Rolls-Royce Group plc 2009 half-year results

Thursday, 30 July 2009

Group Highlights

  • Order book increased by £2bn to a record £57.5bn (2008 year-end £55.5bn).
  • Group revenues increased to £5,142m (2008 first-half £4,049m). Revenues on an underlying basis* increased by 17 per cent to £4,923m.
  • Services revenues increased by eight per cent to £2,420m on an underlying basis.
  • Profit before financing was £593m (2008 first-half £322m).
  • Underlying profit before taxation* increased by nine per cent to £445m (2008 first-half £410m).
  • Net cash outflow of £234m (2008 first-half net cash outflow of £92m) before the impact of a negative £194m (2008 first-half £48m benefit) foreign exchange revaluation.
  • Robust balance sheet with net cash of £1,030m at the half year (2008 year-end £1,458m).
  • Average net cash for the period of £760m (2008 first-half £265m).
  • Interim payment to shareholders of six pence per share, an increase of five per cent over 2008.

* see note 2

Sir John Rose, Chief Executive, said:
“ The global trading environment remains very difficult and we believe the recovery is likely to be slow.

“However, our growing order book, the breadth of the portfolio, our robust balance sheet and the early action we have taken on costs underpin our investment in the business.

“Our performance in the first half has enabled us to confirm our guidance for the full year and to increase the interim payment to shareholders”.

Group Overview

Resilient performance:

Rolls-Royce made progress in the first half of 2009 with the order book, revenues and profits all increasing.

This performance was achieved despite the challenging external environment and the impact of continuing delays on the Airbus A380 and Boeing 787 programmes. The Board remains realistic about the severity of current trading conditions which are in line with expectations at the start of 2009. The depth and duration of the recession is unclear and there is no evidence yet of any recovery.

Rolls-Royce has proved to be resilient in the face of these adverse conditions. The breadth of the Group’s business portfolio, the increasing importance of service activities, the improved market share and strong financial position all enable Rolls-Royce to manage the risks and uncertainties caused by current trading conditions. The Board is therefore able to confirm the guidance for 2009 it gave in February and increase the shareholder payment for the first-half to 6.00p per share, an increase of five per cent.

The advantages of a broad product and service portfolio are well illustrated in the civil aerospace sector. Delays to the Airbus A380 and the Boeing 787 programmes have reduced planned capacity in the widebody sector by approximately 300 aircraft or 100,000 seats over the next two years relative to the industry’s earlier assumptions. However, the delays have also had the effect of generating firmer demand for existing widebody products where Rolls-Royce enjoys a strong position. The Trent 700 on the A330 has, in particular, enjoyed strong demand, with orders for almost 100 engines taken in the first half. Almost 550 Trent 700s have been delivered over the last fifteen years and a further 486 were in the order book at the end of the first-half.

The Marine business continues to benefit from high levels of activity in the oil and gas sector and enjoyed a good first half. Defence Aerospace benefits from a broad portfolio and strong positions on the major military transport aircraft programmes, while Energy is benefiting from the growing worldwide demand for oil and gas and power generation.

Strengthening productivity and efficiency:

Overall performance is helped by the early steps taken to improve productivity and operational efficiency and to reduce costs. This flexibility in the matching of capacity to demand results in a competitive organisation capable of responding to short-term challenges as well as delivering long-term growth.

Strong financial position:

The Group continues to enjoy a strong financial position. It finished the first-half with a net cash balance of more than £1bn and had an average cash position of £760m over the period. The successful issue of a 10-year, £500m sterling bond in April reflected the market’s confidence in the Group’s finances and effectively achieved an early refinancing of the Group’s next scheduled debt maturity in 2011.

Investing for growth:

The Group’s trading performance, the scale of its order book and its ability to manage short-term challenges allow it to invest to support growth and develop new options for the business.

Rolls-Royce recently announced further significant investments in its operational capacity and capability. Four new facilities will be developed in the UK for discs, military fan blades, single crystal castings and civil nuclear components at a total cost of around £300m. A new civil wide chord fan blade facility will be constructed in Singapore to complement the existing capability at Barnoldswick in the UK.

These investments illustrate the continuing development of the Group’s global operational footprint. Over the last five years Rolls-Royce has invested £1.4bn in capital, including £800m to refresh its UK operational footprint. In 2007, the Group announced that it would be proceeding with major new engine assembly and test facilities at Seletar in Singapore and an advanced manufacturing facility at Crosspointe in the Commonwealth of Virginia in the US. The timing of these investments has been adjusted to reflect the delays in the major airframe programmes. Construction of Crosspointe is expected to commence later this year and Seletar in the first quarter of 2010.

The Group’s services activities increased revenues by eight per cent in the first half. Investment to support this growth is continuing with the expansion of the Group’s joint venture repair and overhaul facilities in Singapore and Hong Kong which are scheduled for completion by 2010. Marine has opened new service centres in Galveston, Seattle, Genoa and Rio de Janeiro, with additional facilities planned in Canada, the UAE and West Africa in order to support rapid growth.

