Rolls-Royce Holdings plc 2014 Half-Year Results

Thursday, 31 July 2014

Group Highlights

  • Order book of £70.4bn, down 2%
  • Underlying revenue of £6.8 billion, down 7%
  • Underlying profit before tax of £644 million, down 20%
  • Reported profit before tax of £717 million
  • Announced the sale of the Energy business to Siemens, completion expected end 2014
  • £1bn share buyback - conditional upon the Energy sale
  • Agreed the acquisition of Daimler’s 50% ownership in Power Systems
  • Payment to shareholders of 9.0 pence per share, up 5%
  • Group guidance maintained
£ millionsH1 2013*H1 2014Change
Order book**71,61270,439-2%
Underlying revenue7,3206,836-7%
Underlying profit before tax804644-20%
Return on sales11.4%9.9%-1.5pp
Underlying EPS31.88p25.64p-20%
Half-year payment to shareholders8.6p9.0p+ 5%
Reported revenue7,3456,632-10%
Reported profit before tax(527)7171,244
Reported EPS(20.66)p29.06p49.72p
Net cash**1,9391,177-762

* Restated to reflect the new accounting treatment for Risk & Revenue Sharing Arrangements
** 2013 H1 Order book and Net cash figures are 2013 year-end.

John Rishton, Chief Executive, said:

“Results for the first six months of 2014 are consistent with our guidance, reflecting the expected reduction in our Defence business and weaker trading in Marine, as well as adverse foreign exchange. We expect significant improvement in profit for the second half driven by higher revenue and cost reduction. While there are challenges, we maintain our full-year guidance for the Group.

The prospects for long-term growth remain outstanding across the Group and in particular in civil large engines where our market share of engines on order is over 50%. However, we will experience growing pains. For example, we are investing in new capacity ahead of delivering our order book and restructuring existing facilities to improve efficiency.”

Group Overview1

In the first half of 2014, the Group order book was £70.4bn (£71.6bn at year-end 2013). We received a net order intake of £6.5bn and delivered £644m in underlying profit before tax.

As previously guided, the Group’s financial performance in 2014 is weighted towards the second half. Our confidence for the rest of the year is based on good order cover for OE and for Aerospace services. While we have less visibility of the Marine & Industrial Power Systems (MIPs) aftermarket, this is traditionally weighted towards the second half.

This is a long-term business and we remain confident in its growth trajectory. We continue to make investments to deliver the £70bn order book and to deliver cost reduction. Among our investments in the first half, we opened a new £100m disc facility at Washington, Tyne and Wear in the UK. This plant has the capacity to manufacture 2,500 fan and turbine discs a year. Advanced manufacturing techniques and robotics will reduce disc manufacturing times by 50%.

Customer: In Aerospace, the Trent XWB engines that will power the first commercial flight of the A350 have been delivered to Airbus for the launch customer, Qatar Airways. More than 1,400 XWBs are on order, our fastest selling Trent engine. Technology drawn from the XWB has delivered thrust and efficiency improvements for the Trent 1000-TEN, that ran on a test bed for the first time in June this year and is on course for certification by the end of 2015.

In July at the Farnborough Airshow, we were pleased to announce a seventh member of the Trent family, the Trent 7000, that will exclusively power the new Airbus A330neo. It will bring together the experience of the Trent 700 with technology drawn from the Trent 1000 and the Trent XWB. Since this announcement, commitments for 127 aircraft have been announced.

The Group’s on-time delivery of gas turbines to customers improved to 81% at the half-year from 74% at this time last year. There was also progress in Marine and in Power Systems. Better performance strengthens relationships with our customers and, over time, will help to reduce inventory and cost.

Concentration: The sale of our Energy gas turbine and compressor business to Siemens was announced in May and we expect this to complete around year-end. This agreement will give the Energy business greater opportunities as part of a much larger company and will allow Rolls-Royce to concentrate on the areas of business where we can add most value. Separately, we expect to complete our acquisition of the remaining 50% of Power Systems in the second half.

1Group references to ‘underlying profit’ relate to ‘underlying profit before tax'

Cost: We continue to focus on cost reduction to improve profitability. We have 600 engineers working to reduce cost, with 400 focused on original equipment and 200 on aftermarket. This is yielding benefits. On product cost, we are working hard to offset escalation. On aftermarket, we continue to drive cost down, for example, in our Civil Large Engine business we have improved the reliability of our Trent 700 engines, reducing maintenance costs.

Restructuring costs in the first half were £67m compared with £35m in H1 2013, most of which were severance costs that will produce benefits from the second half. Commercial and Administrative (C&A) costs were lower in the first half, including the benefit of lower indirect headcount. This was reduced by 11% by the end of 2013, and with a similar amount targeted by the end of 2014.

In the last five years, the Group has invested over £2 billion in infrastructure to support future growth, with new facilities often being built alongside the older ones. As these new more efficient facilities come on line with new tooling and modern processes, we will retire older facilities and reduce our operational footprint by 20% by 2020.

Cash: Cost reduction will drive cash improvements. In addition, we continue to make progress on inventory efficiency. Inventory turns were 3.2 times at the half year, an improvement of 0.4 turns from a year ago. This is slightly down on the 2013 full year figure of 3.4 times due to the expected seasonality of inventory and load patterns in the first half. This excludes Power Systems.

