Rolls-Royce Holdings plc · LSE:RR.
Rolls-Royce — Investor Day (November 2016)
85 slides from Rolls-Royce's investor day presentation, Nov 23, 2016
Slide 1: Operational & strategic update
Operational & strategic update Warren East, Chief Executive
Slide 2: Key topics for today
Key topics for today Update on Next steps for Financial IFRS 15 – review progress since delivering long- update of principles and Nov 2015 term shareholder likely outcomes value • 2016 priorities • Management • 2016 progress • Update on • Transformation development • Market outlook principles • Oper
Slide 3: Delivered on a clear commitment over the last twelve months
Delivered on a clear commitment over the last twelve months Investigate & Scope Detail & Implement Review & Refine Q4 2015 FY & Q2 Q4 Announced … Progressed … Next steps … • Conclusions of • Strong transformation • Anticipate developing operating review programme start market conditions • Transforma
Slide 4: 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 4
Slide 5: Transformation well under way
Transformation well under way Organisational hardware Organisational software Primarily fixed costs Right people, right conversations, right time Senior level Improved management Governance of systems and information processes Pace & Simplicity Corporate and Dealing with Culture change and and divis
Slide 6: 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 populatio
Slide 7: Performance now expected at top end of £150-200m savings target
Performance now expected at top end of £150-200m savings target 2016 2017 2018 ~£120m ~£200m ~£200m pa run rate into 2017 run rate into 2018 run rate into 2019 onwards ~£30-60m year on year incremental ~£90-120m saving in 2018 ~£50m year on year incremental year on year saving in 2017 saving in 2016
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: Our focus on pace and simplicity helps our transformation
Our focus on pace and simplicity helps our transformation Focus Engineering excellence Resources + Operational Defining what’s Restructuring excellence absolutely needed around focus Aftermarket excellence 9
Slide 10: Many opportunities for improvement in each of our focus priorities
Many opportunities for improvement in each of our focus priorities Engineering excellence Operational excellence Aftermarket excellence 10
Slide 11: Opportunities for improvement in each of our focus priorities
Opportunities for improvement in each of our focus priorities Reduce Operational 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 27% cycle time • Engagement of employees in the improv
Slide 12: Developing process improvements to overcome service constraints
Developing process improvements to overcome service constraints Reduce Aftermarket lead excellence time • Redefined and surgically 80% focused process to address specific blade replacement issue reduction in turnaround time • Product of the team’s for Trent 1000 blade detailed engineering replacem
Slide 13: Maturing Trent fleet set to drive increasing number of aircraft transitions
Maturing Trent fleet set to drive increasing number of aircraft transitions Reduce Aftermarket lead excellence time 160 Trent installed base - quantity of aircraft 140 Population of aircraft that may transition 120 100 Trent XWB-84k Trent 900 80 Trent 800 60 Trent 700 Trent 500 40 Trent 1000 20 0 1
Slide 14: 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 14
Slide 15: Additional disclosures
Additional disclosures Additional margin disclosure Group 2014 Underlyingincome statement* chil [1 Rolls-Royce Group Oc Reewe 7m —+ ceReene AM Remwe seu AN Reenwe Total Revenus 13884 ‘Total Revenue Cost of Sates (10466) —* — costorsates~ Gross Margin 3398 —» Gross Margin Reampeasye |) __» Namuowasey
Slide 16: Civil trading cash flow
Civil trading cash flow 2015 CY+1 CY+2 CY+3 CY+4 PBFCT by Business £800-900m TotalCare® net debtor movements (x) CARs movements (x) Working Capital Movements x Future disclosure Other non-cash movement in depreciation, capital and intangibles (x) Trading cash flow* X Indicative only *Trading cash fl
Slide 17: Delivered 2016 commitments
Delivered 2016 commitments • Overall expectations for 2016 unchanged • Delivered on our transformation commitments • Ramped up large engine production to c.400 pa 17
Slide 18: Legacy issues
Legacy issues Co-operating with Significant actions to Zero tolerance to authorities including improve ethics/ABC misconduct UK & US culture & processes 18
Slide 19: Key appointments announced
Key appointments announced Chief Operating Officer Chief Financial Officer Simon Kirby Stephen Daintith 19
Slide 20: Started to focus on updating our long-term vision and strategy
