Sir John Rose, Chief Executive, said:
“Rolls-Royce delivered a robust performance despite the continuing uncertainty in the global economy.
“We continue to make progress with our development programmes and new facility construction; these investments are designed to underpin the growth embedded in our order book and achieve productivity improvements.
“We now expect underlying profit for the full-year to be modestly higher than 2009, mainly due to good cost control and a strong trading performance from our Marine business. We expect a modest cash inflow for the year and average net cash balances to remain at a similar level to the first-half.
“We are increasing the first-half payment to shareholders by 6.7 per cent”.
The Group made progress in the first-half of 2010 despite the economic uncertainty, the disruption caused by volcanic eruptions in Iceland and the costs incurred as we invest for future growth. The order book at £58.4bn, underlying revenues of £5.3bn and underlying profit before tax of £465m all increased. The Group maintained its strong financial position with average net cash balances improving by £155m to £915m compared to the first six months of 2009.
Flight test programmes in Civil and Defence aerospace including the Boeing 787, Airbus A400M and Gulfstream G650, all made good progress in the period. The engine for the Airbus A350 XWB, which is due to enter service in 2013, ran for the first time in June. Sea trials of the Astute class submarine and the Type 45 Destroyer, HMS Daring, continued and the Littoral Combat Ship entered active duty.
In April, the Marine business completed the acquisition of ODIM ASA, acquiring the remaining 67 per cent of shares for a cost of £147m, bringing the total cash investment in ODIM ASA to £218m. ODIM ASA adds capability to our strong marine systems portfolio in target markets such as seismic towing, oceanographic survey and subsea and deep-water installation systems.
Rolls-Royce continues to benefit from its global reach and ability to access the world’s faster growing markets. Our success in winning new customers and orders, the breadth and mix of our product and service portfolio, and the financial performance of the Group, demonstrate the resilience of our business. Our confidence in the long-term growth prospects of the Group is reflected in the decision to increase the first-half payment to shareholders by 6.7 per cent to 6.40 pence per share.
The long-term and disciplined application of our power systems strategy across the four segments has created a portfolio we believe can double revenues in the next decade.
Our success at winning business in the widebody aircraft market means Rolls-Royce expects to more than double the current number of Trent engines being delivered by the middle of this decade. To enable this step change in volume, investments in new facilities, tooling and capability have been made in the first-half of 2010 and will continue as we increase operational capacity and improve productivity.
Elsewhere in the business, the first-half saw the official opening of the new Mechanical Test and Operations Centre at Dahlewitz in Germany, and a new facility to support the Joint Strike Fighter LiftFan capability in Indianapolis, USA. Rolls-Royce also expanded the Civil aerospace repair and overhaul facility in Singapore (SAESL) increasing capacity to 250 large engines per year. Significant progress was made with the construction of new facilities at the Seletar Aerospace Park in Singapore and at Crosspointe in Virginia, USA. We continue to develop our UK footprint with additional nuclear manufacturing capacity being added at our facilities in Derby and a new disc manufacturing plant in Sunderland. In addition, we are giving significant support to the development of six advanced manufacturing research centres, four of which will be based in the UK, to improve manufacturing performance across the supply chain.
The Group benefits from a robust financial position which has been further strengthened in the first-half. Average net cash balances were £915m, an improvement of £155m over the same period in 2009, with period-end cash balances improving £113m to almost £1.4bn. The Group’s debt maturities are well spread with the debt credit ratings assessed by all major rating agencies remaining strong with a stable outlook.
There were no major changes in the position of the Group’s UK pension funds over the first-half. Two smaller UK funds are currently undertaking triennial actuarial valuations, and whilst the results will not be available for several months, the Group does not expect any material changes in funding requirements as a result of these reviews.
Despite challenging financing markets, financial and contingent support to customers remains modest.
