progress in Power Systems
Progress in Markets Gas Power Simplify Power Systems Recovery in Demand >30% commodity driven by gas reduction in markets has availability product “Encouraging driven strong and fast variants momentum”` volume growth response capability Service R&D Roadmap Focus on Provides high-speed and implementa
Slide 13: Progress in Defence
Progress in Structure F-35B MT30 Defence Business Lightning II Maintained its solutions now aircraft – first position as possible to deployment to core naval “Positioned well for a better serve the UK engine solid year of operating our customers platform of performance” choice Pipeline Team Full yea
Slide 14: Portfolio restructure: L'Orange and Commercial Marine sales
L’Orange sale completed L’Orange supplies fuel injection technology Portfolio Sale agreed at enterprise value of €673m restructure Purchased by Woodward Inc, USA “These transactions Completed 1 June 2018 build on the actions we have taken over the last two years to Commercial Marine sale ann
Slide 15: Financial Review
Financial Review Stephen Daintith Chief Financial Officer 2018 Half Year Results © Rolls-Royce
Slide 16: Agenda for today
Agenda for today 01 Half year results 02 Business unit review 03 Accounting policy updates 04 Guidance 16 2018 Half Year Results © Rolls-Royce
Slide 17: Half year results
Half year results 17 2018 Half Year Results © Rolls-Royce
Slide 18: Core & Non-core business reporting format
Core & £m Non-core Civil Aerospace X business Defence X reporting Power Systems X format ITP Aero X Core business This section will focus on Corporate/eliminations X Key focus of Group the Core business of Core business X Rolls-Royce: Civil operations Aerospace, Power Commercial Marine X Systems, De
Slide 19: Underlying results
Underlying Organic Underlying Organic Group £m Revenue change op. profit change Underlying Civil Aerospace 3,600 +26% (112) 149 results Defence 1,415 - 162 (6) Power Systems 1,471 +13% 80 52 ITP Aero* 375 +19% 40 32 Strong revenue Corporate/eliminations (181) - (24) - growth Core business 6,680 +16%
Slide 20: Core business underlying results
Organic Core Business £m H1 2018 H1 2017 Change change Underlying Core underlying revenue 6,680 5,611 +19% +16% results Core underlying gross profit 870 712 +22% +12% Gross margin % 13.0% 12.7% +30bps -50bps Research and development costs (296) (396) -25% -28% C&A (479) (436) +10% +4% Joint ventures
Slide 21: Continued underlying growth in core revenue
Continued £m H1 2018 H1 2017 Change Organic change underlying OE revenue 3,247 2,594 +25% +19% growth in LTSA service revenue 1,659 1,455 +14% +13% Core OE & Other service revenue 1,774 1,562 +14% +15% LTSA revenue Core underlying revenue 6,680 5,611 +19% +16% Gross margin (%) 13.0% 12.7% +30bps -50
Slide 22: Core business R&D
Organic Core £m H1 2018 H1 2017 Change business R&D Gross R&D 663 620 +4% Third party contributions (145) (181) -20% Net R&D cash spend Net R&D cash spend 518 439 +14% up £79m Capitalised (239) (84) +177% Capitalisation policy Amortisation 17 41 -64% application change Core R&D P&L charge 296 396 -2
Slide 23: Restructuring: good start
H1 Exceptional P&L charge of £132m for restructuring Restructuring Good start on delivering plan Good start Targets delivery of net £400m Benefits Costs reduction in costs by end 2020 Savings – £400m net saving Total Costs – £500m cash run rate by end of 2020 costs to implement Savings focus
Slide 24: Trent 1000/900 cost update
Trent 1000 / 900 in-service cash costs 7 March 15 June Beyond Trent 2017 2018 Guidance 2018 Guidance 2019 2020 2020 1000/900 cost update “~£100m “broadly “Reduce by “broadly Financial impact double” incrementally Higher” flat” at least £100m” £170m Mitigations offset incremental ~£100m cost in FY18
Slide 25: Trent 1000 triggers for exceptional treatment
Trent 1000 Triggers for exceptional treatment exceptional charge A series of abnormal events, giving rise to a significant level of cost, of a nature not normally expected, which is not reflected in contract price For example: – When we suffer material technical issues arising from regulatory airw
