Rolls-Royce Holdings plc Half Year Results

25-Jul-2013

• Tognum consolidated for the first time in the Group's half year results.
• First flight of the Trent XWB-powered Airbus A350.
• Order book of £69.2 billion, up 15%; up 12% excluding Tognum.
• Underlying revenue of £7.3 billion, up 27%; up 9% excluding Tognum.
• Underlying profit before tax of £840 million, up 34%; up 32% excluding Tognum.
• Reported profit before financing of £884 million, down 30% due to IAE disposal profit in 2012.
• Payment to shareholders of 8.6 pence per share, up 13%.

Rolls-Royce Holdings plc	including Tognum			excluding Tognum
£ millions	H1 2013	H1 2012	Change	H1 2013	H1 2012	Change
Order book	69,247	60,146*	15%	67,449	60,146*	12%
Underlying revenue**	7,320	5,757	27%	6,249	5,757	9%
Underlying profit before tax**	840	628†	34%	787	596	32%
Return on sales***	11.9%	11.4%	0.5pp	13.1%	10.8%	2.3pp
Underlying earnings per share	33.33p	26.22p	27%
Half year payment to shareholders	8.6p	7.6p	13%
Reported revenue	7,345	5,720	28%
Reported profit before financing	884	1,271†	-30%
Net cash	921	1,317*	(396)
Average net cash/(debt)	355	(590)	945

* 2012 year-end data
** See note 2 on page 21 for explanation
*** By reference to underlying profit before financing costs and tax
† Restated by -£9m to reflect amendments to IAS 19

John Rishton, Chief Executive, said:

"Results in the first half show good progress against some of our priorities, as well as highlighting the need for further action in others. In terms of delivery on our promises, we were delighted to take management control of Tognum after nearly two years; the whole organisation was excited by the first flight of the Airbus A350 powered by our Trent XWB engines and we made good progress on our customer initiatives.

"While underlying profits were up 34%, primarily reflecting volume and the benefit from the IAE restructuring, it is clear we have a lot more to do on cost (and cash). Fortunately we have significant opportunities to improve both, but this will take time and firm resolve to deliver.
"We maintain our full year guidance for the Group."

Group Overview

Tognum is fully consolidated in the Group's results for the first time rather than equity accounted as it was in 2012. The contribution of Tognum to the Group's first half results is shown below:

Rolls-Royce Holdings plc	Group			Tognum contribution
£ millions	H1 2013	H1 2012	Change	H1 2013	H1 2012	Change
Order book	69,247	60,146*	15%	1,798	n/a
Underlying revenue**	7,320	5,757	27%	1,071	n/a
Underlying profit before tax**	840	628†	34%	53	32	66%

* 2012 year-end data
** See note 2 on page 21 explanation
† Restated by -£9m to reflect amendments to IAS 19

In the first half of 2013, the Group increased its order book by 15%, underlying revenue by 27% and underlying profit by 34%.

Tognum's results are reported on page 10 in our new business segment called Power Systems. Power Systems comprises Tognum and Bergen Engines, together these make up Rolls-Royce Power Systems Holding GmbH, our joint venture with Daimler that has been renamed from Engine Holding GmbH.

In the first half of 2013 we made progress with our priorities, but there is plenty more to do.

1. Deliver on the promises we have made

Quality has shown improvement and the increased focus on delivery to our customers has led to significant progress in civil large engines and in Marine.

Significant milestones have been achieved in major programmes. These include: the first flight of the Trent XWB-powered Airbus A350, the certification of the A400M military transport aircraft powered by the TP400 and delivery of our first Environship.

2. Decide where to grow and where not to

We continue to invest in capacity and in technology.

We opened new services centres for Civil Aerospace at London Heathrow and for Marine in Guangzhou, China. In the UK, we are close to completing a turbine blade facility in Rotherham and an advanced disc factory in Washington, Tyne & Wear. In the USA, we are constructing a new turbine machining facility at Crosspointe, Virginia.
We acquired specialist composites company Hyper-Therm High Temperature Composites and PKMJ Technical Services, a US nuclear engineering services company.

Areas where we have decided not to invest include the announced sale of our 50% shareholding in the RTM322 military helicopter engine joint venture with Turbomeca and the completion of the sale of Tidal Generation to Alstom, as previously announced.

3. Improve financial performance

We continue to focus on margin progression. In the first half, margins at Group level improved to 11.9% (11.4% in H1 2012). Excluding Tognum, margins improved by 2.3 percentage points to 13.1%. Overall, profits grew by 34%, reflecting the benefits of volume and the 2012 IAE restructuring, with other, largely one-off, impacts broadly offsetting each other. While some progress has been made on cost, there is clearly more to do.

Our cash outflow of £461m, prior to Tognum, acquisitions, disposals and foreign exchange, reflects continued investment to support growth coupled with a £0.8bn increase in net working capital. The increase of £261m in inventory during the period was disappointing and more work needs to be done.

