Rolls-Royce Group plc Interim Results 2008

Thursday, 24 July 2008

Group Highlights

  • Order book increased by 17 per cent to £53.5 billion (2007: year end £45.9 billion).
  • Group sales increased to £4,049 million. Sales on an underlying basis* increased by 12 per cent to £4,211 million.
  • Services revenues increased by 12 per cent to £2,242 million on an underlying* basis, representing 53 per cent of Group sales.
  • Underlying profit before taxation* increased to £410 million, up eight per cent.
  • Profit before taxation of £389 million (2007: first half £377 million).
  • Average net cash of £265 million (2007: first half £373 million).
  • Cash outflow of £44 million (2007: first half cash inflow of £61 million before special £132 million injection to the UK pension schemes).
  • Interim payment to shareholders of 5.72 pence per share.

*see note 3

Sir John Rose, Chief Executive, said:

"We have delivered a strong set of first half results.

"Over the last decade, Rolls-Royce has pursued a consistent strategy which has created a global power systems company with a broad and diverse portfolio of products and services.

"The youth, scale and geographical diversity of our Civil Aerospace installed base, along with our broad portfolio, will help mitigate the consequences of uncertain conditions in the airline industry. Our other businesses are increasingly material and are performing well.

"We are confident that we will continue to deliver profitable growth and positive cash flow for the full year."

Group Overview

Rolls-Royce made strong progress in the first half of 2008, again increasing both underlying profit and earnings per share.

The Group’s order book grew by £7.6 billion to £53.5 billion, further extending the visibility of future revenues. The profile of the order book continues to become more international, with the growing Asian and Middle East markets now accounting for over 40 per cent of the total.

Sales in the period increased by 12 per cent on an underlying basis to £4,211 million and underlying aftermarket sales also increased by 12 per cent.

Underlying profit before tax increased by eight per cent to £410 million. This increase in profitability was achieved after the impact of a further five cent deterioration in the US dollar achieved exchange rate, increases in energy and commodity costs and a £36 million increase in restructuring charges. The increased charge for restructuring was mainly due to the programme, announced in January, to reduce the number of people working on support functions by 2,300 people. In addition, a one-off charge of £16 million was taken in the civil business.

At the end of the first half, the hedge book stood at $9.1 billion with an average exchange rate of 1.87 US dollars to the pound, a deterioration of four cents from the start of 2008. For 2008 as a whole, the Group continues to forecast a deterioration in the achieved rate of between six and eight cents relative to 2007, at an incremental cost to the Group of around £100 million over the full year.

The consistent strategy pursued by the Group over many years has created a broadly based power systems company. The breadth, diversity and materiality of the Group’s portfolio of businesses and products, access to global markets, a growing installed base, the expansion of the Group’s aftermarket services business and the strength of the balance sheet all place Rolls-Royce in a good position to deal with the challenges of the current economic environment.

Activity in the Group’s Civil Aerospace business has continued to increase strongly in the first half despite the impact of global economic pressures and rising fuel prices on the civil aviation industry. Underlying service revenues increased by ten per cent to £1,322 million in the first half and the order book by 17 per cent to £42.1 billion.

Demand for widebody aircraft remained strong and Rolls-Royce now has a 50 per cent share of this sector. Programmes in the business jet market continued to sell well, with 191 deliveries in the first half, an increase of four per cent. The successful launch of the Rolls-Royce powered Gulfstream G650 extends the Group’s footprint in this sector and has attracted a positive market response.

The civil aviation industry will not be immune from the effects of high oil prices, the economic downturn and constraints on financing. However, the impact on the Civil Aerospace business should be mitigated by a number of factors:

  • The widebody and corporate sectors, which together account for more than 75 per cent of Civil Aerospace original equipment revenues, continue to be resilient. The delays to the Airbus A380 and Boeing 787 programmes have reduced planned capacity in the widebody sector by around 300 aircraft over the next three years and caused firmer demand for existing widebody products.
  • The relative youth and fuel efficiency of the Rolls-Royce installed base, which has an average age of eight years, make it less likely that Rolls-Royce powered aircraft will be grounded than older and less efficient aircraft. The majority of announced retirements to date have been narrowbody aircraft or aircraft over 20 years old. In the narrowbody sector the Rolls-Royce effective share is less than ten per cent of the current generation market and less than ten per cent of the Rolls-Royce narrowbody fleet is more than 20 years old.
  • The scale and diversity of the Rolls-Royce installed base, with the number of Rolls-Royce engines having grown by 75 per cent over the last ten years and with a further 462 engines delivered in the first half of 2008, will continue to support growth in aftermarket revenues.

