Guidance

Jul 6, 2015

Hello and welcome to today's Rolls Royce Holding plc Investor Conference Call. Today, I'm pleased to present Ian Davis, Chairman of the Board. Please go ahead. Good morning, everyone. It's Ian Davis, Chairman of Rolls Royce. I assume you've all by now seen the announcement that we John Richton is going to be retiring from Rolls Royce in the summer and that Warren East will take over from him as Chief Executive. This happened after an extensive search once John had told me towards the end of last year of his intentions to retire. What I'd like to do is give you a chance to ask me any questions. If I could just say a couple of words beforehand. We do have to finish by twenty past eleven. So we are a bit constrained. I'd also just like to emphasize upfront, there's no change to our guidance. There's no business story here. And I also hope you appreciate that I cannot and I will not get into a trading update or giving an update on the business. It's absolutely not appropriate for court of this type. I'd also just like to say, it was a surprise and a disappointment to me and the Board when John announced his retirement. Although last year was a very bumpy year as you know as well as I do, the progress in the last four years and indeed the last ten years has been exceptional. We're really doing well I think on the four Cs. We'll begin to see that coming through. A lot more to be done. We've had some tremendous customer advances. And if look at John's record over the four year period in terms of profits order book share price, it isn't really half bad at all. So I did just want to say that on behalf of myself and the company. Equally, I'm genuinely and so is the Board very excited about Warren joining the company. I think you will know of his record. He's got an exceptional record at ARM Holdings. ARM, although it's not a manufacturing business, you may want to ask me about that, it does have a lot of similarities as Rolls Royce in terms of supply chain, its business model and particularly in terms of services and also its involvement in technology supply chain. So a lot similar to that, a great record. And he does have the advantage in knowing a little bit about the company and the company knowing him. And I think that does reduce the cultural risk and all the rest of it. So disappointed John is going, excited about Warren. But just with those few words of introduction, perhaps I could throw this open for any questions you might have. But please don't push me on strategy and trading. We'll do that in the interims in two weeks' time and then again in July. Thank you. And question is from the line of Robert Stallard at RBC. Please go ahead. Your line is open. Thanks very much. Good morning. Good morning. A couple of quick questions. I do apologize. We will go back to that line. Robert, please go ahead. Your line is open. Okay. Is it working now? Yes, it is. Okay. Good morning. Thanks very much. A couple of quick questions. What do you expect Warren to do differently from John? And what's he going to do the same? Thank you very much. Well, I think Warren will have the chance to talk with you in the market in July. I mean in terms of my expectations, there's a lot of tremendous momentum in the company at the moment particularly on the operational full year agenda. And I think the expectation of myself and the Board and Warren is part of the Board is we really want to keep that momentum going, perhaps even accelerate it if we can and then real, real progress. I also would be surprised if Warren doesn't keep this relentless focus on customer. I mean, although last year was a very disappointing year in terms of financial expectations and performance, we made huge strides with customers as we've seen I think one manifestation of that is with the order that we received last week. So I would very much hope and expect and I've obviously talked to Warren about this really, really keep the focus on the 4Cs, the restructuring, the focus on cost and margin. In terms of what will be different, that's up to Warren. That's an unfinished business that we know we have to do. For example, getting into question about how we're going to deal with narrow body, we will look to progress on that. But I do think that continuity as well as change is a very important part of Warren's appointment. And the fact that he knows a bit about the company, he's got a very good sense of it, think is I think quite an important signal. Okay. Thanks very much. Our next question is from the line of Ben Fiddler of Deutsche Bank. Please go ahead. Your line is open. Yes. Thank you. Good morning. I just had one quick question really, which is and feel free to correct me if you think the first thesis is wrong in this. But it strikes me that what Rolls Royce really needs is someone who's got a good track record of restructuring large complex heavy manufacturing industries. And I guess the question is how do you think Warren fits that bill bearing in mind although he has an extremely successful track record at ARM from everything I understand that was about growing the business not about restructuring the business. And it's a business that does not have a large complex heavy manufacturing supply chain underneath it. So it's just to understand your thinking as the Chairman and the Board's thinking about why he is the right individual with the right skill set to manage a business as complex as roles? Thank you. Well, thanks Ben. Well, think restructuring is part of the Rolls Royce story. We have made it very clear that there's a lot of opportunity to improve our operational efficiency and to restructure the manufacturing. But by far the bigger part of the story longer term is growth. And we really are looking to grow our global footprint, grow our global customer base, not least in Asia. And so I wouldn't change your thesis in one sense. Short term, you're right, but longer term this is a growth story. And I think Warren is really, really epitomizes what it takes to build a global business, particularly if I call it David and Glass, we're up against some very big beats in not just the aerospace industry, but in the land and sea business as well. And Warren I think has demonstrated just what it takes to succeed like that. So restructuring, yes, but growth is to me strategically much more important. When it comes to the point, I mean Warren a lot of Warren's experience is incredibly relevant to us. The business model of ARM with its focus on service revenues and Aftercare is very similar. The focus on technology and R and D is actually crucial to us. We do recognize and Warren knows, he doesn't have the manufacturing experience, but there's a lot of that in Rolls Royce. There's also quite a bit of that on the