Rolls-Royce Holdings plc · LSE:RR.
Rolls-Royce — FY2017 Earnings Presentation
70 slides from Rolls-Royce's earnings presentation, February 2018
Slide 1: 2017 Full Year Results
2017 Full Year Results 2017 Property Full Year information, Results strictly private and confidential Property information, strictly private ©2018andRolls-Royce confidential, ©2018 Rolls-Royce
Slide 2: Jennifer Ramsey, Head of Investor Relations
Jennifer Ramsey Head of Investor Relations 2017 Property Full Year information, Results strictly private and confidential Property information, strictly private ©2018andRolls-Royce confidential, ©2018 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 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 4: Safety Notices
Safety Safe Mobile Harbour Phones Notices 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 5: Highlights
Highlights Warren East Chief Executive 2017 Property Full Year information, Results strictly private and confidential Property information, strictly private ©2018andRolls-Royce confidential, ©2018 Rolls-Royce
Slide 6: Results summary
Underlying revenue Underlying gross profit Results summary £15.1bn 6 %* £2,973m 1 %* “encouraging results” Underlying PBT Underlying operating margin £1.07bn 25%* 7.8% 100bps* Free cash flow ‘Dividend’ per share £273m 2016: £100m 11.7p 2016: 11.7p p 6 2017 Full Year Results Property information, str
Slide 7: FY17 overview
FY17 Operational summary overview Large engine flying hours up 12%; in-production Trents up 22% Large engine deliveries up by 35% to a record 483 Trent XWB-84 OE economics cash deficit down 37% Strong recovery in Power Systems under new leadership Successful UltraFan® power gearbox power t
Slide 8: Challenges in Civil
Trent 1000 Trent 900 lower than expected lower than expected Challenges durability of intermediate durability of high in Civil and high-pressure pressure turbine turbine blades and blades compressor rotor blades “increasing challenge of managing significant in-service engine issues” Mitigation re-
Slide 9: Progress in Civil
Progress in Ramp up Growth Deficit Civil reduction 35% 12% 37% “achieved a number growth in growth in reduction in of important large engine large engine Trent XWB-84 deliveries invoiced flying cash deficit operational and hours technological milestones” New New engines technology Three new Advance3
Slide 10: Progress in Power Systems
Progress in Transform Meaningful Simplify Power New Improvement >20% Systems leadership in profitability reduction in team driven and cash flow product “encouraging significant variants efficiencies momentum” Potential R&D Provides high-speed and Digitalisation Focus on low- medium-speed provides em
Slide 11: Progress in Defence Aerospace
Progress in Access Upgrade Renewal Defence Sales and All key $1.4bn of US Aerospace distribution agreement milestones in modernisation DoD service contract significantly of US facilities renewals for “another solid year” improves delivered >18% of in- coverage and services engines reach V-22 Service
Slide 12: Progress in Nuclear and Marine
Progress in Nuclear Retrofit Astute Investment Nuclear and Milestones Operational Raynesway Marine reached for safety-critical and delivery improvement facility to support systems in Dreadnought “executing on Finland and programme restructuring France programmes” Marine Ship Cost Strategic intellige
Slide 13: ITP Aero
Sales by market The business is mainly ITP Aero driven by a range of good platform “acquisition of positions across Large, Narrow and business outstanding stake” aviation for Rolls- In-service support (MRO activity) Royce and other aero Defence engine manufacturers Civil aerospace market FY17 Financ
Slide 14: Priorities for 2017
Priorities for 2017 Strengthen Sustain Rebuild Develop ...our focus on ...the strong ...trust and ...our long- engineering, start to our confidence term vision operational transformation in our long- and strategy and service programme term growth excellence prospects 14 2017 Full Year Results Proper
Slide 15: Strengthen: Engineering excellence
