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Rolls-Royce Holding PLC

Rolls-Royce Holdings Solid progress to make 2018 a breakthrough year, strategically and financially

Rolls-Royce Holdings (LON:RR), today announced 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

2018 Group highlights

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