Rolls-Royce Holdings plc · LSE:RR.

Rolls-Royce — FY2019 Earnings Presentation

47 slides from Rolls-Royce's earnings presentation, Feb 28, 2020

  1. Slide 1: 2019 Full Year Results

    2019 Full Year Results 28 February 2020 1 2019 Full Year Results © Rolls-Royce

  2. Slide 2: Highlights

    Highlights Warren East Chief Executive 2 2019 Full Year Results © Rolls-Royce

  3. Slide 3: Results summary

    Underlying core Underlying core Results revenue operating profit summary After challenging first half, we had a good end to the £15.3bn +6%* £810m +25%* year & delivered a strong 2019 free cash flow Core free cash flow Underlying core PBT £911m 2018: £648m £587m +17%* ‘Dividend’ per share Core under

  4. Slide 4: Delivery: key achievements

    Delivery In 2019 we have Key achievements delivered on: Strong trading performance Significant progress on Trent 1000 fixes Restructuring Portfolio simplification Progressed our low carbon strategy Entering 2020 with conviction and good underlying momentum 4 2019 Full Year Results © Rolls-Royce

  5. Slide 5: Market environments

    Civil Aerospace • Large engine installed base grew 6% in 2019 and now exceeds 5,000 Market • In 2019 passenger air traffic returned to the long run average of 4-5% growth per annum environments • Airframer widebody build rate reductions announced ‒ WB engine deliveries: c.450 in 2020 & 400-450 p.a.

  6. Slide 6: Rolls-Royce sustainability strategy

    Products Technology Decarbonisation of our core markets Pursuing the Rolls-Royce Reducing Lowering fuel consumption, emissions and noise environmental impacts sustainability strategy • 1% average annual aero engine efficiency • Grew group electrical capabilities; acquisition of 2019 saw significant

  7. Slide 7: Business update

    Business update 7 2019 Full Year Results © Rolls-Royce

  8. Slide 8: Business overview: Civil Aerospace, Power Systems, Defence

    Civil Aerospace Power Systems Defence 2019 Full Year Results Overview Revenue +10% Revenue +4% Revenue +1% Profit +£195m Profit +15% Profit -7% • 64% market share in • Strong financial • All time record order WB gross orders in 2019 performance and 1.0x intake of £5.3bn, 1.6x book:bill despite book:

  9. Slide 9: Trent 1000

    • Trent 1000 MRO capacity tripled since 2017, further expansion in 2020 Trent 1000 • Trent 1000 spare engine pool doubled in 2017-2019; a further ~50% increase will be delivered in 2020 In service cash cost expectations • £578m cash costs in 2019, the peak year unchanged since for such costs Novembe

  10. Slide 10: Trent 1000: significant progress resolving issues

    IP Compressor IP Turbine HP Turbine Trent 1000 Significant progress FY 2018 Today FY 2018 Today FY 2018 Today resolving issues TRENT 1000 Package B 8 of the 9 fixes designed and 7 certified Certification H2 Progressing well on designing fix for TRENT 1000 FY 2018 Today FY 2018 Today FY 2018 Today Tr

  11. Slide 11: Trent XWB

    Trent XWB • The world’s most efficient large aero engine in service Excellent entry-into-service • Most important new engine programme: over 50% of expected annual deliveries Trent XWB-84 fleet leading engines are now • Fleet leaders in service for over entering 5th year in 3,500 cycles and over 22,

  12. Slide 12: Other large engine programme performance

    Trent 1000 Trent 700 Trent 7000 Other large engine programme performance 13% of 2019 installed base 32% of 2019 installed base 2% of 2019 installed base Installed fleet • Strong progress to solve • Proven market favourite • Shared architecture with durability; 8 of 9 fixes on the A330, with >60% Tre

  13. Slide 13: Widebody: medium term outlook

    Well placed to capture new demand: ~55% market share of widebody order book • Rolls-Royce widebody fleet is less than 8 years old on average • Non-Rolls-Royce widebody fleet is ~13 years on average Widebody Medium term outlook Rolls-Royce Widebody 12% Our young fleet and strong market position Insta

  14. Slide 14: Transformation

    Transformation 14 2019 Full Year Results © Rolls-Royce

  15. Slide 15: Corporate structure and transformation

    Transformation driven by: • Simplifying our organisational structure • Streamlining processes Corporate • Investing in digitalisation & automation • Enabling our people structure Created simpler structure Reduced indirect workforce by 10% with clear accountability and achieved run-rate savings of £2

  16. Slide 16: Balancing our Capital Allocation

    Existing products Future technologies R&D Spend £1.0bn £1.1bn Balancing our Delivering and enhancing 74% 70% Continuing to invest 25% Capital current production portfolio Next generation at least £1bn per year 55% Allocation gas turbines Low carbon 26% 26% Ramping up investment (electrical), 20% hyb

