Rolls-Royce Holdings 2018 – Full Year Results

Warren East, Chief Executive commented: “Despite the challenges we faced on Trent 1000 in-service issues, solid progress has been made realising our ambition to make 2018 a breakthrough year, both strategically and financially. Underlying financial results are ahead of expectations, with good growth in profit and cash flow. Following the restructuring we announced in June last year we are starting to see the crucial behavioural changes needed to sustain our momentum.

 

We identified and are implementing the fixes to improve the health of the Trent 1000 fleet. Overall our Civil Aerospace large engine fleet performance is getting stronger, especially the Trent XWB-84, which surpassed three million flying hours continuing its exceptional entry into service record.

 

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.“

 

·        Strong underlying revenue growth; core revenue up 10%. Reported revenue up 7%

·        Core free cash flow more than doubled to £641m, ahead of expectations

·        Material improvement in net funds, year-end net cash balance of £611m

·        Group underlying operating profit of £616m; group reported operating loss of £(1,161)m

·        Trent 1000 fixes in place; in-year cash cost of £431m; total costs increased by £100m

·        Exceptional Half Year charge of £554m on Trent 1000 increased to Full Year £790m

·        Large engine flying hour growth of 14%, OE unit losses reduced by 13% to £1.4m

·        Restructuring on track, c.1,300 net headcount reduction, £400m run-rate savings end 2020

·        Decision to withdraw from New Midsize Airplane platform competition

·        Positive outlook; at least £1bn free cash flow by 2020; mid-term ambition of > £1 CPS

 

 

	Underlying Group1					Underlying Core1,2
Year to 31 December	2018		20173	Organic Change4		2018	20173	Organic Change4
Revenue (£m)	15,067		13,671	+8%		14,336	12,786	+10%
Operating profit (£m)	616		306	253		633	317	+71%
Earnings per share	16.0p		2.3p	+10.2p		17.4p	4.4p	+8.7p
		Reported Group
	2018		20173	Change
Revenue (£m)	15,729		14,747	+7%
Operating (loss)/profit (£m)	(1,161)		366	-417%
Earnings per share	(129.2)p		184.4p	(313.6)p
Group free cash flow (£m)5	568		259	309
Core free cash flow (£m)	641		318	323
Cash / (net debt) (£m)	611		(305)	916
Payment per share	11.7p		11.7p	n/a

Financial:

·        Group underlying revenue of £15,067m up 8%; reported revenue £15,729m up 7%. Underlying Civil Aerospace revenue up 12%, Power Systems up 15%, Defence flat and ITP Aero up 6%

 

·        Group underlying operating profit up £253m to £616m; good growth in Power Systems. Significant improvement in Civil Aerospace despite £127m increase in negative contract accounting adjustments (to £276m) offset by £188m higher net R&D capitalisation. Reported operating loss of £(1,161)m down £1,527m reflecting exceptional items

 

·        Group free cash flow improvement of £309m to £568m driven by Core free cash flow of £641m (2017: £318m). Continued improvement in Civil Aerospace engine flying hour receipts, better deposit inflows in Defence and actions taken to standardise supplier payment terms

 

·        Core free cash flow per share of 34.5p (2017: 17.3p); Group CROIC of 12% (2017: 13%)

 

·        Net funds improved from a net debt position of £305m in 2017 to a net cash position of £611m, largely due to receipt of €673m proceeds from the disposal of L'Orange

 

Operational:

·        Civil Aerospace: 469 large engines invoiced, with an additional 11 shipped to OEMs; further good progress in reducing large engine OE losses, down by 13% to £1.4m per engine, growth in large engine installed fleet of 8%, now at 4,757 installed engines driving engine flying hour growth of 14%; new product milestones with Pearl 15 launched for business aviation, Trent XWB-97 entered service on Airbus A350-1000 and Trent 7000 entered service on A330neo

 

·        Power Systems: excellent progress driven by strength across key markets and growth in service revenues; increased long-term service agreement orders; growing success in hybrid rail

 

·        Defence: increase in R&D investment; 17% increase in order backlog; orders for F-35 LiftSystem and EJ200 engines, MT30 continued success in naval, pivotal role in Team Tempest

 

·        Restructuring announced in June 2018 on track: group structure changed; embedding new behaviours and values needed for cultural change; non-manufacturing headcount⁶ reduced by a net c.1,300; remain on track for 4,600 net headcount reduction, related exceptional charge of £223m taken to the income statement; £70m cash costs, excluded from free cash flow

 

Trent 1000:

·        Good progress with technical fixes on Trent 1000: certification of newly designed Package C compressor blade achieved and roll-out of this into fleet commenced; Trent 1000-TEN moved from hard life to less onerous inspection regime

 

·        Trent 1000 exceptional charge increased from £554m at the Half Year to £790m for Full Year. This £236m increase reflects a contribution to customer disruption costs greater than those anticipated at the Half Year. Total cash costs (2017-2022) to resolve Trent 1000 issues £100m higher than earlier estimates; higher disruption partly mitigated by good progress on reducing shop visit costs

 

·        Civil Aerospace incurred cash costs of £431m in 2018 (2017: £119m) in line with Half Year guidance. 2019 Full Year cash impact on Civil Aerospace expected to be around £450m for Trent 1000, before declining by at least £100m in 2020, and reducing materially thereafter

 

Trent 900:

·        Exceptional item of £186m following Airbus' decision to close the A380 production line

 

Investment for the future:

·        Encouraging progress in innovation: Full Year net R&D spend of £1.1bn; continued good progress with UltraFan programme; developments in both small scale full-electric and hybrid-electric flight; micro-grid offering launched; 892 patents approved for filing, a new record for Rolls-Royce

 

£m	2019 Outlook
Underlying revenue
Civil Aerospace	Around 10% growth
Power Systems	Mid single-digit growth
Defence	Stable
ITP Aero	Around 10% growth
Underlying operating profit
Civil Aerospace	Closer to breakeven
Power Systems	Margins around 100bps higher
Defence	Margins around 100bps lower
ITP Aero	Margins stable
Corporate costs	Around £50m
Group underlying operating profit	£700m +/- £100m
Group free cash flow5,8	£700m +/- £100m

Outlook 

Our current widebody order book supports the continued growth of our large engine installed base, which in turn will drive ongoing engine flying hour growth. Revenue and profit improvements will be led by continued reduction in OE deficits and increased servicing activity. In 2019 we expect these dynamics to deliver around 10% revenue growth and operating profits to be closer to break-even. We expect cash costs for the Trent 1000 in-service issues to be around £450m in 2019.  Given the smaller scale of the Trent 900 in-service costs, these will no longer be reported separately. 

As we enter 2019 our confidence for the year ahead is underpinned by significantly improved order coverage than at this point last year. After the strong pre-buy effect in 2018, revenue growth is expected to moderate to mid single-digit growth supported by continued tightening of emission regulations, increasing data storage requirements and the growth of life-cycle solutions. Operating margins are expected to increase by around 100bps and we remain on track to realise our mid-teens operating margin ambition in the mid-term.

The Defence order backlog remains strong with a healthy number of new orders received in 2018 giving us confidence in our medium term outlook. In 2019, revenue is expected to remain stable with operating margins around 100bps lower as we increase investment in new platforms to position us for the next generation opportunities in transport and combat end markets.