Strengthen: Engineering restructured Engineering CTO appointed excellence New programmes - Trent 1000-TEN, Trent XWB-97 and Trent 7000 Created electrical expertise group “sustaining significant R&D expenditure is fundamental to our Engineering R&D Engineering strategy and long- innovation sp
Slide 16: Strengthen: Operational excellence
Strengthen: Creating an agile, highly productive and cost competitive manufacturing footprint Operational Invested £764m in tangible capital expenditure excellence Rapid adoption of advanced digital techniques “our new factories have already undergone a digital Production ramp Productivity Ope
Slide 17: Strengthen: Service excellence
Strengthen: Civil Aerospace worked to minimise customer disruption from in-service Trent 1000 and Trent 900 fleet issues Service Defence Aerospace opened two further dedicated Service excellence Delivery Centres “service focus is driven Power Systems commenced first availability contract by cu
Slide 18: Sustain: Strong start to our transformation programme
Sustain: Completed our transformation programme originally outlined in November 2015 Strong start Internal communication is key to our transformation Cultural change starts at the top programme New restructuring plan aims to take this to the next level “achieved top end Achieved Simplicity o
Slide 19: Rebuild: Trust & confidence in long-term growth prospects
Rebuild: Greater financial transparency Trust & confidence Acting on our promises in long-term Delivering growth prospects “doing what we said CMD PRESENTATION “…Transform restructuring 2017 HY RESULTS PRESENTATION ‘in March next year, share ideas around FURTHER SIMPLIFICATION OF BUSINESS we w
Slide 20: Rebuild: Cash growth drivers
Rebuild: Cash growth drivers Trust & confidence in long-term growth prospects Increase in cash inflows from engine flying hours on growing “around £1bn by installed base around 2020” Increasing contribution from non-Aero businesses Reduction in cash outflows from Civil engine production Indi
Slide 21: 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 Champion Reinvent with digital Transform our electrification Business Vi
Slide 22: Priorities for 2017
Priorities for 2017 Strengthen Sustain Rebuild Develop ...our focus on ...the strong ...trust and ...our long- engineering, start to our confidence term vision operational transformation in our long- and strategy and service programme term growth excellence prospects 22 2017 Full Year Results Proper
Slide 23: Financial Review, Stephen Daintith
Financial Review Stephen Daintith Chief Financial Officer 2017 Property Full Year information, Results strictly private and confidential Property information, strictly private ©2018andRolls-Royce confidential, ©2018 Rolls-Royce
Slide 24: Agenda
Agenda 01 Full year results 02 Business unit review 03 IFRS 15 and other accounting policy updates 04 Outlook and guidance 24 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 25: Full year results
01 Full year results 25 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 26: Encouraging results
Organic Underlying £m 2017 2016 Change change Results Underlying revenue 15,090 13,783 +9% +6% Overview Underlying gross profit 2,973 2,818 +6% +1% Gross margin % 19.7% 20.4% -70bps -100bps Research and development costs (737) (862) -15% -18% C&A (1,168) (1,158) +1% -3% Underlying operating profit 1
Slide 27: Increasing OE & LTSA revenues
Organic Increasing £m 2017 2016 Change change OE & LTSA OE revenue 7,687 7,027 +9% +6% revenues LTSA service revenue 3,695 3,375 +9% +8% Other service revenue 3,708 3,381 +10% +6% Group revenue 15,090 13,783 +9% +6% Gross margin (%) 19.7% 20.4% -70bps -100bps (24%) Other Good visibility of revenue
Slide 28: R&D
Organic R&D £m 2017 2016 Change Gross R&D 1,392 1,331 +1% Net R&D up 7% Third party contributions (357) (394) -12% Increase of c.£50m Net R&D spend 1,035 937 +7% in net R&D Amortisation 83 87 -7% expected in 2018 Capitalised (342) (99) +236% - incl. policy application change: £83m RRSP contributions
Slide 29: Civil Aerospace R&D
Ultrafan Targeting 25% fuel efficiency improvement Civil increased propulsive efficiency (greater thrust) Aerospace improvements to the thermal cycle efficiency (emissions) R&D airframe integration benefit (life of components) Higher capitalisation also Civil Aerospace Impact on Group R&D poli
