Rolls-Royce Holdings plc 2012 Full Year Results

Thursday, 14 February 2013

Group Highlights

• Underlying revenue of £12.2bn, up eight per cent.
• Underlying profit before tax of £1.4bn, up 24 per cent.
• Payment to shareholders of 19.5 pence per share, up 11 per cent.

£ millions	2012	2011	Change
Order book*	60,146	57,630	4%
Underlying revenue**	12,209	11,277	8%
Underlying profit before tax**	1,429	1,157	24%
Return on sales***	12.2%	10.7%	1.5pp
Underlying earnings per share	59.27p	48.54p	22%
Full year payment to shareholders	19.5p	17.5p	11%
Reported revenue	12,161	11,124	9%
Reported profit before financing	2,072	1,189	74%
Net cash	1,317	223	1,094
Average net (debt)/cash	(145)	320	-465

 *     Restated 2011 year-end data excluding IAE order book of £4,571m
**    See Note 2 on p.20 for explanation
***   By reference to underlying profit before financing costs and tax

John Rishton, Chief Executive, said:

“In the second half of the year, revenue growth increased as we delivered 23 per cent more engines than in the first half. Margins improved, reflecting volume, mix, cost control and the IAE transaction.

“In the full year, underlying profits increased for the tenth consecutive year. We have established this record of consistent delivery while continuing to invest in people, technology and facilities.

“The strength of our order book demonstrates the confidence our customers have in our products and services. Our priorities remain: delivering on the promises we have made; deciding where to grow and where not to; and improving financial performance.

“In 2013, we expect modest growth in underlying revenue and good growth in underlying profit with cash flow around break even as we continue to invest for the future.

“Sir Simon Robertson today announced his intention to retire as Chairman of Rolls-Royce at this year’s Annual General Meeting. Simon has made an exceptional contribution over the past eight years. He has worked tirelessly on behalf of the company and his energy and enthusiasm have been an example to us all. I am delighted to welcome Ian Davis as our new Chairman and look forward to working closely with him”.

Group Overview

In 2012, the order book increased by four per cent, underlying revenue by eight per cent and underlying profit by 24 per cent. We delivered a record number of power systems that, typically, produce decades of aftermarket services revenue.

The priorities for the business remain the same as last year:

1. Deliver on the promises we have made.
2. Decide where to grow and where not to.
3. Improve financial performance.

In 2012 we have made progress towards these objectives:

1. Deliver on the promises we have made

The quality of the products and services we supply is measured across the Group and has shown steady improvement. Increased focus on delivery has led to significant improvement in wide-body engines in Civil Aerospace and in our Marine products. Across the Group, we are investing in a wide range of projects that will improve operational performance and reduce cost. This includes  continuing investment in modernising our IT infrastructure that is a key enabler for our business.

Significant milestones have been achieved in our major programmes.

These include:

• In Civil Aerospace, the certification of the Trent XWB engine (in February 2013) that will power the Airbus A350, the launch of the Trent 1000-TEN that will power Boeing 787s entering service from 2016 and the entry into service of the BR725 engine powering the new Gulfstream G650 corporate jet.
• In Defence Aerospace, the Short Take Off and Vertical Landing (STOVL) variant of the F35B Lightning II Joint Strike Fighter entered service with the US Marine Corps and deliveries were made to the UK MoD.
• In Marine, gas turbine power and propulsion equipment was delivered for the US Navy’s Littoral Combat Ship and the UK’s Queen Elizabeth class aircraft carriers.
• In Energy, we expanded our fleet of gas turbine compressor units through contracts for China’s West East Pipeline Project (WEPP) and the Uzbekistan section of the Asia Trans Gas (ATG) pipeline.

2. Decide where to grow and where not to

We continue to invest in capacity to fulfil our order book and in technology to expand our portfolio.

In Civil Aerospace, we are committed to investing in the wide-body, narrow-body and corporate market segments. In Defence Aerospace, we continue to see opportunities both in developing economies and in our traditional markets, despite the pressure on government spending. In Marine, offshore oil and gas remains a fast growing market and, in Energy, we continue to invest in our Civil Nuclear business where we believe Rolls-Royce can play an important part supporting both existing and new build nuclear capacity.

Areas where we have decided not to invest include the sale of our tidal power generation business to Alstom in January 2013 and the sale of a 51 per cent stake in our fuel cell business to LG.

3. Improve financial performance

We continue to focus on margin progression. In 2012, margins at Group level improved to 12.2 per cent (10.7 per cent 2011). The Tognum and the IAE restructuring together contributed 1.1 percentage points, with 0.4 percentage points improvement coming from the underlying business. Overall, profits grew by 24 per cent enabling us to raise our full year distribution to shareholders to 19.5 pence, an 11 per cent increase.

Margin progression, cost reduction and cash generation remain areas of intense focus for the Group, as we seek to improve quality, on-time delivery and working capital, while continuing to invest to meet the rising load. Around £50m of unit cost improvements were realised in 2012.

Our cash inflow of £137m, prior to acquisitions and disposals, was delivered after a heavy year of investment in technology, capability and infrastructure.

During 2012, we made a number of important announcements:

We completed the sale of our equity holding in International Aero Engines (IAE) to Pratt & Whitney. We remain a major supplier to IAE and will receive an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft for the next fifteen years.

