Rolls-royce Holdings Plc · LSE:RR.
Rolls-royce — Investor Day (June 2014)
27 slides from Rolls-royce's investor day presentation, Jun 19, 2014
Slide 1: 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
Slide 2: 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
Slide 3: 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 3
Slide 4: 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 4
Slide 5: 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
Slide 6: 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
Slide 7: 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
Slide 8: 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 8
Slide 9: 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
Slide 10: 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 10
Slide 11: Unlinked TotalCare: Cash vs. margin recognised
Unlinked TotalCare® Cash vs. margin recognised $m Trusted to deliver excellence 11
Slide 12: Unlinked TotalCare: Net cash vs. margin recognised
Unlinked TotalCare® Net cash vs. margin recognised TotalCare® creditor $m TotalCare® debtor Trusted to deliver excellence 12
Slide 13: 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
Slide 14: 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 14
Slide 15: 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
Slide 16: Linked TotalCare: Cash vs. margin recognised
Linked TotalCare® Cash vs. margin recognised $m Trusted to deliver excellence 16
Slide 17: Linked TotalCare: Net cash vs. margin recognised
Linked TotalCare® Net cash vs. margin recognised $m TotalCare® debtor created Trusted to deliver excellence 17
Slide 18: 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
Slide 19: 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 19
Slide 20: 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
Slide 21: Linked TotalCare programme: OE and aftermarket profit
Linked TotalCare® programme OE and aftermarket profit Trusted to deliver excellence 21
Slide 22: Linked TotalCare programme: Net cash vs. margin recognised
Linked TotalCare® programme Net cash vs. margin recognised Debtor position Debtor position decreasing increasing Peak net debtor Trusted to deliver excellence 22
Slide 23: Unlinked TotalCare programme: Net cash vs. margin recognised
Unlinked TotalCare® programme Net cash vs. margin recognised Creditor position increasing Creditor position decreasing Trusted to deliver excellence 23
Slide 24: 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
Slide 25: 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 25 25
Slide 26: Status of TotalCare contracts
Status of TotalCare® contracts Trusted to deliver excellence 26
Slide 27: Accounting for TotalCare arrangements
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