Earnings Call: H2 2017

Mar 7, 2018

Slides

Hello, and welcome to the Rolls Royce twenty seventeen Full Year Results Fixed Income Call. Throughout this session, all participants will be in listen only mode. And afterwards, there will be a question and answer session. I'll now hand you over to Stephen the CFO. Please begin. Thank you very much. Afternoon, everybody. My name is Stephen Daintif. I'm the Chief Financial Officer of Rolls Royce. Thank you for joining us this afternoon for a run through of our 2017 results. I'm sure you've read the release already and maybe one or two of you actually checked into the analyst presentation this morning. But let me just give you one or two highlights, then I'll take your questions. So I think it's an encouraging set of results that we've presented today. Good operational progress and milestones achieved. If look at the financial highlights, I think revenues growing at six percent is always a very good start. Profit is up 25% and free cash flow has trebled to £273,000,000 ahead of expectations and reflecting the progress that we're making across the group, but particularly in Power Systems during the course of the year. Civil Aerospace delivered a record four eighty three engines, up 35% and also achieved a 37% reduction in the cash deficit on the XWB-eighty four, which will be one of our most significant engines over the next few years. Service revenues were strong, which is the aftermarket revenues. They grew by 12%, similar to the wide body flying hour growth and will be the key driver of improving cash flow as we grow our installed base and great visibility around that cash flow as well and reliability of the margins attached to it. You'll also see that we had good transitions this year, a record 67 aircraft versus 46 in 2016. So our aircraft are transitioning better than our competition. So a good year in Civil Aerospace. You'll see that we have, however, experienced some issues on civil aerospace during the year in respect of the 900 and the 1,000, essentially parts not lasting as long as we first anticipated and wearing out more quickly. In both instances, the 900 intermediate pressure turbine blade and in the 1,000, the IPT high pressure blade and also the compressor rotor one and two. So a number of issues on the Trent 1,000. The cumulative cash cost of that those two engine issues in 2017 was £170,000,000 And we guided today that that's going to double to around £340,000,000 in 2018. But I think the encouraging news is that we're still able to give the guidance of £450,000,000 of free cash flow in 2018 despite digesting that £340,000,000 of cash outflow that we're anticipating on those two issues. I think Power Systems had a standout year, growing its revenues nicely, particularly with service revenues growing at 6%. And their profit is growing by over 60%. So really good profit growth in Power Systems and very good cash conversion as well, converting all their profits into cash and then even working capital contributions as well benefiting Power Systems. Defense had another steady performance, good margins, albeit slightly declining, and operating against some tough export markets and with a slightly dampened UK market as well, where certain long term contracts are starting to come or have come to the end of their lives, including the tornado, the typhoon and the Seaking helicopter. We commented today on the restructuring program that we announced back in January, and it's on the Capital Markets Day in June. We're going to tell a little bit more about that and the progress that we're making there. And the if the theme, though, for the restructuring program is to have a lean corporate center and empower businesses. So to take some of the heat away from the corporate center activities and give our businesses a bit more autonomy to decide how to run and operate their businesses, but within a corporate control and governance framework still. We reported our numbers on IFRS 15 as well for the first time for 2017. And I think the market has been very well educated along the way as to what the likely impact is going to be, broadly an £800,000,000 reduction in our profits. And that's almost entirely due to our recognition of the cash losses on original equipment sales in Civil Aerospace immediately, I. E, as soon as the delivery takes place rather than putting the loss on our balance sheet and then amortizing that loss, so to speak, over the life of the contract. And so that is, in very simple terms, around a £700,000,000 hit to our income statement, which as you can see makes up the absolute the vast majority of the overall impact to our P and L account. We've given some good guidance, think, some good sort of granular guidance today around our expectations for 2018. In short order, we're looking at £450,000,000 of free cash flow versus today's £273,000,000 for 2017. And for profits, we're looking at moving the profit from £321,000,000 of profit under IFRS 15 basis to a £400,000,000 profit in 2018 on that new basis. And the just to point out there that the one key variable that is more tricky to model is the number of shop visits that take place when I've explained how the accounting treatment for the OE cash loss is being recognized immediately. But in the aftermarket, we only recognize the revenues and profits when the shop visit takes place. But a key point here is that we collect cash throughout on a flying hour basis. So what you're going to see over the next five, ten years is a big deferred income balance growing on our balance sheet. As we collect the cash, we debit cash and credit the deferred income and put that on the balance sheet. So you'll see that liability growing. So that's a sort of quick run through of our numbers. I think an encouraging set of results. Good to see cash flow growing and moving nicely towards that £1,000,000,000 by 2020 goal that we have, so to speak, and making and again sort of reaffirming our confidence around that today's results. And that's notwithstanding the headwind that we have, the temporary headwind of the 900,000,000 and the 1,000 million We reiterated today the importance of a strong balance sheet and a return to an A grade rating in the near term. That remains an absolute priority for us. And I think we've signaled that intent by indicating that notwithstanding the growth in free cash flow, we're holding the dividend for now and that we will not be revisiting it until 2019. And free cash flow will be the guide for us on the appropriateness of increasing the dividend or not. So I think that's the quick run through. Sorry for taking a little bit longer on that than you might have hoped, but I'm happy to take any questions now that you might have. Thank you very much. Again, just to remind you, if you would like to ask a question, please press 01 on your telephone keypads. You can press 02 to cancel at any time. And a reminder that you do need to have DTMF tones enabled in order to do so. And we'll now have a further pause while questions are being registered. And it seems we have no questions on the telephone lines at this time. So if I could hand the call back to you, Stephen. Well, thank you very much. And I hope there's somebody out there still listening. But thank you very much for your time, and I look forward to talking to you at the half year. Thank you. Bye bye. This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.