The period since the tragic events of September 11, 2001 has
been one of great challenge for our Group, and particularly for the
civil aerospace sector. The initial impact of those events was
subsequently exacerbated by the Iraq war and the outbreak of the
SARS virus during the first half of 2003.
However, two key components have enabled us to achieve this year’s
successful outcome: first, a strong business model based on a
consistent strategy of providing power systems and support for four
global markets with a common technology focused mainly on the gas
turbine and, second, committed people throughout the Group who
understand our objectives, are focused on our customers and are
prepared to support the changes necessary to enable us to be
competitive. I would like to take this opportunity to thank all our
employees for their dedication and commitment.
We have built a well-balanced business, with revenues evenly
divided between original equipment sales and high value-added
This balance has reduced our exposure to a downturn in any
particular sector. As a result we have been able to mitigate the
impact of the continuing recession in civil aerospace, which saw a
further 13 per cent fall in civil engine deliveries in 2003. Civil
engine deliveries have nearly halved from a peak of 1,362 in 2001,
and now account for approximately 20 per cent of our total
The successful implementation of our services strategy has resulted
in ten per cent compound annual growth in aftermarket revenue over
the past five years. In 2003 this revenue amounted to £2.8 billion,
or 50 per cent of our sales. It represents a reasonably predictable
and growing source of revenue based on an increasing number of
long-term, contractual relationships with our customers.
Further visibility is provided by our order book which, despite the
difficult market conditions, grew to a record year-end level of
£17.4 billion, with a further £1.3 billion of business announced
but not yet under contract.
The pension fund deficit has been an area of considerable
uncertainty. We were able to contain the cost of additional funding
in line with the guidance we provided in 2002 with a combination of
changes to the benefit structure and a £35 million annual increase
in contributions from the Group. This ensures that we can continue
to offer an affordable and attractive defined benefit pension
Over recent months the US dollar has weakened significantly
relative to sterling. The nature of our activities means that the
Group has always had an exposure to the dollar exchange rate. We
have therefore pursued a consistent strategy of hedging dollar
revenues and this has operated successfully for more than 15 years,
including periods where the exchange rate has been above two
dollars to the pound. During this period we have maintained an
achieved rate within a range of ten cents, while the spot rate has
moved in a range of 63 cents. We currently have approximately US$10
billion of forward cover at rates which will enable us to achieve a
stable rate over the next four years.
We have completed the major rationalisation programme announced
in October 2001. At the year-end we employed 35,200 people, a net
reduction of 2,100 during the year and a reduction of 8,300, or 19
per cent, since the programme was announced. In addition there has
been a reduction of 1,000 contract jobs.
Rationalisation expense over the past two years has amounted to
£247 million. It is encouraging that, in spite of this, and the
additional debt of £133 million that we brought onto the balance
sheet as a result of sales financing obligations, we have generated
a net cash inflow of £178 million over this period, demonstrating
our robust trading performance.
We will continue to focus on operational excellence, including
rationalisation of our facilities, improvement of manufacturing
processes, supply chain restructuring and lead-time reduction in
order to increase productivity and reduce product and operating
costs. Costs associated with these activities will be included
within underlying earnings.
We have become a truly international business with customers in
more than 150 countries. We have facilities in 48 countries; 40 per
cent of employees are based outside the UK, representing 40
nationalities. More than 80 per cent of sales are to destinations
outside the UK and nearly 40 per cent of sales originate outside
The Group’s priorities are:
Focused investment in technology
Advanced technology is at the heart of our success. Following a
decade of high investment in new product development, the market
requirement for new products is now slowing down. Technology
acquisition, as well as supporting new product development, will
increasingly focus on the development of derivative products, unit
cost reduction, improvement of in-service operation and extending
the scope and value of our service capabilities.
We continue to manage our operational and unit costs effectively.
Over the past two years, despite a 45 per cent reduction in civil
engine deliveries, we have maintained a healthy balance sheet and
produced a creditable operating performance. In 2003 we accelerated
the implementation of our improvement initiatives and continued to
focus on reducing both operating and product unit costs. We will
benefit from the lower cost base as workload recovers.
