Rolls-Royce full year results

Group Highlights

·     Order book of £71.6bn, up 19%

·     Underlying revenue of £15.5bn, up 27%

·     Underlying profit before tax of £1,759m, up 23%

·     Reported profit before tax of £1,759m, down 36%

·     Payment to shareholders of 22 pence per share, up 13%

·     Tognum, now part of Power Systems, consolidated for the first time in the full year results


Rolls-Royce Holdings plc including Tognum excluding Tognum
£ millions 2013 2012** Change 2013 2012** Change
Order book 71,612 60,146 19% 69,978 60,146 16%
Underlying revenue* 15,505 12,209 27% 12,919 12,209 6%
Underlying profit before tax 1,759 1,434 23% 1,502 1,357 11%
Return on sales*** 11.8% 12.2% -0.4pp 12.1% 11.6% 0.5pp
Underlying earnings per share 65.59p 59.59p 10%      
Full year payment to shareholders 22.0p 19.5p 13%      
Reported revenue 15,513 12,161 28%      
Reported profit before tax 1,759 2,766 -36%      
Reported earnings per share 73.26p 125.38p -42%      
Net cash 1,939 1,317        
Average net cash/(debt) 350 (145)        

*     See note 2 on page 21 for explanation

**    Certain profit figures restated, see note 1 on page 19

***   By reference to underlying profit before financing costs and tax


John Rishton, Chief Executive, said:


„2013 was a year of good progress, in which our order book, underlying revenue and underlying profit all grew.

Our priorities remain the 4Cs: Customer, Concentration, Cost and Cash. There has been good progress on Customer, particularly with on-time delivery. On Concentration, we continue to focus on our two technology platforms of gas turbines and reciprocating engines.  We achieved a cash inflow of £359m and improved our inventory turns.  On cost, there is more to do.

The Trent XWB, our largest single programme, is performing well in test flight and will power the new Airbus A350 into service later this year.

In 2014, we expect a pause in our revenue and profit growth, reflecting offsetting trends across the business.  This is a pause, not a change in direction, and growth will resume in 2015.  Cash flow is expected to be broadly similar to 2013.  Our record order book underpins our confidence in the long-term growth of our business.”


Group Overview

In 2013, the Group increased its order book by 19%, underlying revenue by 27% and underlying profit by 23%.  The order book of more than £71bn provides good visibility of income streams for many years to come, and gives us the confidence to increase the dividend by 13% to 22p.


Our financial results now fully reflect our joint acquisition of Tognum, now part of our Power Systems business.  This is an important business and we are confident that it will prove a good investment. It has brought additional scale and technology to our reciprocating engine portfolio and strengthened our market access through the MTU and L’Orange brands.  Power Systems plays a key role in our strategy to go to market via two strong technology platforms:  gas turbines and reciprocating engines.


We continue to focus on the 4 Cs of Customer, Concentration, Cost and Cash.




It is essential that we deliver on the promises made to our customers.  Across the business we have significantly improved on-time delivery.  This foundational step will strengthen our customer relationships and drive more efficient use of resources, such as inventory.  In Civil Aerospace, on-time delivery to our widebody customers was 100% in 2013 for the first time.


In 2013, major milestones were achieved in a number of important programmes.   The Airbus A350 XWB flew for the first time powered by our Trent XWB engines.  We have now received orders for more than 1,600 XWBs, making this our best-selling Trent engine.  The Trent 1000 engine, which powers the Boeing 787 Dreamliner, has achieved the best performance of any new widebody engine entering service, with 99.9% despatch reliability. In June, it was selected by Singapore Airlines to power 50 Boeing 787 aircraft.  In Marine, the first of our innovative Environships went to sea. This vessel combines a wave-piercing bow, gas-powered engines and advanced propulsion systems that together reduce CO2emissions by 40%, compared with equivalent diesel-powered vessels.  Lastly, BAE Systems announced that the UK’s Type 26 Destroyer programme will feature four MTU diesel gen sets from Power Systems, together with our Trent-derived MT30 gas turbines.




Concentration means deciding where to invest for future growth and where not.  We have two technology platforms:  gas turbines and reciprocating engines.  Within gas turbines, we have a strong Civil Aerospace business, with over £60bn in orders.  We will continue to invest here, including the next generation of narrowbody aircraft engines.  We will also look for opportunities to expand in reciprocating engines.


In 2013, we acquired Hyper-Therm a specialist ceramics company, to increase our capabilities in ceramic matrix materials that will, in the future, play a critical part in improving the performance of gas turbine engines.  We also acquired a Norwegian company, SmartMotor AS, a leader in the permanent magnet technology employed in our Marine business.  We integrated PKMJ Technical Services, a US-based nuclear engineering services business with expertise in extending the life of nuclear plants.


Areas where we have decided not to grow include the sale of our 50% holding in the RTM322 helicopter engine programme to Turbomeca, a Safran company.




The highly regulated nature of the aerospace industry means that it will take both time and tenacity to drive cost out of the business, and we are still not where we need to be.  However, there are a number of areas where progress is being made.  We reduced indirect headcount by 11%, with further savings identified for 2014.  Unit cost fell in Marine, Energy and Power Systems, although this was more than offset by an increase in Civil, where capacity growth has preceded volume growth and the cost per unit has predictably risen.  We are building newer, more efficient facilities and capacity that will support a doubling of production of Trent engines. We are moving production away from high cost countries, and we are consolidating our supply chain. These actions will deliver benefits over time.


We have prioritised investment that improves operational performance, adds to our technical capability and reduces cost. This includes a shop floor IT modernisation programme that will increase operational efficiency and an Integrated Production Systems programme that will improve delivery to customers while reducing cost.