Started to focus on updating our long-term vision and strategy Investigate & Scope Detail & Implement Review & Refine Q4 2016 FY & Q2 Q4 Announced … Progressed … Next steps … • Conclusions of • Strong transformation • Anticipate developing operating review programme start market conditions • Transfo
Slide 21: Review our long-term operating priorities and investment needs
Review our long-term operating priorities and investment needs 5 years +10 years +20 years 2015-2020 2020-2030 2030-2050+ Transform, deliver performance and grow Time to review, change or confirm our long-term strategic goals and to set out a clear vision for the business 21
Slide 22: Four key drivers for updating our strategic priorities
Four key drivers for updating our strategic priorities 1 2 Long-term Update industry and competitive technology advantage & trends market attractiveness assessment Strategic priorities 3 4 Further Investment needs transformative and balance actions on cost sheet capacity and efficiency timeframes 22
Slide 23: Attractive growth opportunities across our businesses that merit investment
Attractive growth opportunities across our businesses that merit investment Civil Aerospace Defence Advance and UltraFan™ technologies to deliver step change in engine efficiency Next generation transport & patrol and combat Power Systems Marine Nuclear Next generation gas engines and hybrid gensets
Slide 24: Electrification opportunity
What about the opportunities from emergent technologies? Digital future + = ? Electrification opportunity 24
Slide 25: Initial portfolio review highlighted the strengths of the business
Initial portfolio review highlighted the strengths of the business Strong mix of business 2020 High • Over 80% in attractive growth ~70% markets • Over 75% in with strong competitive Competitive Position advantages Competitive advantage strengthened by investments • 2/3rds of group will benefit from
Slide 26: Future reductions in costs will be driven by changes to systems and processes
Future reductions in costs will be driven by changes to systems and processes Still have significant indirect costs in the organisation Started to transform… • ~600 senior management Outsourced positions removed services and • ~£200m cost savings targeted consumables People £4bn Potentially a lot mo
Slide 27: Three key building blocks to delivering enhanced shareholder value
Three key building blocks to delivering enhanced shareholder value Growth & mix Growth will enable Pace & significantly higher achieved cash Simplicity gross margins. In Civil Aerospace higher volumes should reduce OE In other words losses, and drive avoiding future significant AM cash Cost costs by
Slide 28: Summary
Summary Update on Next steps for Financial IFRS 15 – review progress since delivering long- update of principles and Nov 2015 term shareholder likely outcomes value • 2016 priorities • Management • 2016 progress • Update on • Transformation development • Market outlook principles • Operating • Updat
Slide 29: Financial update
Financial update David Smith, Chief Financial Officer
Slide 30: Agenda
Agenda • Trading summary • Progress on transformation • Future market outlook • Civil revenue and cash disclosures • IFRS 15 update and comparison to 2015 FY results 2
Slide 31: Outlook for 2016 unchanged
Outlook for 2016 unchanged November 2015 November 2016 EBIT 2015: EBIT 2015: £1,325 - £1,475m £1,415m* Expected Expected movements** ~£(650)m movements** £(600) – (650)m • Expected movements slightly better than early expectations • Civil Aerospace: transactional foreign exchange benefits from lower
Slide 32: Transformation benefits now expected at top end of £150-200m range
Transformation benefits now expected at top end of £150-200m range £m 2015 2016 2017 2018 Legacy programmes Aerospace 0 80 0 0 Marine (10) 35 40 0 Incremental benefits (10) 115 40 0 Cumulative benefits (10) 105 145 145 Nov 2015 Transformation Programme Initial phase 0 c. 50 c.70 0 Next steps 0 20-50
Slide 33: Transformation progress in Finance
Transformation progress in Finance 4 1 >40% Efficiency savings in UK DB Targeted reduction in pension schemes legal entities • Governance simplification • Reduced administration costs • 40 trustees down to 10 • Ahead of plan • Efficiencies in collateral management and • Removed 36 entities so fa
Slide 34: Market outlook mixed
Market outlook mixed Civil Defence • Large engine demand remains strong reflecting • Outlook stable strength of XWB order backlog • Aircraft parking reasonably stable Marine • Demand for business aviation generally weakening • No signs of recovery yet in offshore oil & gas markets Power Systems • Fu