The Marine business is benefiting from high levels of activity in the oil and gas sector and has enjoyed a very strong first half with its order book rising by 17 per cent. The oil industry is increasingly investing in deep water, offshore exploration and development, as well as in compression and transportation systems, which generate demand for high specification, bespoke vessels and equipment. This activity is opening up new opportunities for Marine in the supply of offshore ship designs and equipment.

Defence Aerospace continued to benefit from strong US demand, which now accounts for around 45 per cent of its revenues. The business maintained its lead in the military transport sector where the AE series of engines has made strong progress. The programme uses a common core and production facilities across a wide range of applications for the transport sector, including the C-130J, the C-27J, V-22 Osprey TiltRotor and the Global Hawk UAV. These applications will drive significant growth in engine deliveries in the second half of 2008 and beyond, with the C-130J and the V-22 alone expected to generate deliveries of around 160 engines a year over the next few years.

Energy is also benefiting from increased worldwide demand in the oil and gas production sector, driven by higher oil prices and, in the land-based power generation market, by the need for increased peaking capacity. This is opening up new opportunities for the business in the supply of gas turbines and compressors for land-based and underwater pipelines, as well as for power generation on rigs and Floating Production, Storage and Offloading vessels.

The balance sheet is robust, with the Group enjoying a strong cash position and credit rating. This enables the Group to take on long-term commitments, pursue investment opportunities as they arise and deal with any short-term consequences of the current economic environment. Changes to the Group’s defined benefit pension schemes in 2007, including a £500 million cash injection and a reallocation of investments, have significantly reduced volatility in funding requirements.

The Group saw a cash outflow in the first half of £44 million (2007: cash inflow £61 million before special £132 million injection to the UK pension schemes), due to a range of factors including restructuring costs and increased inventory. However, the Group continues to expect a positive cash flow over the full year. Average net cash fell by £108 million to £265 million over the period, primarily reflecting the timing of the cash injection into the pension fund late in 2007.

Underlying earnings per share increased by nine per cent to 17.15p per share (2007: first half 15.72p per share). Basic earnings per share were 16.22p (2007: first half 17.12p).

An interim payment to shareholders has been declared of 5.72p per share (2007: first half: 4.04p). For the 2007 full year, the payment increased by 35 per cent compared with 2006. This interim payment is expected to be around 40 per cent of the full year payment for 2008.

Developments

Rolls-Royce is well placed to continue to develop its business and is investing in new programmes. In March, it launched the BR725, the exclusive engine for Gulfstream’s new G650 corporate jet which is targeting an engine market worth around $14 billion. Also in March, the Group announced that the RR300 helicopter engine, for Robinson Helicopter’s R66, had been awarded its Federal Aviation Authority (FAA) Type and Production Certificate, becoming the first engine to roll off the Group’s new small engine assembly line at Indianapolis. These two engine programmes demonstrate how the Group has continued to broaden its product portfolio.

Since the launch in July 2006 of the Airbus A350 XWB, for which the Trent XWB is currently the sole engine, firm orders have been placed to date for more than 700 engines. The engine addresses a sector of the market estimated to be worth $186 billion over the next 20 years.

There have also been significant developments in Marine and Energy. The Group has continued to develop its marine capability and earlier this month announced its intention to acquire Scandinavian Electric Holdings, a supplier of system packages for diesel electric propulsion systems. Rolls-Royce is also particularly well positioned to respond to the increasing interest in the environmental impact of shipping. It is developing further versions of its successful Bergen gas engine to respond to the impact of increasingly stringent environmental restrictions.

The Group is also seeking to broaden its Energy portfolio to address new opportunities in civil nuclear and distributed power. In July, it announced the reshaping of its nuclear business to apply Rolls-Royce’s existing capabilities to the expanding civil nuclear market, which is estimated to be worth up to £50 billion a year in 15 years time. In March, the Group took a 23.5 per cent equity stake in TGL, a privately owned company developing a free stream tidal power generation capability.

