Rolls-Royce Holdings Plc 2019 Full Year Results

Strong 2019 underlying operating profit driving FCF; reinforcing our confidence for 2020

Warren East, Chief Executive commented: “After a challenging first half, we had a good end to 2019, delivering 25% growth in full year underlying operating profit and an encouraging level of free cash flow. Our restructuring efforts gained momentum, with run-rate cost savings of £269m. Civil Aerospace improved its underlying profit significantly, with record engine deliveries, good aftermarket performance and improved OE unit losses. We made further progress on the Trent 1000; cash costs are in line with guidance. We remain on target to reduce aircraft on ground to single digits by the end of Q2 2020.

We continued to invest significantly in R&D and took important steps towards becoming a leader in low carbon technologies. We grew our electrical capabilities with the acquisitions of Siemens’ eAircraft business and a majority stake in Qinous, as well as developing new in-house hybrid-electric solutions.”

• Good end to 2019: strong Civil Aerospace aftermarket; better Power Systems trading in Q4
• Underlying core operating profit up 25% to £810m; reported group operating loss £(852)m
• Core FCF £911m led by higher profit and reflecting £173m Trent 1000 insurance receipts
• £0.5bn improvement in net cash* position to £1.4bn; gross debt reduced by £1.1bn
• Trent 1000 in-service cash costs £578m; £1.4bn exceptional charge in 2019 results
• Trent 1000 guidance unchanged from November trading update
• Record widebody engine deliveries; 14% lower OE unit loss; 64% share of new orders
• Defence: record £5.3bn order intake driving 26% order book growth and healthy cash flow
• Power Systems: revenue up 4% & operating margin +90bps despite market challenges
• 2020: underlying operating profit up ~15%; at least £1bn FCF; excl. any material COVID-19 impact
• Remain confident in mid-term target of at least £1 per share of FCF (>£1.9bn FCF)

^*Net cash is presented excluding lease liabilities **2019 underlying EPS ~18p before the impact of IFRS 16 Footnotes to the tables can be found with the Financial Highlights

2019 Full Year Group Highlights

Financial:

• Both Group and core underlying operating profit increased 25% to £808m and £810m respectively; led by a £195m organic improvement in Civil Aerospace underlying operating profit to £44m and underlying profit growth in Power Systems of 15% following better Q4 trading
• Strong Group free cash flow (FCF) of £873m (2018: £568m) and core FCF £911m (2018: £648m), driven by improved underlying operating profit and Civil aftermarket cash margin; £578m Trent 1000 in-service cash costs partly offset by £173m insurance receipt
• FCF before working capital movement (inventory, receivables & payables), insurance receipts and Trent 1000 costs was £747m, 79% higher than the prior year (2018: £418m)
• Trent 1000 exceptional programme charge of £1,361m consistent with our November trading statement, driving reported operating loss of £(852)m (2018: £(1,161)m)
• Core R&D cash spend increased modestly to £1,108m; good progress on electrical strategy including acquisition of Siemens’ eAircraft business and strengthening of hybrid capabilities in Power Systems; small modular reactor (SMR) development progressing following UK Government matched funding; investment in future opportunities in Defence (Tempest, Future Vertical Lift, B-52)
• Net cash excluding lease liabilities improved to £1,361m (2018: £840m); gross debt £1.1bn lower

Operational:

• Civil Aerospace: record 510 widebody engines delivered; further progress in reducing average widebody OE loss, down 14% to £1.2m; 6% growth in large engine installed fleet to 5,029 with engine flying hour growth of 7%. Widebody market share of 64% achieved on new orders in 2019
• Power Systems: revenues up 4%; strong power generation growth and market share gains in Asia; increased services penetration; underlying operating profit margin up 90bps to 10.1%
• Defence: excellent performance in 2019 on both orders and cash flow; record order intake of £5.3bn and book-to-bill ratio of 1.6x driving healthy cash flow; 499 aero engines delivered
• ITP Aero: good underlying revenue growth of 21% and strong profit growth to £111m
• Restructuring plan on track; 2,900 cumulative headcount reduction with run rate cost savings of £269m achieved since the programme commenced in June 2018

Civil Aerospace in-service performance:

• Trent XWB now our second largest installed fleet; leading engines now in their fifth year in service. Fleet leader has flown over 22,000 hours without a shop visit; Trent XWB-84 OE deficit reduced by over 20% in 2019 and remains on track to reach breakeven by the end of 2020
• Trent 1000: roll-out of technical fixes progressing well, further actions underway to reduce customer disruption; in-service cash costs unchanged at £2.4bn across 2017-23. AOG reduction to single-digit by end of Q2 2020, unchanged since November update
• Design progressing on track for the improved Trent 1000 TEN high pressure turbine (HPT) blade, the last major issue to resolve; certification of this component still expected in the first half of 2021