Slide 26: Trent 1000 exceptional charge: income statement impact
Trent 1000 Income statement impact exceptional charge Trent 1000 £554m H1 exceptional charge covers abnormal costs which fall outside the scope of our normal TotalCare costs Represents c.40% of total costs of resolving Trent 1000 issues for the period to 2022 - Not incremental to the cash costs
Slide 27: Drivers of cash flow
Drivers of reported £267m Group FCF improvement vs. prior year Drivers of + Increased cash inflows from Civil aftermarket and EFHs cash flow + Higher spare engine volumes – Better H1:H2 balance + Defence & other business WC improvements Significantly ahead of prior year led by + Mitigation actions (
Slide 28: Net working capital change
Main drivers in H1 2018 (£129m benefit vs £324m in H1 2017) Group Increase in inventories £(427)m Net working - Volume growth in both Civil Aerospace & Power Systems capital change - Phasing of product deliveries in Defence Overall H1 2018 Increase in trade and other receivables £(300)m working capi
Slide 29: Group balance sheet
Group balance Completed disposal of L’Orange; net Net cash sheet: proceeds of €673m (£584m) received H1 2018 Ambition to return to a single A rating Announced sale of Commercial Marine; EV of £500m. Expected net £165m proceeds of ~£350m to £400m FY 2017 net debt of Successfully issued €1.1bn (
Slide 30: Shareholder payments
Shareholder 2018 Interim payment maintained; 4.6p per share payments Expected cash cost £86m Committed to restoring shareholder payments to an appropriate level over time; FCF key driver of growth Aspire to mid-term 2.5x FCF / dividend cover through cycle View in the context of overall cap
Slide 31: Business Unit review
02 Business Unit review 31 2018 Half Year Results © Rolls-Royce
Slide 32: Civil Aerospace Overview
Organic £m H1 2018 H1 2017 Change change OE revenue 1,530 1,151 +33% +32% Civil Services – LTSA 1,328 1,190 +12% +12% Aerospace Services - T&M/other* 742 517 +44% +43% Overview Underlying revenue 3,600 2,858 +26% +26% Strong growth in Gross profit 148 137 +8% +12% revenue. Operating Gross margin % 4
Slide 33: Civil Aerospace: engine deliveries
Widebody deliveries Engine +24% Installed OE engine deliveries: deliveries 259 + growth Trent XWB and Trent 1000 Widebody engine 209 production ramp continuing - slowing Trent 700, A330ceo production down Over 2,400 WB engines on order H1 2017 H1 2018 Increased spare engines: more balanced H1/H2 del
Slide 34: Civil Aerospace: OE loss drivers
OE loss 1 Civil Ongoing drive for OE Aerospace: 15% cost reductions across key cash drivers Average OE loss 15% lower than FY 2017 the portfolio XWB-84: Good progress on cost & price reductions widebody OE unit loss H1 2018 deficit increase / decrease % reduction Trent 900: Continue to work Trent XW
Slide 35: Civil Aerospace: key cash drivers, EFH growth
EFH growth 2 Civil Aerospace: Large engine invoiced EFH Large engine in-service fleet key cash +20% +4% drivers 6.9m 4,567 Strong Widebody EFH 5.8m 4,409 growth Modest increase in Business Aviation EFH Expected aircraft H1 2017 H1 2018 FY 2017 H1 2018 retirements driving lower regional EFH Continu
Slide 36: Civil Aerospace: key cash drivers, shop visits
Shop visits 3 Civil Widebody LTSA Widebody LTSA Aerospace: major shop visits check & repair visits key cash drivers +46 +84 242 137 Growing fleet driving 91 158 increased shop visits H1 2017 H1 2018 H1 2017 H1 2018 Increase in Trent 700 engine Accelerated maintenance first overhauls activity on
Slide 37: Trent XWB-84 in service
Trent XWB-84 Total cumulative fleet hours Trent XWB 352 in service >2m Excellent entry 19 operators Dispatch reliability in first half into service Trent XWB-97 entered into service in February 99.9% Solid progress on engine cash deficit reduction % deficit reduction Engine performance Engine unit c
Slide 38: Power Systems Overview
Organic Power £m H1 2018 H1 2017 Change change Systems OE 945 814 +16% +14% 0verview Services 526 461 +14% +12% Underlying revenue 1,471 1,275 +15% +13% Gross profit 354 283 +25% +23% H1 performance Gross margin % 24.1% 22.2% +190bps +180bps driven by strong OE volumes and services Operating profit