Slide 30: C&A
C&A C&A costs: £1,168m Commercial & Administration costs include: Focus for initial phase of our restructuring Pay & benefits General management programme Indirect & 3rd party C&A Communications Property Finance, HR, Legal Strategy & “Lean corporate centre business development – empowered bu
Slide 31: Group cash flow
Material drivers of £173m growth in FCF in 2017 Group - Cash outflows from higher installed engine production in Civil cash flow + Increased cash revenues from aftermarket growth £273m* - ahead of - Trent 900/1000 engine issues expectations + Strong Power Systems margin improvement Around £450m - In
Slide 32: Business Unit review
02 Business Unit review 32 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 33: Civil Aerospace: overview
Organic Civil £m 2017 2016 Change change Aerospace: OE 3,818 3,357 +14% +12% overview AM - LTSA 2,941 2,631 +12% +10% AM - T&M/other* 1,264 1,079 +17% +17% Solid growth in Underlying revenue 8,023 7,067 +14% +12% revenue and Gross margin 1,192 1,185 +1% -2% operating profit Gross margin % 14.9% 16.8
Slide 34: Civil Aerospace: drivers
Civil Aerospace: 1 UNDERLYING REVENUE 2 GROSS MARGIN 3 OPERATING MARGIN drivers REDUCTION SLIGHT IMPROVEMENT Record deliveries OE growth: increase Margin impacted by Reflects gross in large engine greater percentage margin decline Double-digit deliveries (up 35%) of OE EFH growth Increased R
Slide 35: Key Civil cash drivers
The road map to a growing Civil FCF Key Civil cash drivers 1 OE ECONOMICS 2 SERVICE VALUE 3 COST MANAGEMENT AND CAPITAL Cash margin per Growth in installed Focus on operations engine sold engine base /C&A costs (restructuring) Trent XWB-84 Growth in flying progressing hours Disciplined c
Slide 36: Engine deliveries
2017 deliveries Engine 22% Trent XWB deliveries 41% Trent 700 Record levels of widebody 14% Trent 900 deliveries Trent 1000 Record numbers 23% Fewer business jets Further growth (200 down from 292) in 2018 Widebody engines Both are cash headwinds ~550 +35% Around 550 large engine deliveries expected
Slide 37: Installed engine economics
Installed Trent XWB-84 economics Other widebody installed engine Much better progress in 2017 engine economics economics Launch pricing burn off combined with unit cost reduction Reduction from Trent XWB-84 diluted by price pressure on other programmes: Overall average installed engine – Trent
Slide 38: Fleet performance
Fleet In-service fleet Invoiced flying hours performance Trent engine growth driving increase In-production fleet growth, with high in widebody fleet TotalCare coverage, driving increase in aftermarket cash Large engines Trent fleet Large engines In-production fleet growth +6% +7% +4% +12% 4,137 4,4
Slide 39: Major engine refurbishment overhauls
Major Engine Large engines Growth in refurbishment refurbishment overhauls of younger fleet offset overhauls – by decline in legacy engine LTSA 240 240 overhauls Significant step down in regional Flat number of overhauls in 2016 overhauls despite growing fleet Business aviation overhauls c.350 check
Slide 40: Civil Aerospace: trading cash flow
£bn 2017 2016 Civil Original Equipment 444@ £1.6m (0.7) 320@ £1.6m (0.5) Aerospace: Services 12.6m invoiced EFH 1.3 11.2m TotalCare EFH 1.0 trading cash flow Spare engines 0.2 Cash growth from 0.2 Widebody Cash Margin 0.8 large engine 0.7 services more than Business & Regional 0.7 0.7 offsetting hig
Slide 41: Major Civil Aerospace drivers
Over the next Major Civil Widebody 2017 5 years Aerospace Installed engine deliveries 444 CAGR c.5% drivers Spare engine deliveries 39 CAGR c.5% Significant drivers of Installed cash deficit per engine £(1.6)m c.£(0.4)m cash flow over the next 5 years In-service fleet 4,409 CAGR c.8% In On Invoiced
Slide 42: Programmes: Trent 700, Trent 7000, Trent XWB-84
Trent 700 (1,590 in service) Trent 800 (330 in service) 2017 Engine flying hours Total cumulative fleet hours deliveries Programmes 25 % +9% 28m Dispatch Solid in-service performance by over 88 110 reliability in 2017 13 80% of fleet 2016 2017 99.9% aircraft transitions in 2017 Trent 700 is signific
