Delivering today, investing for the future
“Our resilience, coupled with the inherent strength of our business model, will enable us to manage short-term uncertainties and deliver future growth.”
In 2009, Rolls-Royce has delivered solid results despite the severity of the economic downturn, a performance which has again demonstrated the benefits of pursuing a consistent strategy over a long period. This approach has created a broadly-based business with deep customer knowledge, outstanding technology and world-class people.
Our financial results demonstrate the resilience of our business. The Group's order book increased to a record £58.3 billion, with underlying revenue growing 11 per cent to
£10.1 billion and underlying profit before tax improving four per cent to £915 million.
The Group has a strong financial position with average cash balances increasing by
£260 million to £635 million. The triennial valuation of the Group's largest pension scheme has just been completed and confirms that 2010's cash funding will be maintained at a level similar to that in 2009. This demonstrates the benefits of the early action taken to amend the terms of the scheme and to adopt an investment strategy that reduces volatility.
The economic environment remains challenging and it seems likely that world growth will be slower in the years ahead than it has been in the past decade. In these circumstances, we will benefit from our ability to access the world's faster growing markets where there continues to be demand for investment in transport and infrastructure.
We will maintain our focus on cost reduction and improving our operational efficiency. At the same time we will continue to invest in technology, in our product and service portfolio, in the capital assets required to deliver growth, in our international footprint and in our people.
It is important to recognise that ours is a long-term business. Typically, our product and service lifecycles span 40-50 years and we invest in technology programmes that look five, ten, 20 years and more into the future.
A good example of this is the Avon engine. In its latest version – modified to produce significant improvements in power and efficiency – it is meeting the demands of customers in the oil and gas sector. Yet the Avon first entered the industrial gas turbine market 40 years ago. That engine in turn was derived from the original aero version, which powered a Canberra aeroplane on the first non-stop, non-refuelling, jet flight across the Atlantic in 1951.
Examples like this show why it is so important to set our Group's progress into a broad context. This review will chart our progress over the past ten years, during which we more than doubled our revenues and our underlying profits. This has provided us with a platform from which we are confident we can grow our revenues by at least as much again in the decade ahead.
We are now a very different company than we were ten years ago. This can be measured in terms of our scale and geography, in terms of the range of things we do and in terms of operational efficiency. All this has made us a more resilient business and has established a far broader foundation from which to build revenues in the future. A few facts and figures comparing the Rolls-Royce of 1999 with today's Group illustrate the point.
Today, at any one time around 200,000 people are flying in aircraft powered by Rolls-Royce engines. Our ability to keep those aircraft in the sky is a powerful illustration of the ‘mission critical' nature of what we do. At peak times that figure can double, which means that the equivalent of the population of Bristol is being kept aloft by Rolls-Royce engines. That is considerably more than double the number of people we were flying a decade ago.
We have become much more than a civil aerospace company. The revenues from our marine, defence aerospace and energy businesses have grown from £2.1 billion in 1999 to £5.6 billion in 2009. In 2009, revenues from outside our civil aerospace business accounted for more than half of Group revenues.
We are becoming less dependent on our traditional markets of Europe and North America. These geographies, which accounted for around 70 per cent of our revenues in 1999, represent around 66 per cent of our revenues now and that trend is set to continue, as more than half our current order book comes from Asia, South America and the Middle East.
Around half our revenues come from services today compared to 40 per cent a decade ago. This represents an annual compound growth in services of ten per cent.
Throughout this period we have maintained our focus on costs and improving operational efficiency. Every year for the past ten years, revenue per employee has increased, showing a 16 per cent improvement in the year to £271,000 in 2009. We are now selling more than twice as much as we were ten years ago, with 2,000 fewer people.
Taken together, the pipeline of orders we have already signed, our increased market share, the growth and scale of our services business and our focus on costs, underpin our confidence that we will double our annual revenues in the decade ahead by organic growth alone.
Our shareholders have benefited from our success to date with payments increasing from 7.25 pence in 1999 to 15.00 pence in 2009.
The disciplined application of a consistent strategy over many years has delivered a strong, resilient company, which is well positioned for the long-term growth we expect.