The Group’s ability to identify and pursue new options for global growth is further illustrated by two developments in the year. In July the Marine business broadened its involvement in the offshore oil and gas sector by taking a 33 per cent shareholding in ODIM ASA. Similarly, significant progress was made with the development of the Group’s civil nuclear business when it was announced that Rolls-Royce would be building a new civil nuclear manufacturing facility and would be playing the leading role in the UK Government-supported Nuclear Advanced Manufacturing Research Centre.

Trading Summary – 2009 First-Half

The Group’s strong market positions have enabled it to secure orders worth £7.9bn in the first-half, increasing the order book by four per cent to a record £57.5bn at the end of the first-half. Around 60 per cent of the order book will be delivered after 2011. The global economic recession, combined with several years of strong order book build-up, contributed to a slow-down in new orders over the period.

Revenues increased by 27 per cent to £5,142m, a performance that was positively impacted by the weakness of the GBP against the USD and Euro. Underlying revenues improved by 17 per cent, with a 27 per cent growth in original equipment revenues (with all four businesses reporting a 20 per cent or higher increase) and an eight per cent increase in service revenues.

The Group has continued to implement its long-running foreign exchange hedging policy, increasing the USD hedge book during the first-half to $21.1bn to provide more than five years of cover. The average rate of the outstanding foreign exchange contracts in the book was £1~$1.63 at the end of the first-half. The Group’s achieved rate, the blended rate delivered from the operation of the hedging activity, improved by two cents in the first-half. It contributed a £12m transactional benefit to first-half profits. The achieved rate is expected to improve by around two to three cents in the full year compared to 2008. In addition, improved average USD, Euro and NOK exchange rates relative to the GBP provided £35m of translation benefits.

Unit costs increased by around two per cent in the first-half reflecting the continuing effects of the volatility of operational load across the supply chain, programme delays and rising commodity costs. Unit cost performance over the balance of the year will largely depend on the Group’s ability to manage load variations and any unforeseen events.

The Group has continued to invest in the acquisition and development of technology. In the first half of 2009, investment in research and development totalled £440m (2008 first-half £399m), of which the Group funded around 56 per cent, representing five per cent of underlying revenues. Net investment in research and development is expected to be approximately 4.5 per cent of underlying revenues for the full year. The Group announced earlier this week its involvement in two UK Government-supported research and technology programmes directed at low carbon and advanced manufacturing technologies. The programmes have a total value of around £180m, with around half being funded by Rolls-Royce and its partners.

Underlying profit before tax, which excludes the non-cash impact of the hedge book and other financial instruments, increased by nine per cent to £445m (2008 first-half £410m). Good profit growth for the period reflected a significant increase in original equipment and services revenues and foreign exchange benefits. It also took account of higher R&D, increased unit costs and the first-half phasing of fees received under the Trent XWB Risk and Revenue Sharing Partnerships (RRSPs).

The Group’s published profit before tax of £2,515m includes the effects of “marking to market” its financial instruments, for which hedge accounting is not adopted. This effectively reverses much of the revaluations reported in the second half of 2008. The impact of mark to market is included within net financing in the income statement (see note 3).

The first-half underlying tax charge of £85m benefited from a one-off £21m credit following the successful completion of overseas tax audits. This resulted in a reduction in the first-half underlying tax rate to 19.1 per cent. The 2009 full year underlying tax rate is expected to be around 21 per cent.

The Group reported a net cash outflow of £428m for the period, with £194m of this being caused by the revaluation of currency balances at the end of the period. The remaining outflow of £234m reflected a slow-down in order flow and associated customer deposits, increased inventory and significant investment in the business.

Engine deliveries in the civil aerospace sector were achieved with little recourse to financing support from Rolls-Royce. The commitments the Group has made are insignificant in the context of the balance sheet and any additional requests for support are discretionary.

Basic earnings per share were 100.87p (2008 first-half 16.22p), reflecting the mark to market adjustments above, with underlying earnings per share increasing by 15 per cent to 19.64p (2008 first-half 17.15p), partly reflecting an improved tax rate.

Prospects

Rolls-Royce continues to benefit from the breadth of its portfolio, the robust balance sheet and the early action it has taken on costs.

The Group expects that its global markets will continue to be affected by reducing demand and the impact of financing constraints. However, underlying revenues will continue to grow and underlying profits for the year are expected to be broadly similar to those achieved in 2008. The Group continues to expect a modest cash outflow for the whole of 2009 and an increase in the average net cash balance for the full year compared with 2008. The Group is therefore reiterating its guidance for the full year.

Review by business segment (1)

Commentaries relate to underlying revenues and profits unless specifically noted

This Half Yearly Results Announcement 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 projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of the Company's strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Half Yearly Results Announcement, and will not be updated during the year. Nothing in this Half Yearly Results Announcement should be construed as a profit forecast.

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