Rolls-Royce makes a positive contribution to
sustainability. This is achieved through our products, employment
and wealth creation, training and development of our employees,
technological development, work with communities and through our
large and complex global supply chain. More details of some of
these aspects of our performance can be found in the Corporate Social
Responsibility section of this report.
Development of aftermarket services
The Group’s installed base of 54,000 engines in service has created
a substantial aftermarket opportunity. The development of
innovative, long-term service agreements, such as TotalCare in the
civil sector and Mission Ready Management Solutions in the military
sector increases this opportunity. It expands the scope of services
from traditional support such as spare parts supply and repair and
overhaul, to enhanced services such as engine health monitoring and
predictive maintenance. Our unique knowledge of our products and
proprietary technology creates a competitive advantage in the
provision of these services and enables us to add significant value
for our customers.
In 2004, Rolls-Royce is celebrating its centenary.
Ever since Henry Royce and the Hon C S Rolls met in 1904,
engineering excellence and innovation have been central to the
company. As it has throughout our history, our success depends upon
maintaining our technology base and recruiting the best people.
Today, we have structured technology programmes in place covering
the next five, ten and 20 years of our development and need to
ensure that we continue to have access to the people who will drive
In order to celebrate our centenary, we are launching a major new
initiative called the Rolls-Royce Science Prize. Its
aim is to recognise and reward excellence in science teaching
practice in our schools and to encourage an interest in science
that will, we hope, ensure that we have access to the future
scientists that will enable our success. The initiative will be UK
based initially, but the intention in the years ahead is to
implement it in other countries where we operate.
We have created a strong international Group with a balanced
business portfolio and we expect to increase profits in 2004,
despite challenging conditions in some of our markets. Over time,
we believe that the Group is capable of achieving a ten per cent
return on sales, across all its businesses, as the business model
matures and our operational efficiency continues to improve.
In civil aerospace the long-term trends for growth in air travel
remain favourable. With our wide product range and innovative
service offerings, we are well placed to continue to secure a
substantial share of this market. In the short term, the flying of
the relatively young Rolls-Royce powered aircraft
fleet continues to grow and to generate increasing aftermarket
revenues. Over the next 20 years we foresee a total market
opportunity for new engines worth more than US$500 billion, with a
gradual recovery from the current depressed market starting over
the next two years.
Our defence aerospace business has established a strong position in
the world market, with a broad portfolio of programmes and a large
customer base. In the short term, we expect the mix of programmes
to provide a stable outlook. Over the medium term we will benefit
from the continuing development of the programme portfolio and the
increasing service opportunity.
Our marine propulsion business is a world leader. Over recent years
its growth has been led by the commercial offshore support sector,
which is now slowing down. However, a re-equipment cycle in the
naval sector, new opportunities in the merchant sector and the
expansion of our services activity in the commercial marine market
are expected to enable us to continue to develop this business.
Our energy business returned to profit in 2003, following a
programme of new product investment and the costly technical
problems associated with the industrial Trent. The industrial Trent
is now fully released for sale and we expect to increase our market
share in power generation as the market recovers over the next few
years. The oil and gas market remains strong and we are securing a
high share of the available business, including important new
contracts in the gas transmission area. Over recent years, the
business has benefited from the receipt of technology fees, which
we expect to reduce in 2004.
The Group is in a sound financial condition. In 2003 the level of
average net debt was reduced by £140 million to £950 million. We
expect to continue to reduce average net debt. At the year end,
gearing stood at 15 per cent and the company had £2.2 billion of
total committed borrowing facilities, following two successful
refinancings amounting to £380 million in the US and Asia and the
retirement of £780 million of maturing facilities.
For more than a decade, Rolls-Royce has invested in
building leading positions in four global, growing markets. The
exploitation of our core technology in different sectors produces a
valuable portfolio effect for the business as a whole.
The long-term nature of our product programmes results in returns
over many years. The high value-added aftermarket services
opportunity created each time a gas turbine is sold provides the
key to adding value for our customers and maximising these returns.
Our successful strategy to capture this opportunity, coupled with
the increasing efficiency of our operations, underpins our
confidence in the future.
Sir John Rose