Board as well. And as a Board and Warren himself is absolutely committed to building the necessary support about around areas where he doesn't have the expertise. So we are going to absolutely continue the restructuring. There's a lot of momentum going on that and I feel that we have the appropriate expertise to do that. While we're focusing on the strategic development of the company and building the other aspects, not least around the services, which as you know Ben is more than 50% of our revenues and value. Thank you very much. Our next question is from the line of Christian Lachlan at Bernstein. Please go ahead with your question. Your line is now open. Yes. Hi. Thanks. Ian, I just wanted to actually my questions have already been answered. I tried to remove myself from the queue. But anyways, thanks. Nice to hear your voice anyway, Christian. Okay. If anyone has any further questions at this stage, could you please say press 0 and then 1 you. Okay. First question is from the line of Sandy Morris at Jefferies. Please go ahead. Your line is open. Hello. Good morning. Just pursuing Ben's sort of line of questioning slightly, we did do an extensive search. Did we ever really get so far as interviews of people who might have fulfilled Ben's criteria better and then having weighed it all up decided that again sitting on the board as a non exec was already someone who best fit the bill. Is that did we get into that degree of detail, Iain? Sorry to of pester on this. No. Yes, we did. We did do an extensive search both inside the company and outside including people from either the industry or related industries. And so it was a very thorough search. Obviously, the current industries were a big part of it, but we concluded at the end of that that Warren was the right man for the job. Okay. Thank you. That's good. Thanks so much, Ian. Our next question is from the line of Edward Stacie at Besi. Please go ahead with your question. Your line is open. Hello. Just a question really about the operating difficulties that you had last year and then Mr. Rifton sort of choosing to retire just as those appear to be sort of solved I guess. In a way, I suppose we wait a few more quarters before we before the stock market will really be very confident that all of the twenty fourteen issues are laid to rest. Can you say anything about the degree of confidence that everything has been dealt with that needed to be dealt with? Well, as I said at the beginning, there's no change in our guidance and plan. And we're hard at work fixing the things that need to be fixed and most importantly growing the business and building the customers. I would just say that 2014 was a tough year for us particularly on the financial side, but we do need to keep from a business point of view we have to keep that in context. On the technology and the customer side, last year was the best year that we've had and we're beginning to see some of the fruits of that now. And when you look at things in ten year cycles, 2014 was one of those excuse my language oh shit years in terms of certain things happening. But the fundamental strategic momentum wasn't really changed. I'd also say to last year, a lot of our problems weren't actually operational problems for us. They were market related. And we know that we didn't cover ourselves in Glory in the way we communicated with the market and I hope you'll begin to see us really the efforts of us. We're absolutely determined to get our communications better. But a lot of last year's problems were market related. This isn't an easy period in equipment supply as you know as well as I do. So yes, absolutely we are focused on fixing those problems that we can fix. There are certain problems which are just go with the cycle and we'll get through that. But it's really, really important that we keep our focus on the customers and the technology. And it's not just a business school wishlist thing. This is what leads to the cash in the long term. And last year on that sense wasn't such a bad year. I would just remind people for context that last year was our second record year in terms of profits and revenues as well. So this is to me it was all about expectation management as it was about actual performance. And we know that we've got to do better on expectations management and communications. And I'd be very surprised if you didn't find that Warren didn't keep that momentum going along with David. That's very clear. Thank you very much. And Okay. We go over to the line of Ben Fiddler. Please go ahead. Your line is open. Ben, your line is open. You might want to take yourself off mute. Can you hear me now, sorry? Yes. We can hear you now. Sorry to come back with one further question. But just to understand, does Warren have a free mandate to as CEO change whatever he wants whether that be accounting, whether that be the structure of the organization and the portfolio shape, whether that be the long term strategic plans and the guidance etcetera? I mean you've given him a free you see it as him having free rein to do what he wants with that as a Board to you? Well, don't think any CEO is certainly not on the Board of which Iron Chan will have a totally free mandate to do whatever they want. But I do believe that CEOs should run the company with their team and certainly that will be the spirit of it. And he can and should look at anything he wants to look at. If he's unhappy with any of our procedures accounting or otherwise, I would expect him to argue strongly the case for that. But any major changes like that would absolutely go through the Board. Thank you very much. Okay. At this stage, there are no further questions in the queue. May I please pass it back to you? Yes. Okay. Well, thank you very much. I do appreciate this is a very, very brief call. And I do hope that if you have any follow-up questions you'll be in touch with our IR team. I do want to reiterate we are determined to improve our communication with the investing community. As I said, I hope you'll begin to see some signs of this, but this is something I personally can commit on the company that if we are disappointed you're not being sufficient just let us know. We're determined to get the relationships that we seek with our shareholders. As I said, we're a long term company. We've got to deliver and we'd like to have long term relationships with our investors. But thank you very much for joining the call and do get in touch with the IR team. And if you'd like to see me at some stage let me know. And Warren for sure will be in touch with you when he takes up the reins in July and August. Thanks very much everyone. This now concludes today's call. Thank you all very much for attending. You may now disconnect your lines.