Slide 43: Programmes: Trent 1000 and Trent 900
Trent 1000 (476 in service) Trent 900 (360 in service) Total cumulative 2017 deliveries 30 to 67 fleet hours Programmes >4.5 m 123 % 30 67 2016 2017 Cost of Trent 1000 and Trent 900 in- Engine flying hours +45% Engine flying hours service issues: £170m cash cost in 2017 Trent 1000-TEN +11 % Powere
Slide 44: Power Systems: overview
Organic Power £m 2017 2016 Change change Systems: OE 1,961 1,810 +8% +1% overview Services 962 845 +14% +6% Underlying revenue 2,923 2,655 +10% +3% Encouraging signs Gross margin 842 702 +20% +12% for 2018 Gross margin % 28.8% 26.4% +240bps +240bps Operating profit 330 191 +73% +61% Strong services
Slide 45: Power Systems: drivers
Power Systems: 1 UNDERLYING REVENUE 2 GROSS MARGIN 3 OPERATING MARGIN drivers Better end-market 240bp improvement: Focused R&D spend environment product mix benefit (down 6%) 11.3% 10.4% 9.3% Stable OE but Improved H1-H2 C&A costs down 7% 8.1% 2,831 7.2% 2,923 growing services balance he
Slide 46: Power Systems: RRPS 2018 transformation
Performance push OE sales and service push ~£350m Revenue impact 2017 vs 2015 Power Working capital optimisation ~7% Net working capital reduced vs 2015 Systems: Material cost reduction ~4% EBIT impact 2017 vs 2015 RRPS 2018 Structural cost reduction transformation Engine variants ~30% Reduc
Slide 47: Defence Aerospace: overview
Organic Defence £m 2017 2016 Change change Aerospace: OE 966 890 +9% +4% overview AM - LTSA 413 462 -11% -13% AM - T&M 896 857 +5% +1% Margins impacted by Underlying revenue 2,275 2,209 +3% -1% lower LTSA lifecycle Gross margin 575 564 +2% -2% cost reductions Gross margin % 25.3% 25.5% -20bps -20bps
Slide 48: Defence Aerospace: 2017 drivers
Defence Aerospace: 1 UNDERLYING REVENUE 2 GROSS MARGIN 3 OPERATING MARGIN 2017 drivers OE revenue up: Adverse margin mix: R&D costs up 10% – Transport & – lower legacy on future Transport Patrol partly spares volumes programme spend offset by lower – lower one-off £14m headwind as Combat sal
Slide 49: Defence Markets overview
US UK Export (c. 60% revenues) (c. 15% revenues) (c. 25% revenues) Defence Strong position on 2010 MoD Defence Principally leveraging Markets Transport & Patrol review drove significant existing UK technologies fleets but significant budget constraints overview competition from A&D OE/servic
Slide 50: Marine and Nuclear: drivers
1 UNDERLYING REVENUE 2 GROSS MARGIN 3 OPERATING MARGIN Marine: Revenues down 9% reflecting declining Cost-cutting programmes R&D spend flat, focused on drivers OE activity in weak mitigating volume thrusters & ship markets declines intelligence £m 2017 2016 Revenue 1,077 1,114 Services stabl
Slide 51: IFRS 15 and other accounting policy updates
03 IFRS 15 and other accounting policy updates 51 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 52: IFRS 15: no change to cash
IFRS 15 No change No change to Significantly Continue long- no change to in-year cash total profit or cash over the improves transparency term contract accounting for to cash life of a long on Civil LTSAs – term contract Aerospace OE accounting – much closer adjustments Will bring greater to cash re
Slide 53: IFRS 15 2017 analysis
IFRS 15 Current accounting IFRS 15 2017 analysis Group underlying 2017 Change 2017 OE revenue (£m) 7,687 (928) 6,759 Principal Group AM revenue (£m) 7,403 (480) 6,923 impact is from Civil Total revenue (£m) 15,090 (1,408) 13,682 Aerospace Operating profit / (loss) (£m) 1,175 (854) 321 Bigger profit
Slide 54: Major IFRS 15 drivers
OE revenue and margin Recognise a profit, or a loss where costs exceed price Unit volumes Major IFRS Unit cost 15 drivers Sales prices net of concessions Risk and revenue partner share of revenues Service revenue and margin Recognise revenue on long term service contracts as cost is incurred
Slide 55: IFRS accounting issues on the horizon
IFRS 9 IFRS 16 Accounting Financial Instruments Leases issues on the horizon Simplified 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
Slide 56: Outlook and guidance