  17. Slide 17: Financial Review

    Financial Review Stephen Daintith Chief Financial Officer 17 2019 Full Year Results © Rolls-Royce

  18. Slide 18: Agenda for today

    Agenda for today 01 Full year results 02 Progress on key drivers 03 Business unit review 04 Guidance 18 2019 Full Year Results © Rolls-Royce

  19. Slide 19: Full year results

    01 Full year results 19 2019 Full Year Results © Rolls-Royce

  20. Slide 20: At a glance

    At a glance After a challenging first half we delivered a strong end to the year • Underlying operating profit growth 25% • Strong core FCF of £911m – good Civil Aerospace aftermarket growth, Trent 1000 insurance receipts secured • Civil Aerospace – further strong improvement in operating profit • G

  21. Slide 21: Revenue: in line or better than guidance

    As provided in 2018 Preliminary Results Organic Revenue Revenue (£m) 2019 Change 2019 Guidance 2018* underlying results Civil Aerospace 8,107 +10%  10% growth 7,378 Delivering strong growth Power Systems 3,545 +4%  mid-single digit growth 3,434 across the Group Defence 3,250 +1%  stable 3,124 ITP

  22. Slide 22: Operating profit: margin guidance met or exceeded

    As provided in 2018 Preliminary Results Operating 2019 vs 2018 Operating profit Profit (£m) 2019 Margin Guidance 2019 Guidance Margin 2018* underlying results Civil Aerospace 44 0.5%  closer to break-even (2.2)% (162) Core operating profit Power Systems 357 10.1%  ~100 bps higher margin 9.2% 315 i

  23. Slide 23: Strong Core FCF £911m

    • Strong end to 2019 following challenging first half; – Q4 inventory reduction – Disciplined spend control Strong Core FCF – Improved Q4 trading in Power Systems £911m – Trent 1000 - secured insurance receipts of £173m Further step towards our • Improved quality: Materially lower contribution from

  24. Slide 24: Group FCF of £873m, +£305m

    Group FCF of £873m, +£305m Drivers of £305m year-on-year improvement Operational cash flow improvement Improved sustainable +£507m Increased operating profit cash flow Growth in Civil deferred revenue (LTSA) Lower PPE capex as large projects end R&D cash spend stable; lower capitalisation Lower work

  25. Slide 25: Summary funds flow

    Summary £m 2019 2018 Change funds flow Underlying Operating Profit 808 616 192 Growth in Civil deferred revenue (LTSA) 754 679 75 Core FCF D&A in excess of lease payments 749 756 (7) ~£911 m +£507m PPE capex (747) (905) 158 Receivable and payables contribution £623m lower Capitalised R&D and certifi

  26. Slide 26: Working capital improvements

    Key actions: Working capital improvements Focus on durable working capital £390m improvements reduction in inventory in H2 • Delivery growth in Civil Aerospace and Power Systems in Q4 • Tight focus on supply chain management; will continue through 2020 • Buffer inventory of Series 1600 in Power Syst

  27. Slide 27: Significantly improved cash position

    • Year end net cash £1.4bn +£0.5bn YoY ‒ Led by Group FCF of £873m Significantly ‒ Commercial Marine & Power Development proceeds of £453m improved cash • £1.1bn reduction in gross debt: position ‒ Repayment of £500m bond at maturity (H1 2019) £1.1bn reduction ‒ Early repayment of £523m of EIB loans

  28. Slide 28: Progress on key levers

    02 Progress on key levers 28 2019 Full Year Results © Rolls-Royce

  29. Slide 29: Progress on our three fundamental levers

    2019 saw further progress delivered on key drivers of cash flow improvement Progress on our three OE widebody Widebody aftermarket C&A, R&D, fundamental average loss cash margin Capex levers £0.2m £0.3bn 280bps improvement improvement lower as % sales per engine Trent XWB-84 leads Strong growth in U

  30. Slide 30: Reduced OE average loss per engine

    Widebody engine deliveries Widebody avg. OE losses* Reduced OE 510 483 average loss per 469 engine (£1.2m) (£1.4m) (£1.6m) £0.2m 2017 2018 2019 2017 2018 2019 improvement * Installed widebody engines per engine Significant mix shift to new programmes 14% unit loss reduction despite shift to new 2018

  31. Slide 31: Widebody aftermarket cash margin

    Widebody aftermarket cash margin (pre-Trent 1000 costs) Civil Aerospace aftermarket U/L cash margin £1.6bn £1.9bn Drivers of improved income: cash margin • 7% EFH growth • Strong T&M growth In-service fleet 4,757 5,029 • Price escalation £0.3bn engines engines • Growth in pay at shop visit events im

  32. Slide 32: Driving value from services across the Group

    Core underlying revenue split £7.9bn services - driven by: Driving value Civil £4.9bn LTSA • ~90% of Trent engines covered by LTSAs from services OE £3.8bn 13% • Installed fleet ~5,000 large engines, ~9,000 across the Group £7.4bn small engines 3% £15.3bn Services now represents Total Power Systems