Our strategy has five elements and 2009 saw us make progress against each of these.
Rolls-Royce has become a truly global Group, providing ‘mission critical' power and propulsion systems to a wide range of customers in over 120 countries. The scale of the progress that has been made is illustrated by the fact that the size of our order book in Asia and the Middle East today is around double the Group's entire order book in 1999.
During 2009 we won new customers in Asia, Africa, Europe, the Middle East and North and South America.
Our global reach, coupled with the fact that very few companies offer the highly sophisticated range of products and services that we do, positions us well to take advantage of opportunities in early recovering and emerging economies.
We have managed our balance sheet cautiously and for the long term so that we can continue to invest in manufacturing capability and technology. These investments are targeted specifically to support anticipated growth and meet our customers' future needs.
Technology is a critical differentiator in our four markets, all of which demand increased fuel efficiency, reduced environmental impact and higher levels of reliability and durability. We have invested £7 billion in R&D over the past ten years to maintain our technological advantage, with a particular emphasis on collaborative research involving a network of universities around the world.
This focus continued in 2009, as we championed the development of a network of Advanced Manufacturing Research Centres – four in the UK and one each in the US and Singapore – bringing business and academia together to undertake research relevant to industry.
In 2009, the Group announced a £300 million investment in four new factories in the UK: a casting facility for single crystal turbine blades; an advanced disc facility; a wide-chord fan blade facility for defence engines and; a civil nuclear facility to assemble and test components. This represents the latest phase in a programme of capital replacement which has seen Rolls-Royce invest £1.8 billion in UK infrastructure over the past decade, creating world-class manufacturing facilities in multiple locations and providing skilled jobs in state-of-the-art environments.
To address our global market opportunities, in 2009 we began work on a manufacturing and assembly facility at Crosspointe in the United States. We also confirmed a large engine assembly plant and announced a new wide-chord fan blade factory in Seletar, Singapore, our first outside the UK. This will bring the total investment in the Seletar campus to around £300 million by the time it is completed in 2012.
We now manufacture in 20 countries and have service centres in over 50.
We invest continually in developing proprietary technology which will meet our customers' present and future needs. We currently have 39 ‘live' major engineering programmes, compared to 25 a decade ago.
2009 was a remarkable year in which we celebrated the first flight of six of our customers' aircraft : the Boeing 787; Gulfstream G650; Airbus A400M; Embraer Legacy 650, the BAE Systems Mantis UAV and the AgustaWestland Lynx Wildcat helicopter. Early in 2010, the short take-off and vertical landing (STOVL) version of the F-35 Joint Strike Fighter deployed the unique Rolls-Royce LiftSystem® for the first time.
These are unprecedented achievements, with more entirely new aircraft taking to the skies in a period of three months than in the previous five years. The capability to meet these requirements is the direct consequence of a decade of investment and innovation.
In the marine market in 2009, we saw the US Navy's Littoral Combat Ship go on active duty, the first sailing of the Royal Navy's Astute class submarine and the commissioning of the Royal Navy's first Type 45 Destroyer, HMS Daring.
All these aircraft and vessels are powered by Rolls-Royce and will enter active service in the next two to three years. The lives of each of these programmes is expected to span 40 years or more, giving us exceptional clarity of future original equipment and service revenues.
We have successfully grown our market share in each of our businesses, generating revenues today and establishing a platform for future growth.
Our share of the civil aerospace market has expanded from 27 per cent in 1999 to 34 per cent today and our future order book will ensure that our market share continues to grow, driven by the strong position Rolls-Royce has established on the new generation of wide-bodied aircraft. On the new Boeing 787 and the Airbus A350 XWB families, Rolls-Royce has achieved a market share of 64 per cent.
In the defence aerospace sector we are the world's number two and Europe's number one producer of aero engines, with an extensive engine portfolio for all key sectors of the market.
Revenues in our marine business have more than doubled since 2005. We now design, supply and support power and propulsion systems for naval and commercial applications, with over 30,000 vessels worldwide using our equipment.
In 2009, our energy business recorded its highest ever underlying revenue and profit. We serve energy customers in over 120 countries. Our position in providing power for the oil and gas sector remains strong and the industrial Trent engine continues to establish its presence in the power generation market.