Group Trading Summary

Rolls-Royce Holdings plc	including Tognum			excluding Tognum
£ millions	H1 2013	H1 2012	Change	H1 2013	H1 2012	Change
Order book	69,247	60,146*	15%	67,449	60,146*	12%
Underlying revenue**	7,320	5,757	27%	6,249	5,757	9%
Underlying OE revenue**	3,751	2,723	38%	3,011	2,723	11%
Underlying services revenue**	3,569	3,034	18%	3,238	3,034	7%
Underlying profit before tax**	840	628†	34%	787	596	32%
Return on sales***	11.9%	11.4%	0.5pp	13.1%	10.8%	2.3pp
Net cash	921	1,317*	(396)
Average net cash/(debt)	355	(590)	945

* 2012 year-end data
** See note 2 on page 21 for explanation
*** By reference to underlying profit before financing costs and tax
† Restated by -£9m to reflect amendments to IAS 19

Order Book

• The order book growth of 15% to £69.2bn includes a contribution of £1.8bn from Tognum. Excluding Tognum, growth of 12% reflects an increase in all segments except Defence Aerospace. The order intake in the first half of £15.3bn included new orders of £10.9bn in Civil Aerospace, £0.9bn in Defence Aerospace, £1.7bn in Marine, £0.5bn in Energy and £1.4bn in Power Systems.

Income Statement

• Underlying revenue growth of 27% to £7.3bn includes a contribution of £1.1bn from Tognum. Excluding Tognum, growth of 9% reflects increases in all segments: up 6% in Civil Aerospace to £3.2bn, up 9% in Defence Aerospace to £1.2bn, up 16% in Marine to £1.2bn and up 10% in Energy to £0.5bn. These increases were driven primarily by volume, mix and foreign exchange benefits.
• Underlying OE revenue growth of 38% to £3.8bn includes a contribution of £740m from Tognum. Excluding Tognum, growth of 11% reflects increases in all segments: up 8% in Civil Aerospace to £1.4bn reflecting increased engine deliveries, up 17% in Defence Aerospace to £0.7bn due to revenue mix and pricing, up 12% in Marine to £0.7bn due to growth in Offshore and foreign exchange benefits partially offset by pricing pressure in Offshore and Merchant, and up 6% in Energy to £0.2bn.
• Underlying services revenue growth of 18% to £3.6bn includes a contribution of £331m from Tognum. Excluding Tognum, growth of 7% reflects increases in all segments: up 3% in Civil Aerospace to £1.8bn broadly in line with installed thrust growth; up 1% in Defence Aerospace to £0.6bn due to higher sales of spare parts for military transport engines; up 21% in Marine to £0.5bn reflecting demand for spare parts sales in Offshore and in Naval submarines; and up 12% in Energy to £0.3bn due to increased market share.
• Underlying profit before tax growth of 34% to £840m includes a contribution of £53m from Tognum. Growth reflects the benefits of volume and £112m from the restructuring of IAE in 2012. In the business segments: Civil Aerospace increased by 59% to £486m; Defence Aerospace increased by 10% to £211m due to volume, revenue mix and cost improvement; and Marine decreased 8% to £135m due to adverse revenue mix and pricing pressure.
• Reported profit before financing of £884m (£1,271m in H1 2012) has fallen by 30% mainly due to the IAE disposal profit of £700m in 2012. Underlying to reported adjustments are further explained in note 2 on page 21.
• Both underlying profit before financing and reported profit before financing in 2012 have been restated by -£9m to reflect amendments to IAS 19, as further explained in note 9 on page 27.

Balance Sheet

• Net cash at the period end was £921m (£1.3bn at the end of 2012). The average net cash of £355m in the first half (average net debt of £590m in H1 2012) reflects the timing of the sale of our interest in IAE in 2012.
• The Group continues to have strong liquidity with £4bn of cash and committed facilities, including £1bn of additional funding raised in the first half. Debt maturities remain spread through to 2026.
• Pension liabilities increased by £425m on an accounting basis to £870m. This was primarily due to due to the consolidation of £397m of Tognum liabilities.

Cash Flow

• Our cash outflow of £461m, prior to Tognum, acquisitions, disposals and foreign exchange, reflects continued investment to support growth coupled with a £0.8bn increase in net working capital.

Full year 2013 Guidance

For the full year 2013, we maintain our guidance for the Group.

Excluding Tognum, we expect modest growth in underlying revenue and good growth in underlying profit, with cash flow around breakeven as we continue to invest for future growth.

In Civil Aerospace, we anticipate modest growth in revenue and strong growth in profit. In Defence Aerospace we expect modest growth in revenue and have changed our guidance on profit from a modest reduction to broadly flat. In Marine we expect modest growth in revenue and profit. And in Energy we expect some improvement in revenue and profit.

We expect Tognum's underlying revenue and underlying profit to be broadly flat, unchanged from previous guidance.