The Group delivered a cash inflow of £359m (£312m excluding Tognum), after payments to shareholders, prior to acquisitions, disposals and foreign exchange.   Inventory has been an area of significant focus. While substantially improving our on-time delivery to customers and preparing for the ramp-up in volumes, we have improved inventory turns from 3x to 3.4x, excluding Tognum.  This is one of the largest one year improvements in our stock turns.


We continue to invest significantly to deliver our order book.  In 2013, capital expenditure was £687m (£590m excluding Tognum and £491m in 2012), with new aero engine test facilities at the Stennis Space Centre in Mississippi, USA and in Dahlewitz, Germany; a new Marine services facility in Guangzhou, China; and turbine blade facilities in Rotherham in the UK and at Crosspointe in the US, as well as a disc factory in Washington Tyne and Wear.


Group Trading Summary


Rolls-Royce Holdings plc Including Tognum Excluding Tognum
£ millions 2013 2012** Change 2013 2012** Change
Order book 71,612 60,146 19% 69,978 60,146 16%
Underlying revenue* 15,505 12,209 27% 12,919 12,209 6%
Underlying profit before tax 1,759 1,434 23% 1,502 1,357 11%

*     See note 2 on page 21 for explanation

**    Restated, see note 1 on page 19



Order Book


·   The order book increased 19%, to £71.6bn, up 16% excluding Tognum.  Power Systems’ order book of £1.9bn, reflects growth of 6%.  We received orders for engines to power 334 widebody aircraft; a significant year for Civil Aerospace. The order book increased in Civil Aerospace, Marine, Energy and Power Systems, but decreased in Defence Aerospace.  The order intake in 2013 included new orders of £18.9bn in Civil Aerospace, £1.6bn in Defence Aerospace, £2.7bn in Marine, £1.1bn in Energy and £2.7bn in Power Systems. The regional composition is broadly unchanged, with Asia and the Middle East representing 49% of the total order book.


Income Statement


·   Underlying revenue increased 27% to £15.5bn, including £2.6bn in revenue from Tognum.  Excluding Tognum, the Group’s revenue increased 6% to £12.9bn, with 7% growth in original equipment and 4% growth in services. In 2013, 47% of the Group’s revenue was generated by the sale of aftermarket parts and services (52% in 2012).


·   Underlying profit before tax increased 23% to £1.8bn, including a £180m increase from Tognum.  Excluding Tognum, profit increased 11% to £1.5bn, reflecting volume growth, continued strong margins in Defence Aerospace and the restructured relationship with International Aero Engines.


·   Following a review with the Financial Reporting Council (FRC), we have changed our accounting policy for entry fees.  In prior years, entry fees were recognised as other operating income at the time they were paid.  This policy has been refined to align with our policy for capitalising development costs. The 2012 impact of the change in policy has been to increase underlying profit before tax by £25m and to reduce net assets by £184m.  The impact of this change in 2013 has been to reduce underlying profit by £39m.  Additional details can be found in note 1, page 19.


·   Both underlying profit before financing and reported profit before financing in 2012 have been restated by -£20m to reflect amendments to IAS 19, as further explained in note 1 on page 20.


Balance Sheet


·     The Group remains committed to maintaining a strong balance sheet and a strong, investment grade credit rating. Standard & Poor’s retains a rating of A/stable and Moody’s a rating of A3/Stable.


·     The Group continues to have good liquidity with £1.9bn of cash and £3.6bn in facilities.  Debt maturities remain well spread through to 2026.


·     On an accounting basis, pension liabilities reduced by £100m, largely as a result of adopting the amendments to IAS 19, which requires the use of AA corporate bonds to value pension assets.  The acquisition of Tognum increased the liabilities by £397m and there was a reduction of £49 million as a result of changes in assumptions during the year.  The Group also provided a discretionary cost of living increase to our largest pension, at a cost of £64m.


Cash Flow


·     A cash inflow of £359m, prior to acquisitions, disposals and foreign exchange, reflects good progress on inventory and working capital, in a year of significant investment in capital expenditure and intangibles.  Free cash flow, defined as operating cash after pensions and taxes, but before payments to shareholders, acquisitions & disposals, and foreign exchange was £781m (£669m excluding Tognum).





Segment Reporting


To better align our reporting structure with our organization, going forward we will report as: Aerospace and Marine & Industrial Power Systems (MIPS).  Aerospace comprises our Civil Aerospace and Defence Aerospace businesses.  MIPS comprises our Marine, Power Systems and Energy & Nuclear businesses. Our nuclear submarines business will be reported within our Energy & Nuclear business.  We will continue to report the same level of financial detail for our businesses as we normally do.




For the full year 2014, we expect underlying Group revenue and profit to be flat. This reflects a 15-20% decline in Defence revenue, the consequence of well-publicised cuts in defence spending among major customers, and completion of the delivery phase of two major export programmes.  Additionally, Marine will generate lower revenue in 2013, driven by Offshore.  We expect growth to resume in 2015.


We expect profitability to be stronger in the second half of 2014, reflecting the timing and mix of trading and cost reduction.  To be more consistent with market practice, our cash guidance in the future will be based on free cash flow.  We expect our 2014 free cash flow to be similar to 2013 (£781m).  Across the businesses, we expect underlying results as follows in 2014:


In Civil Aerospace, we anticipate modest growth in revenue and good growth in profit. In Defence Aerospace, we expect 15-20% reductions in revenue and profit. In Marine, we expect a modest reduction in revenue and modest growth in profit.  In Energy & Nuclear, we expect good growth in revenue and profit.  In Power Systems, we expect modest growth in revenue and good growth in profit.  Additional details follow in our business reviews and financial results.