More generally, the Group has maintained its commitment to research and development (R&D). R&D investment funded by the Group in the first half was £222 million, or 5.3 per cent of underlying Group sales. Around two thirds of this investment is devoted to improving the environmental performance of the Group’s products.

The Group has continued to expand its global footprint and strengthen its operational performance. In Singapore, the ground-breaking ceremony took place for the new engine assembly and test facility for large commercial aero engines, which the Group announced in 2007. Also in development is Crosspointe, a new advanced manufacturing, assembly and test facility in the Commonwealth of Virginia in the US.

Good progress has been made with the programme announced in January to reduce by 2,300 the number of people working in support areas. To date around 1,900 employees have left Rolls-Royce. The Group anticipates that the programme will be complete by the end of 2008 and that it will be self-financing in the year. Meanwhile, Rolls-Royce has continued to recruit in operational areas as well as maintaining its apprentice and graduate programmes.

Prospects

Over the last decade, Rolls-Royce has pursued a consistent strategy which has created a global power systems company with a broad and diverse portfolio of products and services.

We are confident that we will continue to deliver profitable growth and positive cash flow for the full year.

Review of first half 2008 by business sector

Civil Aerospace

Order book: £42.1bn (2007: year end £35.9bn)
Engine deliveries: 462 (2007: 421)
Underlying sales: £2,102m (2007: £2,011m)
Underlying aftermarket service sales: £1,322m (2007: £1,205m)
Underlying profit before financing: £272m (2007: £261m)

The Civil Aerospace business has made good progress in the first half, with over £8 billion of new orders.

Underlying sales rose to £2,102 million, driven by growth in the corporate sector, increased deliveries of the V2500 for the Airbus A320 family and a ten per cent increase in aftermarket revenues. These trends are expected to continue for the full year. Trent deliveries for widebody aircraft were slightly lower in the first half but are expected to increase strongly in the second half.

Underlying profit increased by four per cent in the period, reflecting increasing volumes and a higher aftermarket mix. This was achieved despite higher unit costs, a five cent deterioration in the US dollar exchange rate and restructuring costs. In addition there was an increase in customer provisions of £16 million against a specific customer, relating to regional aircraft.

The business extended its product portfolio with the launch of the BR725, selected as the exclusive powerplant for Gulfstream’s new flagship corporate jet, the G650. Rolls-Royce continues to be the leading engine supplier in the corporate sector, with a 34 per cent market share.

The Trent engine family secured orders worth £4.5 billion for a further 360 engines. The most mature Trent, the Trent 700, consolidated its lead position on the Airbus A330, on which it has a 53 per cent market share, and won orders for up to 194 engines. At the end of June the order book included a total of more than 2,300 Trent engines across six programmes. The global nature of the customer base was again evident, with orders from customers in Asia, Latin America and the Middle East, as well as the US and Europe.

In June, the Group established a joint venture company with GKN Aerospace to carry out research and development on the use of composite materials in future aero engine fan blades.

The Group’s services activity continues to develop and is increasingly valued by civil aviation customers. Over half of Rolls-Royce’s modern jet engine fleet is now covered by TotalCare® or CorporateCare® service agreements, a level that is expected to increase given that around 70 per cent of recent widebody orders incorporate these arrangements.

In July, the Group further extended its services provision, announcing a new joint venture company with its partner Mubadala Development Company, offering on-wing care for the rapidly expanding Middle East aviation market.

Defence Aerospace

Order book: £4.9bn (2007: year end £4.4bn)
Engine deliveries: 198 (2007: 168)
Underlying sales: £769m (2007: £808m)
Underlying aftermarket service sales: £441m (2007: £422m)
Underlying profit before financing: £104m (2007: £106m)

The Defence business continued to strengthen its market position in the first half, winning contracts worth £1.2 billion. The business’s broad portfolio already comprises around 20,000 in-service engines and the fleet is expected to grow given the Group’s strong position on a number of key programmes in the transport and combat sectors.

Overall underlying sales declined slightly in the first half due to the timing and mix of deliveries on new production engines, while aftermarket sales increased by five per cent. Both original equipment and aftermarket sales will improve in the second half.

Underlying profits were stable, despite an increased restructuring charge and adverse phasing of research and development spend.