Engine Holding (EH), the collaboration we formed with Daimler in 2011, assumed full management control of Tognum. We will fully consolidate the results of EH, including Tognum, from 1 January 2013.

We acquired the 50 per cent of the shares we did not already own in Aero Engine Controls (AEC) from Goodrich Corporation. Engine control systems play an increasingly important part in enhancing the fuel efficiency and overall performance of modern jet engines.

We have passed information to the Serious Fraud Office (SFO) relating to concerns about bribery and corruption involving intermediaries in overseas markets. This follows a request for information from the SFO about allegations of malpractice in Indonesia and China. We have significantly strengthened our compliance procedures in recent years, including new policies for Global Ethics and Intermediaries. We have also expanded the Compliance function. As a further measure, we have appointed Lord Gold to lead a review of current procedures and report to the Ethics Committee of the Board.

Group Trading Summary

£ millions	2012	2011	Change
Order book*	60,146	57,630	4%
Underlying revenue**	12,209	11,277	8%
Underlying OE revenue	5,893	5,258	12%
Underlying services revenue	6,316	6,019	5%
Underlying profit before tax**	1,429	1,157	24%
Return on sales***	12.2%	10.7%	1.5pp
Net cash	1,317	223	1,094
Average net (debt)/cash	(145)	320	-465

   *     Restated 2011 year-end data excluding IAE order book of £4,571m
**    See Note 2 on p.20 for explanation
***   By reference to underlying profit before financing costs and tax

Order Book

• The order book increased four per cent to £60.1bn, adjusted for the IAE disposal.  Order intake of £16.1bn included new orders of £10.3bn in Civil Aerospace, £1.6bn in Defence Aerospace, £3.3bn in Marine, £0.8bn in Energy and £0.4bn in EH.

Income Statement

• Underlying revenue increased eight per cent to £12.2bn, including 12 per cent growth in underlying OE revenue (£5.9bn) and five per cent growth in underlying services revenue (£6.3bn).
• Underlying OE revenue growth included a 23 per cent increase in deliveries of Trent and corporate engines in Civil Aerospace and a six per cent increase in military transport, combat, UAV and civil helicopter engines in Defence Aerospace. Growth was offset by the reduction in OE revenue in Marine (down three per cent), and in Energy and in Bergen’s contribution to EH (both down 35 per cent).
• Underlying services revenue growth included an increase of five per cent in Civil Aerospace, in line with growth in the installed base, and five per cent in Defence Aerospace. Energy and EH also saw good growth. Marine was up one per cent reflecting increased maintenance activity by customers and higher spares spend in the second half.
• Underlying profit before tax increased 24 per cent to £1.4bn, reflecting revenue growth, improved revenue mix, unit cost reduction and net trading contributions of £77m from Tognum and £92m related to the IAE restructuring. These benefits were partially offset in Civil Aerospace by higher R&D charges and lower entry fees associated with major new programmes, and in Defence Aerospace by the non recurrence of the £60m Strategic Defence Security Review (SDSR) settlement.  Underlying earnings per share (UEPS) improved 22 per cent.

Balance Sheet

• The year-end cash position of £1.3bn (£223m in 2011) includes the contributions of £942m for IAE and £167m for Bergen. The average net debt in 2012 of £145m (average net cash of £320m in 2011) reflects the timing of the acquisition of Tognum in 2011 and the sale of our interest in IAE in 2012. Excluding the effects of acquisitions and disposals, average net cash of £725m in 2012 compared with £805m in 2011.
• In April, Standard & Poor's Ratings Services raised its long- and short-term corporate credit ratings for the Group to 'A/A-1' from 'A-/A-2'.
• The Group continued to have good liquidity with £3.6bn of cash and committed facilities. Debt maturities remain well spread through to 2019.
• Pension liabilities increased by £148m on an accounting basis, largely due to a reduction in the discount rate. On an economic basis, funding requirements remain stable following the series of measures taken in recent years to achieve greater certainty for our major UK schemes.

Cash Flow

• A cash inflow of £1.1bn during 2012 included £942m from the disposal of IAE and £167m for the contribution of Bergen to EH. Excluding acquisitions, disposals and foreign exchange, the inflow of £137m reflects the continued investment programme in future growth and the increase in net working capital required ahead of OE volume growth, predominantly in Civil Aerospace.

Group Prospects

Full year 2013 Group guidance excluding Engine Holding:

For the full year 2013, we expect the Group to see modest growth in underlying revenue and good growth in underlying profit, with cash flow around breakeven as we continue to invest for future growth.

This guidance excludes the impact of Engine Holding, for which further information is given below.

Full year 2013 segmental guidance:

For the full year 2013, we expect underlying revenue and underlying profit for our business segments as follows:

In Civil Aerospace, we anticipate modest growth in revenue and strong growth in profit. In Defence Aerospace we expect modest growth in revenue and a modest reduction in profit. In Marine we expect modest growth in revenue and profit. And in Energy we expect some improvement in revenue and profit.

The implications of Engine Holding on 2013 performance:

Engine Holding comprises Bergen and Tognum. The Group cannot provide financial guidance for Tognum while it is still listed. Tognum also reports its 2012 results today. These can be accessed at www.tognum.de/investors.

Review by business segment

• Civil Aerospace
• Defence Aerospace
• Marine
• Energy

Additional financial information

Additional financial information  (PDF 639 Kb)