Chief Executive’s review Sir John Rose

Sir John Rose

A very different company

It is worth recalling at the outset that the current crisis is not the first to which Rolls-Royce has had to respond.

In recent years our markets have been impacted by the events of September 11, 2001, the Gulf War in 2002 and the SARS epidemic in 2003.

As a business, we have also had to deal with a wide range of negative developments such as a weakening US dollar, high oil and commodity prices and delays in major new airframe programmes. All these challenges have been effectively managed by the Group.

The drivers of the current global economic crisis clearly differ significantly from previous downturns. However, Rolls-Royce itself is also a very different company.

Our turnover in 2001 was around £6 billion, with only 38 per cent of our revenues derived from services. We had a geared balanced sheet with average net debt of around £1 billion and a large and volatile pensions deficit. Our order book of £16.7 billion was concentrated on traditional Western markets such as the UK and the US. As a result, in the downturn that started in 2000 but was exacerbated by the tragedy of 9/11, the Group was less resilient than today.

Rolls-Royce is now well diversified by product, customer and geography. Our revenues have increased to over £9 billion with over 50 per cent now derived from services. Our order book has increased more than threefold to over £55 billion and is broadly spread across all the world’s principal markets. Most significantly of all, we have a strong balance sheet with no net debt. Our long-term strategy of hedging currency risk has served us well, allowing a manageable and predictable deterioration in the sterling/US dollar achieved rate over the past five years.

Our large installed base of over 54,000 engines supports a growing services business. The scale of this services activity, together with the size of the order book and the longevity of our programmes, gives us much clearer visibility of future revenues. All these characteristics increase the Group’s resilience and despite the uncertain outlook, give us confidence for the future.

In this more challenging environment, operational performance, cost reduction and matching capacity to load will be particularly important.

In January 2008, we took early action to reduce costs by taking the difficult decision to reduce staffing in support functions by 2,300 people. This programme has been completed at no net cost to the Group and in 2009 will reduce our costs by £100 million. A further proposed reduction of 1,500–2,000 jobs in 2009 is expected to be cost neutral in the year, while delivering similar savings in 2010. These programmes demonstrate our commitment to achieving and sustaining world-class levels of operational efficiency and improving our competitiveness.

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