Market environment: mid-term ambition of £1 FCF per share remains supported

• Updated widebody engine delivery expectations of 450 in 2020 and 400-450 per year over the mid-term, following previously announced airframer build rate reductions
• Despite challenges in certain Power Systems end markets, growth expected to continue led by mission-critical power generation, rising services penetration and further geographical expansion
• Defence targeting a number of attractive mid-term growth opportunities, particularly in the US where we are well positioned
• The outbreak of COVID-19 represents a macro risk and is likely to have an impact on air traffic growth in the near term; however long term growth trends remain intact

2019 Full Year Results: Financial Highlights

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

Notes:

¹Underlying: for definition see Note 2

²Core 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, Civil Nuclear North America Service business and other smaller non-core businesses

³The prior period has been restated to reflect the treatment of our Civil Nuclear North America Services business as non-core (disposal announced in September 2019). See Note 1 for details

⁴Organic change at constant translational currency (‘constant currency’) by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

⁵Free 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 is shown in Note 24

2020 Outlook

Commenting on the outlook for 2020, Warren East added: “The changes we have been implementing over the past two years are creating a tangible and sustainable cultural and performance shift. The momentum we gained in 2019 underpins our confidence for the year ahead. We will continue to make progress against our key drivers of improving OE losses, growing aftermarket cash flow, and controlling our indirect costs, while investing significantly in R&D to enable our future growth.

There are macro risks to navigate in 2020, notably the outbreak of COVID-19. The situation is still evolving, and as such our guidance for 2020 excludes any material impact. We are monitoring developments, taking mitigating actions, and will update the market as appropriate. Core operating profit growth is expected to be around 15%, with at least £1bn of FCF in 2020, as we drive towards our ambition to exceed £1 per share of FCF – or at least £1.9bn – in the mid-term.

We see a significant opportunity in the years ahead to lead the transition to providing low carbon power and we made significant progress on this strategy in 2019. We will continue to invest in developing increasingly efficient engines, exploiting new technologies, and innovating to become a disruptor in new areas. We are increasingly well placed to realise our long-term aspiration to be the world’s leading industrial technology company.”

Detailed 2020 guidance

Notes:

^*Civil Aerospace profit improvement despite headwind from £100-150m lower capitalisation of R&D in 2020

^{^}For 2020 guidance purposes Power Systems 2019 is shown excluding Bergen, which is included in non-core to reflect treatment from 2020

¹Underlying: for definition see Note 2

²Core 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, Bergen (for 2020 guidance purposes only), Civil Nuclear North America Service business and other smaller non-core businesses.

³The prior year has been restated to reflect the treatment of our Civil Nuclear North America Services business as non-core (disposal announced in September 2019). See Note 1 for details

⁴Organic change at constant translational currency (‘constant currency’) by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

• Net R&D cash spend is expected to be broadly stable at ~£1.1bn
• Capitalised R&D should reduce by £100m-£150m reflecting lower capitalisation in Civil Aerospace
• Capex (PPE) is expected to be £100m-£150m higher reflecting higher investment in Trent 1000 spare engines as we take further pro-active steps to reduce customer disruption in 2020
• Trent 1000 in service cash costs expected to be £450m-£550m
• P&L finance costs are expected to be broadly stable (2019: £223m); cash flow finance costs modestly lower reflecting gross debt reduction in 2019 (2019: £73m)
• P&L underlying tax rate is expected to be in the low-to-mid 30s in 2020 (2019: 47.9%); Cash tax paid expected to increase to £260m-£290m (2019: £175m), mainly due to the timing of payments in the US and Germany
• As part of our ongoing portfolio evaluation to create a simpler, more focused group, we are announcing today that we are carrying out a strategic review of our Bergen medium speed gas and diesel engine business. Bergen will be reported within non-core businesses in 2020 results. For guidance purposes 2019 results are shown on this basis with our 2020 divisional guidance above
• All guidance presented for 2020 excludes any material impact from COVID-19

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 Full 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.

Results presentation

A presentation will be held at 09:00 (GMT) today. Details of how to join the event online are provided below. Downloadable materials will be available on the Investor Relations section of the Rolls-Royce website from the start of the event.

Online webcast registration details:

To register for the live webcast, including Q&A participation, please visit the following link:

https://edge.media-server.com/mmc/p/724ns9b4

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

Download the full press release