Slide 39: Power Systems underlying revenue
Underlying revenue H1 OE revenue growth of 14% £1,471million Power led by strong end markets By type Volume driven; strength across 64% OE Systems almost all markets; PowerGen down 14% 0verview due to tough PY comparison base Services 36% 12% H1 services revenues +12% On track; Strong growth in
Slide 40: Defence Overview
Organic Defence £m H1 2018 H1 2017 Change change Overview OE (& Development) 608 629 -3% +1% AM - LTSA 250 227 +10% +16% AM - T&M 557 622 -10% -7% Underlying revenue 1,415 1,478 -4% - Solid performance; Gross profit 281 292 -4% +1% margins impacted by higher R&D spend on Gross margin % 19.9% 19.8% +
Slide 41: Defence underlying revenue
Underlying revenue £1,415million Defence Solid OE revenue By type Transport and Submarines Overview growth offset lower Combat T&M & Other 39% OE & Development 7% 43% 1% volumes 18% Services revenue flat Confidence in the LTSA Increased LTSA and Combat 16% outlook for remainder spares offset Sub
Slide 42: ITP Aero Overview
Organic £m H1 2018 H1 2017 Change change ITP Aero Underlying revenue 375 309 +21% +19% Overview* Gross profit 85 50 +70% +67% Gross margin % 22.7% 16.2% +650bps +650bps Outlook positive Operating profit 40 8 32 32 despite near-term cash investment cycle Operating margin % 10.7% 2.6% +810bps +820bps
Slide 43: Accounting policy update
03 Accounting policy update 43 2018 Half Year Results © Rolls-Royce
Slide 44: Accounting policy updates: IFRS 9 and IFRS 16
Accounting IFRS 9 IFRS 16 policy Financial Instruments Leases updates Amendments to accounting for All leases on balance sheet financial instruments Effective from 1 January 2019 Effective from 1 January 2018 with adjustment to reserves on with adjustment to reserves on that date that date No
Slide 45: Guidance
04 Guidance 45 2018 Half Year Results © Rolls-Royce
Slide 46: Free cash flow guidance updated
Free cash flow (FCF) guidance updated 2018 Cash Prior FCF guidance for Group (excl. ITP Aero) as provided at FY17 Results Outlook £450m £(100)m £100m Cash flow guidance £350m £550m now expected to be Updated FCF guidance on a like-for-like basis in the upper half of our guidance range £450m Now expe
Slide 47: Profit guidance updated
Profit guidance updated 2018 Profit Prior profit guidance for Group (excl. ITP Aero) as provided at FY17 Results Outlook £400m £(100)m £100m Profit guidance now £300m £500m expected to be in Profit guidance on a like-for-like basis the upper half of our guidance range £400m Now expected to be in the
Slide 48: Business outlook
Business outlook Warren East Chief Executive 2018 Half Year Results © Rolls-Royce
Slide 49: Priorities for 2018 remain unchanged
Priorities for 2018 remain unchanged Customers Technology Resilience Financial Progress Large engine Service Cultural change Improving free cash production ramp-up revitalisation flow Improving Expanding service Development of adaptability Strengthened network new engine balance shee
Slide 50: Restructuring: must do
Restructuring Must do: 01 Drive out unnecessary costs 02 Remove complex & duplicative processes 03 Develop a real performance culture 50 2018 Half Year Results © Rolls-Royce 04 Create ownership behaviour
Slide 51: Develop: Our long-term vision and strategy
Pioneering the Power that Matters Develop: Rolls-Royce pioneers cutting edge technologies that deliver the cleanest, Our long-term safest and most competitive solutions to meet our planet’s vital power needs vision and strategy “Creating the leading Champion Reinvent with digital Transform our Indus
Slide 52: Q & A
Q&A 2018 Half Year Results © Rolls-Royce
Slide 53: Safe harbour statement
Safe harbour This announcement contains certain forward-looking statements. These forward- looking statements can be identified by the fact that they do not relate only to statement historical or current facts. In particular, all statements that express forecasts, expectations and projections with r