  33. Slide 33: Bending the fixed cost curve

    Summary C&A • C&A costs down 4%, £938m % of 6.9% from £977m sales 6.1% ~5% £1bn Bending the • PPE capex reduction £158m as £0.9bn fixed cost curve major capital projects near completion • R&D investment at highest levels £1,108m (2018: £1,106m) but falls as 280bps % of sales 2018 2019 CMD lower; tar

  34. Slide 34: Trent 1000 in-service cash costs

    • In-service cash cost expectations unchanged since November update Trent 1000 • ~£2.4bn total in-service cash costs in-service cash (2017-2023) costs • 2019 is the peak year for cost at £578m 2019 is the peak year • £173m insurance receipts secured for cost at £578m in December Cash costs Insurance

  35. Slide 35: Business unit review

    03 Business unit review 35 2019 Full Year Results © Rolls-Royce

  36. Slide 36: Civil Aerospace

    Organic £m 2019 2018 Change change Civil Aerospace OE revenue 3,246 3,119 +4% +4% Services – LTSA 3,138 2,752 +14% +14% Operating profit £44m Services - T&M/other 1,723 1,507 +14% +14% Underlying revenue 8,107 7,378 +10% +10% Gross profit 622 493 +26% +25% Underlying revenue by end market Gross marg

  37. Slide 37: Power Systems

    Organic £m 2019 2018 Change change Power Systems OE 2,386 2,310 +3% +4% Services – LTSA 134 128 +5% +6% Robust growth and margin improvement in Services – T&M/Other 1,025 995 +3% +4% challenging markets Underlying revenue 3,545 3,434 +3% +4% Gross profit 909 866 +5% +6% Underlying revenue by end mar

  38. Slide 38: Defence

    Organic £m 2019 2018 Change change Defence OE 1,461 1,452 +1% -2% Services – LTSA 566 530 +7% +3% Stable sales, excellent year for order intake and Services – T&M/other 1,223 1,142 +7% +5% cash flow Underlying revenue 3,250 3,124 +4% +1% Gross profit 669 690 -3% -6% Underlying revenue by end market

  39. Slide 39: ITP Aero

    Organic £m 2019 2018 Change change ITP Aero OE 782 666 +17% +19% Services 154 113 +36% +37% Good growth on Trent and non Rolls-Royce Underlying revenue 936 779 +20% +21% programmes Gross profit 206 156 +32% +33% Gross margin % 22.0% 20.0% +200bps +200bps Underlying revenue by end market Operating pr

  40. Slide 40: Guidance

    04 Guidance 40 2019 Full Year Results © Rolls-Royce

  41. Slide 41: 2020 outlook

    £m 2019 2020 Outlook 2020 outlook Underlying revenue Civil Aerospace 8,107 Stable to low single-digit growth Power Systems* 3,306 Low single-digit growth Operating profit growth Defence 3,250 Stable to low single-digit growth around 15% ITP Aero 936 Stable Core FCF at least £1bn Corporate / eliminat

  42. Slide 42: 2020 funds flow guidance

    ~£1bn Operating profit Growth around 15% 2020 funds flow guidance ~£750m LTSA deferred revenues broadly stable year-on-year +/- ~£150m Operating profit growth across all our of business ~£(600)m Capital spend* above D&A broadly stable year-on-year +/- ~£50m Continued progress against our key cash dr

  43. Slide 43: Business outlook

    Business outlook Warren East Chief Executive 43 2019 Full Year Results © Rolls-Royce

  44. Slide 44: 2020 outlook

    2020 outlook “The momentum we gained in 2019 underpins our confidence for the year ahead… Core operating profit growth is expected to be around 15% with at least £1bn of FCF in 2020, as we drive towards our ambition to exceed £1 of free cash flow per share in the mid-term (at least £1.9bn FCF)” Guid

  45. Slide 45: Managing COVID-19

    Managing Procedures in place to ensure We are actively monitoring the COVID-19 the health, safety & wellbeing situation & taking appropriate A macro-risk for 2020 of our people actions. We will update the market as appropriate COVID-19 is likely to have an impact on air traffic growth in the near te

  46. Slide 46: 2020 priorities

    2020 priorities Customers Operations • Meet customer commitments • Drive operational excellence and • Bring Trent 1000 AOGs down reduced inventory to single digits • Achieve £400m run-rate savings on restructuring Finance People & culture • Deliver significant operating profit • Deliver leaner and m

  47. Slide 47: Long-term priorities

    Long-term priorities Realise our ambition to be the world’s leading industrial technology company • Embed behavioural change and a desire for continuous improvement • Drive operational and financial improvement; exceed £1 per share FCF in the mid term • Transition to low carbon power: a growth oppor

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