Earnings Call: H1 2017

Aug 3, 2017

Slides

Hello, and welcome to today's Rolls Royce Holdings, LLC twenty seventeen Half Year Results Fixed Income Conference Call. And throughout this, all participants will be in listen only mode. And after a brief presentation, there will be opportunity for questions. I'll now hand you over to Stephen Davis, CFO. Please begin, Stephen. Thank you, Hugh, and afternoon, everybody. So I've just spent two or three minutes running through the highlights of the numbers, and I'm very happy to take your questions. But I think the how I would summarize the first half is very much in line with our plans, a very solid performance for the six months of the year. We are also, at the same time, confirming that our outlook for the year is unchanged. And just as a reminder of that, have guided to a modest growth in profit in 2017 over 2016 and about the same sort of level of free cash flow in 2017 over 2016, which last year was about GBP 100,000,000, and the same thing again this year. And that free cash flow is against the backdrop of making more engines than ever. And as you know, we sell our engines civil aerospace had a loss. So we're able to offset that drag on the business through improvements elsewhere, which we are very happy with. So looking through the numbers headline numbers, revenue has grown by 6% across the group half year on half year. And the two big drivers of that are in civil aerospace, which grew very nicely over the year and double digit revenue growth in civil aerospace and power systems, which grew by 3% over the half year over half year. Nuclear grew by 8%, but that number is off a relatively small base. I think it's both civil, aerospace and power systems that are the most sort of pleasing numbers for the first half of the year. At the same time, gross margin improved quite nicely, a 13% growth in gross margin driven by growth in Power Systems, I've got this one, but also by an improvement in the economics of the XWB engines, which we are reducing the loss on sale, the cash loss on the sale of those engines. And we are, again, as we confirmed a couple of days ago, expecting that number to get to a breakeven position by 2020. We almost doubled our profit number to GBP $345,000,000 for the half year versus what was £158,000,000 last year. So nice growth in our in operating profit with the gross margin improvements coming through, but also with some good savings in commercial and administration costs of the GBP 38,000,000 saving there year on year. On that note, operating margin increased to 5%, which is an improvement from the first half last year, which is 2.6%. But we wouldn't want to pretend at all that we're pleased with the 5% margin, and there's still a long way to go to get to sort of a double digit margin that we aspire to over the next few years. Free cash flow saw a GBP 75,000,000 improvement year on year. So despite the fact that we're making 500 engines sorry, 200 engines in the first half of the year that make a loss of about £1,600,000 each. And this time last year, that number was closer to 150,000,140 So 60 more engines at a loss of £1,600,000,000 But despite that, we are still generating £75,000,000 more cash. And that's despite also generating sorry, spending another £90,000,000 more on CapEx and depreciation if you compare year on year. So good operational cash generation and improvement there, which we are encouraged by. We have decided to keep our dividend flat for the time being at 4.6¢ per share. We will revisit the dividend when we start to see the growth in free cash flow that we are anticipating. So a solid start to the year. No change in the outlook on a full year basis, the one I just described. And we took the opportunity on Tuesday earlier this week to confirm to the market that we're very comfortable with the £1,000,000,000 of free cash flow that's being talked about in the sort of market and in the media. We don't have this as a formal target, but it is very much a sort of ambition that we are working towards. And in fact, we would hope to go beyond that as well around 2020 and subsequently, and then grow from there into 2021, 2022. And really acknowledging that this is the source of cash generation that the £15,000,000,000 power revenue business ought to have in any event, not just as sort of a nice to have coal, but it's almost a financially imperative for us to have this level of free cash flow given our long term investments that we have to make where we are developing engine programs or engines that may not be on the plane for another ten or fifteen years or so. So I would say the half time update is good progress so far. Lots to do in the second half of the year, but we are quietly confident around our the outlook that we've set the market and ourselves. And we believe that we're well placed for twenty eighteen and 2019 and moving towards that £1,000,000,000 of free cash flow by the end of the decade, which, whilst it's not an internal target, has very much become something that we are looking at as a very useful rallying cry for the organization of where we ought to be as a business. So that's my sort of broad overview. I'm happy to take any questions that you might have. Thank you. And I announce you, just ask that question. And if you find that question has been answered, before it's returned to speak or wish to track that question, simply press 0 and then 2 to cancel. And there'll be a brief pause while the questions are being registered. Okay. Well, at this stage, there seems to be no actually, wait one sec. One is now coming through. And that's over the line of Philippe Grandois of Societe Generale. Please go ahead. Your line is open. Yes. Good afternoon. Thank you for taking my question. Just a quick one on the ITP acquisition. If you could confirm the timing of completion for this deal and your preset option to pay for the acquisition. I think Moody's, for example, assumes that you will pay both same shares for this transaction. If you could clarify what you intend to do? Okay. So thank you for your question. So the completion now is just dependent on the final single approval from the Spanish government. And we are anticipating that will be before the end of the calendar year. So given that we're now entering the period where it's sort of summer holidays and so on, I would expect that it's probably going to be in the fourth quarter of this calendar year, maybe in September, but the fourth quarter of this calendar year. So that's the sort of timing you should be thinking about. And then as a reminder, the payment phasing for the EUR $720,000,000 transaction is will be paid at over eight quarters, and we have the option of using either equity or cash. Our choice with each payment will very much depend on the share price and our balance sheet and cash balance on, as you might imagine. And I would expect that the first payment will probably be in equity just to get the ball rolling on using equity so that we can be part of that meaningful setup. But I think after that, no firm decisions made at this stage. I think we keep our options open and no firm decisions will with equity and then take it from there. But very much dependent on how where the share price is. Think where the share price is now, it's a lot more attractive to use equity than it would have been twelve months ago when we were down to sort of £6 or so a share. At 9.5 the equity becomes far more attractive. So can't read too much into that, but we'll start with equity and take it from there. Thank you. Thank you. Okay. One final chance. If anyone has any further questions at this stage, please do press 0 and one on your phone keypad now. And there'll be a further pause while any final questions are being registered. Okay. Well, back to you for any closing comments. Well, thank you for your time, everybody, and I look forward to talking to you shortly after our full year results, which will be in March 2018. Thank you very much. Bye bye. This now concludes today's call. Thank you all very much for attending. You can now disconnect your line.