The Group maintained its lead position on military transport aircraft. As part of the AirTanker consortium, it won a 27 year engine and support contract to supply the Trent 700 engine to the UK Ministry of Defence, worth over £700 million. The AE 2100 programme continued to make strong progress. AE 2100 orders this year have included a $135 million contract for the Canadian Air Force for the C-130J and an exclusive nine year agreement, worth around $915 million, with Alenia Aeronautica for C-27J propulsion systems.

A number of major development programme milestones were reached during the period, demonstrating the breadth of the defence portfolio. The F-35 Lightning II (Joint Strike Fighter) achieved first flight, fitted with the Rolls-Royce LiftSystemâ, while the aircraft's collaborative F136 engine successfully completed its critical design review. On the Airbus A400M programme, Europrop International, in which Rolls-Royce has a 25 per cent share, delivered four TP400-D6 flight test engines to power the first A400M. The RR300 helicopter engine achieved its Federal Aviation Authority (FAA) Type and Production Certificate in March.

Marine

Order book: £5.5bn (2007: year end £4.7bn)
Underlying sales: £1,016m (2007: £700m)
Underlying aftermarket service sales: £326m (2007: £257m)
Underlying profit before financing: £87m (2007: £58m)

Rolls-Royce is a world leader in the provision of marine propulsion systems, offering a unique set of products and services for the naval and commercial sectors. Through its services business, it also supports propulsion systems installed on more than 20,000 vessels, including those in service with 70 navies worldwide.

The business continued to benefit from increased demand in the merchant and offshore sectors and achieved record sales in the first half. Underlying profits increased significantly, supported by strong volume growth in both original equipment and support services. Marine is now the Group’s second largest business in revenue terms.

Increasing oil prices are supporting significant investment in the offshore oil and gas sector, driving demand for the Group’s vessel designs and power systems equipment. Order activity continues to be robust, with new orders totalling £1.6 billion in the first half supporting a further increase in the order book to £5.5 billion.

Two landmark orders were received from China: a £58 million contract with China Oilfield Services Ltd to provide design and equipment systems for two offshore support vessels and a £13 million contract with BGP Marine China to design and equip an advanced seismic research vessel. The ships will support oil and gas exploration and production and are the Group’s first such contracts in the Chinese market.

Also in China, the Group’s integrated propulsion and manoeuvring system, Promas, is being installed on four merchant cargo ships under construction.

In the naval market, Marine passed a significant milestone with the successful ‘light-off’ of the two MT30 gas turbines installed on the US Navy’s first Littoral Combat Ship. These Trent-derived engines are the most powerful marine gas turbines available worldwide.

The business also signed a memorandum of understanding with the Vietnam Shipbuilding Industry Group (Vinashin) in Hanoi to support the development of Vietnam’s fast-growing marine industry.

Services capabilities were expanded with the opening of a new facility in Mumbai to support the Group’s growing installed base of marine equipment. This development is part of an expansion of the Marine services capability that includes construction of new Service Centres in Galveston and Rio de Janeiro and the upgrading of the Rotterdam Service Centre.

Energy

Order book: £1.0bn (2007: year end £0.9bn)
Engine deliveries: 18 (2007: 9)
Underlying sales: £324m (2007: £227m)
Underlying aftermarket service sales: £153m (2007: £117m)
Underlying loss before financing: £(8)m (2007: loss £(1)m)

The Energy business supplies a broad range of aero-derived gas turbine packages to the worldwide oil and gas and power generation markets. With over 160 million hours of operating experience, the business has supplied over 4,000 packages to customers in around 80 countries.

Strong order intake in both the oil and gas and power generation sectors contributed to a 10 per cent increase in the order book in the first half, with new orders being won for 13 industrial Trent units in a broad range of locations, including Australia, Europe, Russia and South East Asia.

Sales increased by 43 per cent, driven by significantly increased original equipment and aftermarket sales across both the oil and gas and power generation sectors.

At Dolphin Energy in Qatar, the world’s first industrial Trent mechanical drive gas turbines achieved full plant gas export capacity.

The Group continued to progress its programme to develop a commercially competitive fuel cell system. A 100 hour concept demonstration test of a fully integrated system is planned for the second half as part of the programme to prove the unit.

Steps have also been taken to exploit the Group’s nuclear capability, derived from its 50 year involvement in the UK Royal Navy’s nuclear submarine programme. In July, Rolls-Royce announced that it was establishing a new unit to take advantage of the emerging opportunities in civil nuclear in the UK and in other countries.

