Rolls-Royce (England): Group Highlights:
• Record order book, at £22.9bn (2004 £18.9bn).
• Sales increased to £6,603m. Sales on an underlying* basis increased by nine per cent.
• Services revenues** increased by 12 per cent on an underlying* basis.
• Profit before financing costs increased to £877m.
• Underlying profit before financing costs*** increased to £679m, up 40 per cent on a like-for-like basis.
• Underlying profit before taxation*** increased to £584m, up 49 per cent on a like-for-like basis.
• Cash inflow of £552m (2004 £251m).
• Average net debt reduced to £260m (2004 £632m).
• Final payment to shareholders increased by 7.5 per cent to 5.38p per share, making a full year total of 8.72p per share.
* see note 4.
** including 100 per cent of repair and overhaul joint ventures.
*** see notes 1, 4.
Sir John Rose, Chief Executive, said:
“We have established positions in four global market sectors where the barriers to entry are high. Growth in our sales and order book and our consistent focus on improved efficiency underpin our expectation of further growth in profits and positive cash flow in 2006.”
Rolls-Royce continued to make good financial progress in 2005, with a strong increase in profitability and cash flow.
The Group’s performance has been built on a consistent strategy, supported by investment in market access, technology and capability. Growth has been achieved organically through the introduction of new products, the expansion of its comprehensive aftermarket services capability and strong partnerships, as well as the successful development of past acquisitions. This has resulted in continued strong order intake and sales growth.
The focus on cost reduction and increased efficiency enabled the group to mitigate the headwinds caused by commodity price inflation and an adverse trend in the achieved US dollar exchange rate.
Group sales were £6,603m, an underlying increase of nine per cent, reflecting organic growth in each of the Group’s market sectors.
Underlying profit before tax, on a like-for-like basis, increased by 49 per cent and a cash inflow of £552 million was generated, resulting in positive net cash of £335 million on the balance sheet at the year-end. Average net debt was reduced by 59 per cent, to £260 million.
Underlying earnings per share rose 55 per cent to 24.14p (2004 15.56p) and basic earnings per share rose 29 per cent to 20.11p (2004 15.56p). A final payment to shareholders has been proposed of 5.38p per share, making a total payment for the year of 8.72p per share, a 6.6 per cent increase compared to the payment in 2004.
New orders in 2005 reached a record level of £11.3 billion, and brought the year-end firm order book to a record £22.9 billion, an increase of 21 per cent over 2004. Over the past 10 years, the order book has grown by 14 per cent per annum compound. Good progress was made across all four of the Group’s markets.
Rolls-Royce is increasingly international. During 2005 the Group incorporated a new subsidiary in Bangalore, in order to expand engineering capacity over a range of new programmes; established a joint venture in Singapore, to develop a commercially viable power system based on solid oxide fuel cell technology; opened a new marine factory in Shanghai, from which the Group’s £300 million turnover merchant business will be managed; and established new sources of supply in markets such as China, Indonesia, Malaysia, Singapore and Taiwan.
The Group had three key priorities during the year:
• Focused investment in technology and products
The Group’s structured approach to technology acquisition ensures that it has ‘on the shelf’ technologies ready to incorporate into the latest generation of products whilst acquiring the technologies required for future products. As the Group continues to address new market opportunities in each of its business sectors, the level of self-funded investment in research and development is expected to remain at approximately five per cent of Group sales. The impact of this investment on the income statement will reflect the mix and maturity of individual development programmes and will result in a significantly lower level of capitalisation of costs in 2006. During the year the Group launched a number of new programmes, notably the Trent 1700 for the A350 and the Avon 200, an upgrade of the existing Avon engine that has been so successful in the energy sector.
• Operational efficiency and unit cost reduction
The Group continued to make progress with its drive for greater efficiency, offsetting the impact of commodity price inflation with cost reduction activities, including increased productivity, low-cost sourcing and supply chain management. The significantly higher workload challenged the ability of the supply chain and this remains an area for attention. The impact of higher inventories, carried to facilitate the factory modernisation programme, was more than offset by tight management of financial working capital. Importantly, more efficient working practices were implemented as a pre-condition for new factory investment.
• Continued development of aftermarket services
Aftermarket services revenues, including 100 per cent of repair and overhaul joint ventures, increased by 12 per cent in 2005 and have grown at 11 per cent per annum compound over the last ten years. Services sales now represent 54 per cent of Group sales. This follows the successful broadening of the Group’s product range, an increasing number of engines in service, and investment in a comprehensive range of aftermarket services capabilities. Increasingly, the Group is taking responsibility for the maintenance of its engines and systems under long-term service agreements, resulting in a much closer alignment with the customers’ interests and a better application of the Group’s skills and assets. During 2005, a number of innovative services agreements were announced in each of the Group’s business sectors.
Rolls-Royce is addressing four long-term growth markets. The aggregate demand for engines and services over the next 20 years is estimated to be worth approximately two trillion dollars. The Group’s consistent investment in technology and new products and services enables it to respond to new market developments, creating the opportunity for organic growth in each sector.
The growing number of Rolls-Royce engines in service and their long service lives are expected to generate attractive returns over decades. As the business model develops and the revenues from aftermarket services continue to grow, the Group expects to achieve positive cash flow while maintaining its level of investment in technology and product.
The Group considers it is prudent to continue to strengthen its balance sheet because of the long-term nature of its programmes and the significant investments and obligations they entail. The Group also recognises the importance of dividends to shareholders and is proposing a further increase in the payment to shareholders in 2005, representing an increase of 6.6 per cent compared to the payment made in 2004.
The deficit on the Group’s pension schemes, after taking account of deferred taxation, was £1,154m (2004 £1,002m). The Group introduced significant changes, in 2003, to reduce the pension scheme deficit and will review further actions in the light of the actuarial review of the main scheme, which is due this year, and the changing regulatory environment.
The Group has continued to pursue its strategy of hedging future net dollar revenues and at the end of 2005 had approximately $10.5 billion of forward cover at an average exchange rate of 1.67 dollars to the pound (2004 $9 billion at 1.60). The Group is using this hedge book in conjunction with cost reduction initiatives and further ‘dollarisation’ of the cost base to manage future foreign exchange risk. The achieved exchange rate in 2005 deteriorated by four cents relative to 2004.
Continued progress is expected in 2006, underpinned by the strong order book, growing services revenues and increasing efficiency. As a result, the Group expects increased profits and a positive cash flow in 2006.
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