© Rolls-Royce Group plc 2004
Legal information
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The period since the tragic events of September 11, 2001 has
been one of great challenge for our Group, and particularly for the
civil aerospace sector. The initial impact of those events was
subsequently exacerbated by the Iraq war and the outbreak of the
SARS virus during the first half of 2003. However, two key components have enabled us to achieve this year’s successful outcome: first, a strong business model based on a consistent strategy of providing power systems and support for four global markets with a common technology focused mainly on the gas turbine and, second, committed people throughout the Group who understand our objectives, are focused on our customers and are prepared to support the changes necessary to enable us to be competitive. I would like to take this opportunity to thank all our employees for their dedication and commitment. We have built a well-balanced business, with revenues evenly divided between original equipment sales and high value-added aftermarket services. This balance has reduced our exposure to a downturn in any particular sector. As a result we have been able to mitigate the impact of the continuing recession in civil aerospace, which saw a further 13 per cent fall in civil engine deliveries in 2003. Civil engine deliveries have nearly halved from a peak of 1,362 in 2001, and now account for approximately 20 per cent of our total sales. The successful implementation of our services strategy has resulted in ten per cent compound annual growth in aftermarket revenue over the past five years. In 2003 this revenue amounted to £2.8 billion, or 50 per cent of our sales. It represents a reasonably predictable and growing source of revenue based on an increasing number of long-term, contractual relationships with our customers. Further visibility is provided by our order book which, despite the difficult market conditions, grew to a record year-end level of £17.4 billion, with a further £1.3 billion of business announced but not yet under contract. The pension fund deficit has been an area of considerable uncertainty. We were able to contain the cost of additional funding in line with the guidance we provided in 2002 with a combination of changes to the benefit structure and a £35 million annual increase in contributions from the Group. This ensures that we can continue to offer an affordable and attractive defined benefit pension scheme. Over recent months the US dollar has weakened significantly relative to sterling. The nature of our activities means that the Group has always had an exposure to the dollar exchange rate. We have therefore pursued a consistent strategy of hedging dollar revenues and this has operated successfully for more than 15 years, including periods where the exchange rate has been above two dollars to the pound. During this period we have maintained an achieved rate within a range of ten cents, while the spot rate has moved in a range of 63 cents. We currently have approximately US$10 billion of forward cover at rates which will enable us to achieve a stable rate over the next four years. |
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We have completed the major rationalisation programme announced in October 2001. At the year-end we employed 35,200 people, a net reduction of 2,100 during the year and a reduction of 8,300, or 19 per cent, since the programme was announced. In addition there has been a reduction of 1,000 contract jobs. Rationalisation expense over the past two years has amounted to £247 million. It is encouraging that, in spite of this, and the additional debt of £133 million that we brought onto the balance sheet as a result of sales financing obligations, we have generated a net cash inflow of £178 million over this period, demonstrating our robust trading performance. We will continue to focus on operational excellence, including rationalisation of our facilities, improvement of manufacturing processes, supply chain restructuring and lead-time reduction in order to increase productivity and reduce product and operating costs. Costs associated with these activities will be included within underlying earnings. We have become a truly international business with customers in more than 150 countries. We have facilities in 48 countries; 40 per cent of employees are based outside the UK, representing 40 nationalities. More than 80 per cent of sales are to destinations outside the UK and nearly 40 per cent of sales originate outside the UK. The Group’s priorities are:Focused investment in technologyAdvanced technology is at the heart of our success. Following a decade of high investment in new product development, the market requirement for new products is now slowing down. Technology acquisition, as well as supporting new product development, will increasingly focus on the development of derivative products, unit cost reduction, improvement of in-service operation and extending the scope and value of our service capabilities.Operational excellenceWe continue to manage our operational and unit costs effectively. Over the past two years, despite a 45 per cent reduction in civil engine deliveries, we have maintained a healthy balance sheet and produced a creditable operating performance. In 2003 we accelerated the implementation of our improvement initiatives and continued to focus on reducing both operating and product unit costs. We will benefit from the lower cost base as workload recovers.Development of aftermarket servicesThe Group’s installed base of 54,000 engines in service has created a substantial aftermarket opportunity. The development of innovative, long-term service agreements, such as TotalCare in the civil sector and Mission Ready Management Solutions in the military sector increases this opportunity. It expands the scope of services from traditional support such as spare parts supply and repair and overhaul, to enhanced services such as engine health monitoring and predictive maintenance. Our unique knowledge of our products and proprietary technology creates a competitive advantage in the provision of these services and enables us to add significant value for our customers. |
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ProspectsIn 2004,In order to celebrate our centenary, we are launching a major new initiative called the We have created a strong international Group with a balanced business portfolio and we expect to increase profits in 2004, despite challenging conditions in some of our markets. Over time, we believe that the Group is capable of achieving a ten per cent return on sales, across all its businesses, as the business model matures and our operational efficiency continues to improve. In civil aerospace the long-term trends for growth in air travel remain favourable. With our wide product range and innovative service offerings, we are well placed to continue to secure a substantial share of this market. In the short term, the flying of the relatively young Our defence aerospace business has established a strong position in the world market, with a broad portfolio of programmes and a large customer base. In the short term, we expect the mix of programmes to provide a stable outlook. Over the medium term we will benefit from the continuing development of the programme portfolio and the increasing service opportunity. Our marine propulsion business is a world leader. Over recent years its growth has been led by the commercial offshore support sector, which is now slowing down. However, a re-equipment cycle in the naval sector, new opportunities in the merchant sector and the expansion of our services activity in the commercial marine market are expected to enable us to continue to develop this business. Our energy business returned to profit in 2003, following a programme of new product investment and the costly technical problems associated with the industrial Trent. The industrial Trent is now fully released for sale and we expect to increase our market share in power generation as the market recovers over the next few years. The oil and gas market remains strong and we are securing a high share of the available business, including important new contracts in the gas transmission area. Over recent years, the business has benefited from the receipt of technology fees, which we expect to reduce in 2004. The Group is in a sound financial condition. In 2003 the level of average net debt was reduced by £140 million to £950 million. We expect to continue to reduce average net debt. At the year end, gearing stood at 15 per cent and the company had £2.2 billion of total committed borrowing facilities, following two successful refinancings amounting to £380 million in the US and Asia and the retirement of £780 million of maturing facilities. For more than a decade, The long-term nature of our product programmes results in returns over many years. The high value-added aftermarket services opportunity created each time a gas turbine is sold provides the key to adding value for our customers and maximising these returns. Our successful strategy to capture this opportunity, coupled with the increasing efficiency of our operations, underpins our confidence in the future.  Sir John Rose Chief Executive |
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