We have unrivalled knowledge of the complex technologies within our products and a deep understanding of our customers' needs. We have used these to develop services that improve our customers' operations.
Our aerospace operations centres are a good illustration of this capability. In dedicated facilities serving airline, corporate and defence customers, these Rolls-Royce centres collect real-time data from our engines as they are operating around the world, 24 hours a day, 365 days a year. By analysing, sharing and acting upon this information we can optimise the performance of our engines in service. The centres are a focal point for service delivery, assessing the condition of the fleet and directing logistics and field maintenance.
We have transferred service best practice across all our businesses so that each now offers a through-life service capability. We continue to strengthen our global services network and in the past year opened, or expanded, marine services facilities in Niteroi in Brazil, Galveston and Seattle in the US and Newfoundland in Canada. We opened an On-Wing Care facility for corporate and regional aircraft in Indianapolis, in the US, and continue to invest in our civil aerospace overhaul bases in Hong Kong and Singapore.
To execute this strategy effectively and on a worldwide basis, the skills, diversity and dedication of our people are key. The global nature of our customers and our operations means that our people have to be capable of teamwork across geographies. They need to be flexible and open minded, to have world-class capabilities and shared values. Of the 38,500 people we employ, 45 per cent are now based outside the UK.
Today we run a civil aerospace business from the UK with emerging capabilities in Germany and the US. The Presidents of both our defence and energy businesses are based in North America. The US is our biggest defence market and in our energy business, gas turbines are produced in Canada and packaged in the US. We have transferred our marine headquarters to Singapore, reflecting the significance of the Asia region for shipbuilding.
Effective communication that enables the organisation to work well across time zones and borders is crucial. We invest time and effort in communication, using a combination of modern technology and traditional formats to help us to stay connected. In 2009, we shared our strategy storyboard with every employee. The programme was conducted in groups of around ten with a presenter and a record keeper. This amounts to more than 4,000 presentations over 6,000 hours, with a record of the conversation kept to make sure that we benefit from local insights.
In 2009, Rolls-Royce recruited more than 250 new apprentices and 334 graduates, more than ever before, young men and women of over 30 nationalities who have the potential to become leaders of the future.
We are able to attract exceptional people because of the range of world-class skills we require to deliver high value-added manufacturing and services. These range from expertise in marketing and law, through to specialist engineering and logistics, all of which need to be practised internationally and at the highest level.
While we have continued to invest, economic conditions have forced us to take some difficult decisions as well. We have had to reduce our staff in parts of the business where demand has been weak, leading to a net reduction in headcount across the Group of around 500 people in the past year.
Taking these difficult decisions early, investing where the business case is strong and continually looking for ways to improve, have enabled us to respond to the difficult economic environment. Our employees have again demonstrated their capability and commitment and I would like to thank them for playing an integral part in our Group's continuing success.
I have described how Rolls-Royce has transformed itself in the past ten years and how, in doing so, it has established a platform for the doubling of revenues in the decade ahead.
In 1999, Rolls-Royce had an order book of £13.2 billion. Today our order book stands at £58.3 billion, with a record number of major global programmes balanced across our four business sectors. These include the Trent XWB, which is not due to enter service until 2013, yet has already achieved more than 1,000 orders – a powerful demonstration of the confidence our customers have in our ability to deliver.
The market share we have gained, the investments in new products we have made and the balance of the business we have achieved, affords us access to a global market for products and services we assess to be worth more than US$2 trillion over the next 20 years, made up of US$1,400 billion for civil aerospace, US$450 billion for defence aerospace, US$320 billion for marine and US$120 billion for energy.
In the short term, the Group expects the trading environment to remain difficult, with the implications of delayed airframe programmes and launch costs adding to demand and operational uncertainty. The Group expects underlying revenues and profits in the current year to be broadly similar to those achieved in 2009. We anticipate a modest cash outflow in 2010 with average cash balances remaining above £500 million.
Our resilience, coupled with the inherent strengths of our business model will enable us to manage these short-term difficulties and deliver future growth.
February 10, 2010