Foreign Exchange

The Group has significant exposure to foreign currencies and the strength of sterling has impacted our results.

About half of the Group’s underlying revenue is exposed to the effects of translational foreign exchange. This relates mainly to US$ and Euro revenues recognised by our overseas entities, where revenue and profits are translated into sterling at the prevailing spot rate.

A one cent movement in the average US$ rate will affect underlying revenue and profit on an annual basis by £15m and £2.5m respectively. A one cent movement in the average Euro rate will affect underlying revenue and profit on an annual basis by £40m and £4m respectively.

The principal foreign exchange rates during the first half of 2014 were:

Average ratesH1 2013H1 2014

Changes in average spot rates have had the impact of reducing underlying revenue in the first half by £226m and underlying profit before tax by £21m, compared with the first half of 2013.

The group is also exposed to the US$ through the revenue generated in US$ by our UK entities. To hedge against short to medium term volatility, we maintain a US$ hedge book. This book was $23.9bn at the half year, with an average rate of $1.59. This represents around 4.5 years of net exposure. There has been no significant impact from transactional foreign exchange in the period compared with 2013.

Order Book

The Group’s order book reduced during the first half by £1.2bn to £70.4bn, reflecting a net order intake of £6.5bn, less deliveries during the period. We continue to see good demand for our products and services, many of which will remain in service and generate aftermarket revenue for decades. Our Defence Aerospace order book grew for the first time since 2010 and our Marine order book grew for the first time since 2012.

Income Statement

Underlying revenue reduced by 7% to £6.8bn compared with H1 2013 (down 4% at constant foreign exchange). OE revenue was down 9% and services revenue was down 4%. OE revenue was down largely due to the expected reduction in Defence Aerospace OE deliveries and weaker trading in Marine. Services revenue was down because of lower time & materials revenue in Civil Aerospace and a slower services run rate in Marine and in Power Systems. Services revenue increased in Defence Aerospace.

Underlying profit reduced by 20% to £644m compared with H1 2013 (down 17% at constant foreign exchange). Profit was affected by lower volume, a one-off product quality charge in Marine, higher restructuring costs, a higher R&D charge and lower entry fees from Risk & Revenue Sharing Arrangements.

Balance Sheet

The Group remains committed to maintaining a strong balance sheet and an investment grade credit rating. Standard & Poor’s retains a rating of A/Stable and Moody’s a rating of A3/Stable. In June, we announced a £1bn share buyback, that will return to shareholders the proceeds from the sale of the Energy gas turbine and compressor business. The Group continues to have good liquidity, with £1.2bn in net funds and £3.5bn in committed facilities.

The TotalCare net debtor at the half year was £1.8bn, an increase of £165m. The increase primarily reflects the delivery of new engines with linked TotalCare contracts.

Free Cash Flow

A cash outflow of £432m in the first half (outflow of £326m in H1 2013) reflects the expected lower trading volume and the phasing of capital expenditure, higher R&D and higher restructuring. We expect cash to improve in the second half.


Group guidance is maintained. Excluding adverse foreign exchange translation effects (estimated at £500m on revenue and £70m on profit, at current exchange rates) and a one-off charge in Marine (estimated at £30m) to rectify a product quality issue, the Group continues to expect revenue and profit to be flat for the full year, with free cash flow similar to 2013.

Segmental guidance is provided in the new format below as communicated at our recent Investor Briefing:

At constant FXRevenueProfit
Civil Aerospace+2% to +5%+8% to +12%
Defence Aerospace-15% to -20%-15% to -20%
Marinec. -10%-15% to -25%*
Nuclear & Energy+5% to +10%+30% to +40%
Power Systems+/- 2%+5% to +10%

* Prior to the impact of the £30m one off charge

At a segmental level guidance is maintained, except in Marine. We now expect Marine profit to be down 15%-25% prior to the one-off charge, reflecting a change in revenue mix (previously guided at down 10% including the impact of the one-off charge). The change in Marine profit guidance is compensated at the Group level by improvements across the other businesses.

The guidance assumes that the Energy business remains in the Group for the full year. Our free cash flow guidance is prior to the effect of acquisitions and disposals.

We expect to complete the acquisition of the remaining 50% shareholding in Rolls-Royce Power Systems later this year. Daimler relinquished its economic interest with effect 25 March 2014, and therefore underlying earnings per share includes 100% of its profits from that date.

We expect the Group will resume growth in 2015.

Business Segment Reviews*

Civil Aerospace Link opens in a new window 

Defence Aerospace Link opens in a new window 

Marine Link opens in a new window 

Nuclear & Energy Link opens in a new window 

Power Systems (Tognum and Bergen) Link opens in a new window 

* Commentaries in all reviews relate to underlying revenue and underlying profits, unless specifically noted.

Additional Financial Information Link opens in a new window 

Independent review report to Rolls-Royce Holdings plc Link opens in a new window 

Further Information

For further information, please visit our website at:



Simon Goodson
Director – Investor Relations
Rolls-Royce plc
Tel: +44 (0)20 7227 9237


Richard Wray
Director of External Communications
Rolls-Royce plc
Tel: +44 (0)20 7227 9163

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This Half-year Results Announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law.

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