Rolls-Royce Holdings Plc 2019 Half Year Results

Full year guidance maintained

Warren East, Chief Executive commented: “We delivered further progress across the group in the first half in line with our full year expectations. We expect a significant improvement in cash in the second half as we unwind inventory built up to support customer deliveries and benefit from improved trading in both Power Systems and Civil Aerospace. In Civil Aerospace we delivered on key drivers of future cash flow with further improvement in average OE unit losses and continued aftermarket growth. Defence grew both revenue and profit and enjoyed substantial order intake. In Power Systems we also saw good revenue growth and order intake and entered the second half underpinned by a healthy backlog.

We have made good progress on resolving the Trent 1000 compressor issue, though regretfully, customer disruption remains. Progress on our restructuring programme is in line with the plan we outlined a year ago. We took significant strides in accelerating our electrification ambitions through the announced acquisition of Siemens’ eAircraft business in our drive to create cleaner, more sustainable and scalable power for the future.”

• Good revenue progress; underlying Core and Group +7%; Group reported revenue +5%
• Core free cash outflow of £(391)m; to materially improve in H2 as inventory reduces
• Delivery on services growth in Civil Aerospace +18% and Power Systems +7%
• Large engine flying hour growth +8%; OE unit loss -13%; Trent 7000 production ramp-up
• Progress on Trent 1000 in-service issues; Pack B & C aircraft on ground (AOG) below 25
• Trent 1000 in-service costs increased by a total of ~£100m across the next three years
• Restructuring on track; £134m run-rate cost savings; acceleration expected in H2
• On track for FY guidance for Core underlying operating profit and FCF of £700m +/- £100m
• Outlook: at least £1bn free cash flow in FY 2020; mid-term ambition > £1 CPS

*Change in Free Cash Flow represents YoY movement

*Net cash excludes IFRS 16 lease liability of £2.4bn in 2019
For other notes to table see page 3

2019 Half Year Group Highlights⁴

Financial:

• Group underlying revenue of £7,353m up 7%; reported revenue £7,883m up 5%. Underlying Civil Aerospace revenue up 11%, Power Systems up 6%, Defence up 2%; ITP Aero up 23%
• Group underlying operating profit up £48m to £203m; significant improvement in Civil Aerospace to £(21)m loss, strong growth in Power Systems +20%, solid growth in Defence +2% and an 18% decline in ITP Aero. Reported operating profit of £83m up £830m largely driven by a reduction in exceptional charges to £128m (H1 2018: £733m)
• Exceptional charges: Trent 900 of £59m following further assessment of impact of A380 production line closure, taking total exceptional costs to £245m; restructuring charges of £69m
• Group net R&D spend of £518m in line with previous year. Continued investment in improving efficiency of existing products and developing future technologies; progress on electrical strategy including announced acquisition of Siemens’ eAircraft business and programme to strengthen hybrid electric power and propulsion R&D activities in Germany; SMR development a step closer
• Group free cash outflow returned to typical seasonality with an outflow of £(429)m (H1 2018: £(72)m) with planned inventory build in Civil Aerospace & Power Systems, which will unwind in H2; net cash balance improved to £508m, excluding lease liabilities (H1 2018: £298m)
• Portfolio simplification with disposal of Commercial Marine and Power Development

Operational:

• Civil Aerospace: 257 large engines delivered; further good progress in reducing average large engine OE unit losses, down by £0.2m to £1.3m; growth in large engine installed fleet of 7% year- on-year to 4,897 installed engines driving engine flying hour growth of 8%; material ramp up in Trent 7000 production
• Power Systems: strong revenue growth of 6%; increasing penetration of services; £1.7bn order intake (book to bill 1.1x); full year outlook underpinned by strong order coverage of ~80%
• Defence: solid revenue and profit performance; strong book-to-bill ratio 1.5x gives confidence in outlook; F-35 LiftSystem driving higher OE sales; directed energy successfully demonstrated
• ITP Aero good underlying revenue growth at 23% led by civil programmes; profit lower reflecting temporary OE mix headwind and lower spare parts sales which are expected to pick up in H2

Civil Aerospace in-service performance:

• Trent XWB cumulative flying hours now over 4m, 562 engines in service achieving 99.9% dispatch reliability; OE deficit reduced by a third in the first half
• Progress made on Trent 1000, increasing our MRO capacity to help minimise disruption and reducing AOGs, albeit pace of decline has been slightly below our original plans; in-service cost estimates increased by a total of £100m across the next three years
• Trent 1000 TEN high pressure turbine (HPT) blade issue being managed through proactive inspections; new blade design and certification underway; costs expected to be within the bounds of normal risk we manage on our programmes in any given year

Market environment:

• Air traffic growth is at the long-term trend level of 4-5%; stable widebody airframe build-rates expected short to medium term; A380 production ceasing 2021; widebody order backlog at 2,136 engines; supports good ongoing growth in our in-service fleet to underpin medium term plan
• Increased focus on life-cycle solutions and further improving environmental performance puts Power Systems in a strong position to take advantage of OE demand. Global defence markets remain stable with a number of appealing mid-term growth opportunities

2019 Half Year Results: Financial Highlights

Percentage or absolute change figures in this document are on an organic basis⁴ unless otherwise stated.

For notes to table see page 3

2019 Outlook: Guidance maintained

Commenting on the full year outlook, Warren East added: “We remain on track to meet our full year guidance for underlying Core operating profit and Core free cash flow⁷ of £700m +/- £100m. Our outlook remains positive, underpinned by continued progress on our key free cash flow drivers towards our ambition to exceed £1 of free cash flow per share in the mid-term, together with the steadily improving health of the Trent 1000 fleet.

After a decade of significant investment, we remain committed to delivering improved returns while continuing to invest in the innovation needed to realise our long-term aspiration to be the world’s leading industrial technology company.”

Notes to financial tables and commentary:
1 Underlying: for definition see Note 2 on page 29
2 Core includes Civil Aerospace, Power Systems, Defence and ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019, Rolls- Royce Power Development sold on 15 April 2019, L’Orange sold on 1 June 2018 and other smaller non-core businesses. The H1 2018
segmental analysis has been presented on a consistent basis with the new segmental structure and excludes L’Orange which was sold on 1 June 2018
3 The financial information for the prior period has been restated to reflect changes to the provisional ITP Aero balances and other adjustments. See note 1 on page 27 for more details
4 Organic change at constant translational currency (‘constant currency’) by applying FY 2018 average rates to H1 2019 and H1 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated
5 Free cash flow is defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders, payments to
investigating authorities and M&A. Excludes cash costs of 2018 restructuring plan. The derivation of free cash flow from the cash flow statement is shown on page 42
6 Comparators for currency hedge book shown at FY 2018 position
7 Free cash flow outlook includes in-service engine costs as outlined on page 14

This announcement has been determined to contain inside information.

Enquiries:

Photographs and broadcast-standard video are available at www.rolls-royce.com. A PDF copy of this report can be downloaded from www.rolls-royce.com/investors.

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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