Slide 35: Civil Aerospace revenue outlook (current accounting basis)
Civil Aerospace revenue outlook (current accounting basis) £m 2015 2016 2017 2018 2019 2020 Original Equipment (OE) 3,258 Large engine: linked and other 1,570 Large engine: unlinked installed 504 Business Jet 903 V2500 281 - - Aftermarket (AM)* 3,486 Large engine* 2,182 Business Jet 425 Regional 360
Slide 36: Civil Aerospace medium term trading cash flow outlook
Civil Aerospace medium term trading cash flow outlook (current accounting) £m 2015 2016 2017 2018 2019 2020 Underlying profit before financing 812 Depreciation, amortisation and impairment 410 Sub-total 1,222 Contractual Aftermarket Rights (CARs) (161) additions Property, plant, equipment and other
Slide 37: IFRS 15 key changes from 2018
IFRS 15 key changes from 2018 IAS 11/18 IFRS 15 Consequence Contractual • In substance, OE sale • AM intangible asset still CARs can no longer be aftermarket gives right to an AM conceptually exists, but recognised rights (CARs) intangible asset not with OE customer Contract • May be different • Mus
Slide 38: IFRS 15 highlights
IFRS 15 highlights • Significant non-cash adjustments to OE and AM revenue and profit recognition in the near-term – Heavily influenced by high production volumes; new engine programmes and market share gains in aftermarket • No change over product life cycle to cash flows and profit achieved – Same
Slide 39: Agenda
Agenda • Walkthrough of IFRS 15 changes to Legend 2015 results for Civil Aerospace for: – revenue Previously disclosed information, quantification largely available in – profit prior year results – balance sheet • Examples to contrast current and IFRS Previously disclosed information, 15 accounting
Slide 40: Scope of impact
Scope of impact Civil Aerospace Civil Aerospace OE revenue Civil Aerospace AM revenue Business jet and Business/ Large Engine OE V2500 Large Engine AM Regional V2500 Engines Spare TotalCare® & Time & Installed OE Materials CorporateCare® Around 50% of OE Around 1/3 of AM revenues generate revenu
Slide 41: Estimated IFRS 15 changes: 2015 Civil OE
Estimated IFRS 15 changes 2015 Civil OE Underlying Revenue Underlying Profit No profit on linked OE sale No profit on linked OE sales £(370)m £(370)m No capitalisation of linked No capitalisation of linked engine cash loss engine cash loss £(151)m £(151)m £(734)m No CARs on unlinked No CARs on unlin
Slide 42: Estimated IFRS 15 changes: 2015 Civil AM
Estimated IFRS 15 changes 2015 Civil AM Underlying Revenue Underlying Profit No amortisation of prior No amortisation of prior years concession deferral years concession deferral £268m £268m Reduced valuation policy Reduced valuation policy adjustment adjustment £(136)m £(136)m ~£(210)m ~£(175)m Oth
Slide 43: Estimated IFRS 15 changes: Civil 2015 balance sheet
Estimated IFRS 15 changes Civil 2015 balance sheet – pre-tax adjustments Intangible Assets TotalCare® net assets Total Impact Reversal of the CARs Reversal of cumulative balance linked contract profit reported ahead of cash £(0.4)bn ~£(2.3)bn ~£(3.5)bn* Transition from flying hour to cost basis ~£(0
Slide 44: IFRS 15 v Current GAAP
IFRS 15 v Current GAAP Cash flows, of course, are completely unchanged by the new standard 2015 2020 2025 2030 IFRS 15 v current AM GAAP OE flows, of course, are completely unchanged by the new standard. Cash 16
Slide 45: IFRS 15 v Current GAAP
IFRS 15 v Current GAAP Cash flows, of course, are completely unchanged by the new standard 2015 2020 2025 2030 IFRS 15 v current AM GAAP Original Equipment delta to current GAAP falls as average unit losses OE reduce on original equipment sales of installed large engines 17
Slide 46: IFRS 15 v Current GAAP
IFRS 15 v Current GAAP Cash flows, of course, are completely unchanged by the new standard 2015 2020 2025 2030 IFRS 15 v current AM GAAP Aftermarket delta to current GAAP expected to reduce as the average age of our fleet grows Significant growth in market share means average age will take Original
Slide 47: IFRS 15 summary by business
IFRS 15 summary by business Civil Aerospace Defence Aerospace: Power Systems, evaluation underway Marine and Nuclear • Main change to Large • Evaluation underway but • Evaluation underway but Engines OE & OE change expected to expected to be de Aftermarket and business be de minimis minimis and regi
Slide 48: IFRS 15 next steps
IFRS 15 next steps Workshops today Looking forward • Walkthrough of IFRS 15 changes to • Mid-2017: Indicative Group impact 2015 results for Civil Aerospace for: of IFRS 15 on 2016 FY results – revenue • Feb 2018: 2017 FY results – full – profit 2017 IFRS 15 restatement with – balance sheet H1/H2 spl
Slide 49: IFRS 15 Summary