04 Outlook and guidance 56 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 57: 2018 Outlook and new segment format
£m 2017 IFRS 15 2018 Outlook Underlying revenue 2018 Civil Aerospace Defence 6,613 3,184 High single-digit growth Stable Outlook Power Systems 3,106 High single-digit growth Other* 779 New segment Group 13,682 Mid single-digit growth format Underlying operating profit Civil (330) Losses up to third
Slide 58: Outlook commentary
Civil Aerospace ITP Aero Revenue growth from higher OE delivery Double-digit revenue growth driven by volumes and services activity strong increase in delivery volumes of new civil programmes Outlook Higher services activity driving profit growth. Around £50m increased R&D Margin contraction
Slide 59: H1 2018 format
Organic H1 2018 £m 2018 H1 2017 H1 Change change format Civil Aerospace x,xxx x,xxx +x% +x% How we expect Defence x,xxx x,xxx +x% +x% to report at the Power Systems x,xxx x,xxx +x% +x% ITP xxx xxx +x% +x% half year Other/eliminations (xxx) (xxx) Group continuing x,xxx x,xxx Civil Nuclear Submarines
Slide 60: Group cash flow 2018 outlook
Group cash Cash outflows from higher installed engine flow production in Civil 2018 outlook Increased cash revenues from aftermarket growth £450m FCF +/- £100m Increase in-service costs Reduction in C&A costs Further working capital improvements Higher tax 60 2017 Full Year Results Property informat
Slide 61: Dividend
Dividend Dividend held steady at same level as 2016 Part of overall capital allocation considerations Conscious linkage to FCF generation Board to review policy in 2018 Final dividend Full year dividend Cash cost 7.1p 11.7p £214m 61 2017 Full Year Results Property information, strictly priva
Slide 62: Summary
Summary 62 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 63: Priorities for 2018 remain the same
Priorities for Costs Cash Clearing the fog 2018 remain Restructuring Enhanced analysis IFRS15 the same announced Changing the Drivers of Pace & simplicity internal language performance Capital Markets Event Incentive schemes Simpler view Target mid-June Restructuring Balance shee
Slide 64: Summary
Summary 1 2 3 4 Delivering Improving With a focus Restructuring priorities financial on cash programme performance driving pace & simplification & efficiency 64 2017 Full Year Results Property information, strictly private and confidential, ©2018 Rolls-Royce
Slide 65: Business outlook, Warren East
Business outlook Warren East Chief Executive 2017 Property Full Year information, Results strictly private and confidential Property information, strictly private ©2018andRolls-Royce confidential, ©2018 Rolls-Royce
Slide 66: Vision & strategy: Pioneering the Power that Matters
Pioneering the Power that Matters Vision & Rolls-Royce pioneers cutting edge technologies that deliver the cleanest, strategy safest and most competitive solutions to meet our planet’s vital power needs Champion Reinvent with digital Transform our electrification Business Vitalise existing capabilit
Slide 67: Fit for purpose
Fit for Restructuring announced - five to three business units purpose Strategic review of commercial marine Existing five operating businesses Civil Power Defence Aerospace Systems Aerospace Nuclear Marine £8.0bn £2.9bn £2.3bn £0.8bn £1.1bn Civil Nuclear Submarines Naval Marine Commercial £0.2b
Slide 68: Priorities for 2018
Priorities CUSTOMERS TECHNOLOGY for 2018 mitigate impact to focus through “to make meaningful rectify in-service product digitalisation, issues, ramp up large electrification and progress in meeting engine production, revitalisation our strategic, grow service operational and capabilities financial
Slide 69: Significant progress; clear priorities for the team
2017 2018 Clear priorities Growth “encouraging results” “significant progress” for the team expectations remain positive Operational focus on Meaningful progress in Restructure to better Long-term market ramp-up, delivery free cash flow generation serve customers demand in Aerospace, performance, ne
Slide 70: Safe harbour statement
Safe harbour This announcement contains certain forward-looking statements. These forward- statement 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 r