Whilst order activity in many markets remains subdued, we secured orders worth £5.9bn in the first-half of 2010, increasing the Group’s total order book to a record £58.4bn. Approximately £17.9bn of the order book relates to service contracts. A further £1.1bn of orders were announced at the Farnborough Airshow.
Revenues increased by five per cent to £5.4bn. Underlying revenues improved by seven per cent, with good growth in service revenues from all businesses and an especially strong performance from original equipment sales in the Energy business.
The Group maintained its foreign exchange hedging policy and increased the hedge book over the period to $20.8bn, with an average rate of $1.60. Better rates locked into the hedge book provide visibility of improving rates over the next few years. Underlying profits in the first-half benefited by £37m from improving exchange rates. This consisted of £28m from a seven cent improvement in the USD achieved rate, and a further £9m from translation benefits on overseas businesses, mainly in the Marine segment. For the full-year, USD achieved rates are expected to improve by between six and nine cents contributing between £50m and £75m to underlying profit, compared to 2009.
Investment in research and development was £436m (2009 first-half £440m), of which the Group funded 55 per cent (£238m). The charge to the income statement reduced slightly, by £8m to £192m; primarily as a function of lower cash spend. For the full-year, the charge to the income statement is expected to increase by between £40m and £50m as more engineering time focuses on early stage programmes, such as the Trent XWB, where research and development spending is charged in the income statement as incurred.
The Group has benefited from improved cost control and a strong trading performance in the Marine segment. This has helped mitigate the reduction in profitability in the Civil business, resulting in a modest growth in underlying Group profits.
Underlying profit before tax, which excludes the non-cash impact of the hedge book and other financial instruments, increased by four per cent to £465m (2009 first-half £445m). This growth in profit reflected a six per cent increase in original equipment revenue, eight per cent growth in service revenue, reduced R&D charges, lower restructuring charges and improved foreign exchange rates. These more than offset headwinds due to weaker revenue mix and the non-recurrence of one-off benefits in 2009.
The Group’s reported loss before tax of £(475)m, compared with a first-half profit of £2,515m in 2009, includes the effects of the “mark-to-market” of its financial instruments, for which hedge accounting is not adopted. The impact of mark-to-market is included within net financing in the income statement (see note 3 on page 9 ).
The underlying tax charge of £116m increased £31m from 2009 as the effective rate rose to 25 per cent for the period, from 19 per cent in the first-half of 2009. The 2009 effective rate benefited from a one-off £21m credit following the successful completion of overseas tax audits and changes in legislation. The full-year underlying tax rate is expected to remain at around 25 per cent.
Underlying earnings per share reduced by five per cent to 18.72p (2009 first-half 19.64p), primarily reflecting higher effective tax rate in the first-half of 2010. Basic earnings per share were a loss of 18.07p (2009 first-half - earnings of 100.87p), reflecting the mark-to-market adjustments described above.
The Group reported a good first-half cash performance. Net cash inflow was £113m for the period reflecting an increase in underlying profitability, improved working capital performance, the receipts of inventory disposals under the Aviall distribution services agreement and after the acquisition of ODIM ASA.
Our power systems strategy has broadened and provided a better balance to our portfolio and has also created a strong financial foundation from which to support long-term growth.
Group prospects are underpinned by access to growing markets, participation in a record number of major programmes and expanding aftermarket service activity. We expect these factors to support a doubling of revenues over the next ten years. We continue to invest in technology, product development and operational facilities to support this growth.
In the short term, the Group expects the global economic environment to remain uncertain. The Group expects underlying revenues to grow by approaching ten per cent in 2010. This includes the benefit of ODIM ASA, which is expected to contribute approximately £200m to Group revenues in 2010.
For the full-year, underlying profits are expected to be modestly higher than 2009, benefitting from a strong trading performance in the Marine segment and improving cost control.
Average cash balances are expected to remain at similar levels to those achieved in the first-half of the year and there will be a modest cash inflow in 2010.
1 Commentaries relate to underlying revenues and profits unless specifically noted
2 2009 order book data relates to 31 December 2009
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.