IFRS 15 Summary • Significant non-cash adjustments to OE and AM revenue and profit recognition in the near-term – Heavily influenced by high production volumes; new engine programmes and market share gains in aftermarket • No change over product life cycle to cash flows and profit achieved – Same ov
Slide 50: Conclusions
Conclusions Outlook for 2016 unchanged IFRS 15 introduces significant non-cash adjustments to OE and AM revenue and profit recognition in the short term Transformation progressing well Overall life-cycle product profitability unchanged by application of IFRS 15 Market outlook mixed No change to cash
Slide 51: Breakout introduction
Breakout introduction Warren East, Chief Executive
Slide 52: Introducing our breakouts
Introducing our breakouts Engineering Power Systems: focused Nuclear: next generation excellence product development R&D and civil capability Operational Civil Aerospace: achieving Marine: responding to excellence our supply chain goals market challenges Aftermarket Civil Aerospace: enhancing Defenc
Slide 53: Civil Aerospace
Civil Aerospace Eric Schulz
Slide 54: Market environment
Market environment Orders, Parked 120 112 108 106 101 deliveries and aircraft 100 87 99 Parked Trent aircraft cancellations Parked Trent 80 65 76 Widebody orders rate volumes stable 60 has fallen below through 2016 40 45 40 34 delivery rates, 30 backlog burning down 24 Trent powered 20 aircraft tran
Slide 55: Our positioning
Our positioning Rolls-Royce widebody engines • Well positioned in key segments • Healthy order book on key platforms support market share gains • Strong brand in business jet market • Growing aftermarket as fleet matures • Developing value-added services to drive further customer intimacy 5
Slide 56: Managing key priorities
Managing key priorities 1 Ramp up: capacity and efficiency 2 New Products Introduction (NPI): 3 new programmes 3 Fleet issues: e.g. Trent 1000 “surgical strike” 4 Transformation programme: catalyst for change 5 Future technology: next generation platforms 6
Slide 57: Operational Excellence – key takeaways
Operational Excellence – key takeaways The business has a clear plan to achieve Examples what are demanding requirements: • Investing in capacity to deliver ramp Transforming Creating Continuous • Improving efficiency to drive down fixed internal value in improvement cost profile facilities external
Slide 58: Aftermarket Value – key takeaways
Aftermarket Value – key takeaways Capturing aftermarket value and reducing Examples costs as widebody fleet grows is top priority: • Continual improvement of customer Installed engine Delivering the right service offering and infrastructure growth service solutions • Innovation in value added servic
Slide 59: Summary
Summary Ramp-up delivers a significant 1 market share gain opportunity Using our ‘Fly’ transformation 2 programme as a catalyst Addressing in-service issues and 3 demonstrating customer focus Long term outlook remains 4 very positive 9
Slide 60: Defence Aerospace
Defence Aerospace Chris Cholerton
Slide 61: Defence Aerospace
Defence Aerospace Overview Growth Drivers Market Outlook • 16,000 engines in • New combat • UK/US investment service programmes stable • 160+ Customers in • Future transport and • Turkey, Japan, India over 100 countries patrol opportunities and South Korea investment forecast to • World Number 2 • R
Slide 62: Pursuing growth opportunities in combat aircraft
Pursuing growth opportunities in combat aircraft Future Combat Air System TAI TF-X F-35B FCAS Turkey LiftSystem UK/France Future Combat Air System FCAS UK/France AMCA India F3 Typhoon Advanced Medium Combat Aircraft Japan EJ200 typhoon 12
Slide 63: Transport & Patrol – defend and grow
Transport & Patrol – defend and grow … C-130J A400M V-22 …through investment in new products and world class facilities Defending our leadership in Transport & Patrol through Maximising competitiveness investments in new technology through world class facilities 13
Slide 64: Aftermarket value: takeaways
Aftermarket value: takeaways • Enhancing value at lower cost • Improved customer intimacy • Extending the life of engines in service Material management Digital & Data Upsell services Customer intimacy Services innovation 14
Slide 65: Summary
Summary Strong market positioning 1 in core segments Technology innovation to 2 ensure competitiveness Investment in creating 3 world class facilities Delivering aftermarket 4 value 15
Slide 66: Power Systems
Power Systems Marcus Wassenberg
Slide 67: Portfolio overview
Portfolio overview Govern- Marine & Power Rail, Construction Injection mental Offshore Generation Mining, & Agriculture Systems Oil&Gas Global Service 25% 20% 30% 13% 8% 4% 17