Strong volume growth contributed to an improved trading performance in the first half. Increased charges for restructuring and the expected increase in the Group’s investment in fuel cells and lower levels of technology fees in the first half of 2008 all contributed to the result in the period. Continued strong volume growth in both original equipment and aftermarket is expected to deliver a modest profit in the second half of 2008.

Financial review

The firm and announced order book, at constant exchange rates, was £53.5bn (2007: year end £45.9bn). Aftermarket services represented 26 per cent of the order book (2007: year end 28 per cent).

Sales increased by 13 per cent to £4,049m (2007: £3,591m). Sales on an underlying basis grew by 12 per cent. Payments to industrial Risk and Revenue Sharing Partners (RRSPs), charged in cost of sales, amounted to £107m (2007: £95m).

The published profit before tax increased to £389m from £377m. Underlying profit before tax was £410m (2007: £380m). Underlying earnings per share increased by nine per cent, to 17.15p (2007: 15.72p) (see note 6).

Gross research and development investment increased seven per cent to £399m (2007: £373m). Net research and development investment charged to the income statement in the first half was £177m (2007: £195m) after net capitalisation of £45m (2007: £9m) on development programmes. The second half charge for R&D is expected to be around £40m higher than in the first half, the bulk of the increase being in Civil. Receipts from RRSPs in respect of new programme developments, shown as other operating income, were £13m (2007: £40m).

Investment in intangibles was £127m (2007: £60m) and, in addition to capitalised R&D of £57m, included £32m (2007: £24m) on recoverable engine costs and a further £25m (2007: £9m) on certification costs and participation fees.

Restructuring costs of £60m (2007: £24m) were charged within operating costs including costs associated with optimising the Group’s support functions.

The taxation charge was £97m (2007: £74m). The taxation charge on an underlying basis was £101m, representing 25 per cent of underlying profit before tax (2007: £102m, representing 27 per cent of underlying profit before tax). The effective underlying tax rate is impacted by a number of factors including the geographical mix of profits, changes in legislation and the benefit of research and development tax credits.

There was a cash outflow in the period of £44m (2007: inflow £61m before £132m special injection to the UK pension schemes). Key features were an increase in overall working capital of £334m from 2007 year end, including increased trade and other receivables of £490m, an inventory increase of £250m, mitigated by a £406m increase in trade and other payables (including customer deposits). The net cash balance at the half year was £844m (2007: year end £888m).

Average net cash was £265m (2007: £373m), the reduction in the half-year largely accounted for by the phasing of a £500m investment in the Group’s UK pension schemes that occurred largely at the end of 2007.

Provisions were £324m (2007: year end £301m). Provisions carried forward in respect of potential customer financing exposure amounted to £57m at the period end (2007: year end £44m).

There were no material changes to the Group’s gross and net contingent liabilities in the first half. Contingent liabilities include commitments made to civil aerospace customers in the form of asset value guarantees (AVGs) and credit guarantees. At the end of June 2008, the gross level of commitments on delivered aircraft was $1,198m (£602m), including $666m for AVG’s and $532m for credit guarantees. The net exposure after reflecting the level of security was $241m (£121m).

Related party transactions were broadly in line with 2007 (see note 14).

Pre-tax post-retirement benefit obligations were £123m (2007: year end £123m) (see note 10). After taking account of deferred taxation, post-retirement benefit obligations were £86m (2007: year end £88m).

The proposed interim payment to shareholders is equivalent to 5.72 pence per Ordinary Share (2007: interim payment 4.04 pence). This payment will be the first to be paid in C Shares rather than B Shares, the only material difference being that C Shares will not carry the right to convert directly into Ordinary Shares (see note 7 below). The interim payment is payable on January 5, 2009 to shareholders on the register on October 31, 2008. The ex entitlement date for C Shares is October 29, 2008.

As the Company will no longer be issuing B Shares, the directors have decided to exercise the Company’s right to redeem compulsorily all remaining B Shares in issue at their nominal value of 0.1 pence per share on 22 September 2008. Payment of these redemption monies will be made to shareholders on 29 September 2008 together with a final B Share dividend accrued on B Shares from 1 July up until 22 September.

Need more information?

CONTACT US >