Slide 68: Market positioning
Market positioning Market information Market position OE market split* Application Market position Yacht Governmental Marine Commercial Marine PowerGen Naval Rail, Mining, Oil&Gas Defense C&A Oil&Gas Mining Rail Construction & Agriculture Market size Market growth ~£17bn >GDP growth PowerGen Continu
Slide 69: Our strategy defines three key strategic areas of focus
Our strategy defines three key strategic areas of focus Strategic directions Strategic priorities Defend strong position in high-profit markets 1 Shaping our Future Rolls-Royce Power Systems 2 Maintain technology leadership Selectively grow in Grow in Service-intense Industrial high-volume PowerGen
Slide 70: RRPS 2018 transformation priorities
RRPS 2018 transformation priorities • Clarity over core • Greater ambition & target markets performance targets Shaping Shaping • Sustainable profit • Expanding value- markets ambitions sources added service offerings ‘Shaping our future’ • Greater focus on • Streamlining structures growth markets &
Slide 71: Engineering Excellence: takeaways
Engineering Excellence: takeaways Focused R&D investments which meet demanding customer life cycle cost and tightening emissions regulations Streamlining R&D approach to maximise returns on investment Making targeted investments in new technologies to maintain technology leadership Enhancing systems
Slide 72: Conclusion
Conclusion Broad and diverse 1 market positioning Clear strategic direction 2 and priorities RRPS 2018 transformation 3 actions well underway Increased focus on 4 disciplined R&D programme 22
Slide 73: Marine
Marine Mikael Mäkinen
Slide 74: Marine – where are we today?
Marine – where are we today? Our markets Our performance 4,500 300 2,500 300 Clarksons - Number of vessels by contract year 4,000 Offshore E&P Spending* – $ billions 250 250 3,500 2,000 Revenue - £m 3,000 200 200 Profit - £m 1,500 2,500 150 150 2,000 1,000 1,500 100 100 1,000 500 50 50 500 0 0 0 0 2
Slide 75: Our strategy
Our strategy Developing Winning innovative customer solutions engagement Strengthen core offerings Improve responsiveness, reduce disruption and Protecting our and concentrate only on Becoming utilise data to help solutions aligned with unique offering Marine 4.0 vision Shipshape customers optimize
Slide 76: Marine 4.0 Future Vision
Marine 4.0 Future Vision Key Trends Reliability and Big Data Environmental Safety Smart Efficiency Electrification Manufacturing 26
Slide 77: What we will look like in Marine 4.0
What we will look like in Marine 4.0 Innovation & Delivery Norway & Finland Route to Market Naval Market China, South Korea, USA & UK Singapore New Capability India, Eastern Europe & Vietnam Marine 4.0 initiated after completing >40% reduction in factories 2012-2016 27
Slide 78: Operational Excellence: key takeaways
Operational Excellence: key takeaways Responding to market 1 challenges Continuing to lower the fixed 2 cost base Focused investment based 3 on clear strategic direction 28
Slide 79: Nuclear
Nuclear Harry Holt
Slide 80: Overview
Overview Revenue by market Submarines Civil nuclear / other 80% 20% Revenue by mix Original equipment Customer services 37% 63% 2015 Financial data 30
Slide 81: Submarine business
Submarine business • Supply and manufacture of Sole Technical Authority for nuclear steam pressure vessels, fuel cores, raising plant (NSRP) for over 50 years propulsors, flexible couplings and turbo- Responsible generators for all major Project Plant design activities on management • Management and
Slide 82: Across the lifecycle Civil Nuclear presents a significant opportunity
Across the lifecycle Civil Nuclear presents a significant opportunity Addressable market Market access constraints Rolls-Royce Rolls-Royce Geographic addressable target market constraints market £5.5bn £5bn £20bn Non Rolls-Royce In-house capability OEM customer incumbency £60bn capability £6.5bn £3b
Slide 83: Engineering Excellence: takeaways
Engineering Excellence: takeaways Defence capability is unique, providing 1 strategic relevance, stable business model and bedrock for growth in civil nuclear Civil Nuclear market is substantial, 2 resilient and growing across all phases of the nuclear lifecycle Well positioned to exploit that growt
Slide 84: IR contacts
IR contacts John Dawson Director / Head of Investor Relations Tel: +44 20 7227 9087 Helen Harman Assistant Director Tel: +44 20 7227 9339 Ross Hawley Assistant Director Tel: +44 20 7227 9282 investor.relations@rolls-royce.com 34
Slide 85: Safe harbour statement
Safe harbour statement This announcement or publication 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 proj