Earnings Call: H2 2014

Feb 13, 2015

Slides

Hello, and welcome to today's Rolls Royce Holdings plc twenty fourteen Full Year Results Fixed Income Conference Call. Today, I'm pleased to present David Smith, Group CFO. Please begin. Good afternoon, everybody, and thank you for taking the time to join us today. Some of you will have already heard our webcast this morning, so I won't go through the results in detail. Clearly, 2014 was not an easy year for Rolls Royce and we know it wasn't an easy year for some of our investors either. Nonetheless, we did meet the guidance for 2014 given in October. Our order book grew 5% excluding the Energy business and that shows the continued customer confidence that underpins our strong medium term growth prospects. We have today also given new 2015 guidance for revenue profit and a number of other factors. In the interest of simplicity and transparency, we are now providing guidance in terms of absolute numerical ranges instead of percentage changes. We've guided 2015 revenue to between 13,400,000,000.0 and 14,400,000,000.0 and profit to between 1,400,000,000.0 and $1,550,000,000 We see free cash flow at around £200,000,000 plus or minus 150,000,000 We do expect continued headwinds on free cash flow as we scale up the civil engine business and continue to utilize customer deposits, particularly partially offset by the early benefits of the action we're taking on costs and cash such as our focus on inventory. We expect both CapEx and net R and D will be lower in both absolute terms and over time as a percentage of revenue. Our guidance has been based on 2014 FX rates and therefore assumes no currency effects either adverse or favorable. We expect underlying restructuring charges to be around 90,000,000 to $100,000,000 That is about $60,000,000 lower than in 2014. As in 2014, we expect performance delivery to be weighted towards the second half of the year. Our balance sheet remains strong. This is important because it gives us the ability to withstand the shocks and turbulence, which sometimes occur in our industry and clearly provides confidence to our customers who are buying products that will remain in service for decades and will require decades of aftermarket support and they do look to our credit ratings. I'm confident and excited about the future growth that we can deliver. However, we must manage the transformation of our industrial base that's required to deliver it very carefully. And in the near term, refocus and double our cash and cost activities to help uncertainty that surround us at the moment. That won't be easy, but I've done this before in other companies. It takes time, but now we have the whole team focused on it. Thank you for your attention and I look forward to your questions. Thank Our first question is from the line of Sam Morton of Credit Suisse. Please go ahead. Your line is open. Hi, good afternoon. So I didn't get the chance to listen to the call earlier. I just wanted a little bit more detail on the free cash flow guidance. I was trying to understand what makes the swing factor so big relatively and maybe what factors we should think about changing that free cash flow either higher or lower? And then secondly, I was hoping that you might be able to give us an update on the pension deficit. I could see the numbers in the release today, but I just wondered when there might be a review coming up? Thanks a lot. Okay. So if I take the first question first around cash flow. Maybe as you went on the call, I'll give you a little bit more context also to the guidance that we gave. Essentially, I would say that in the aerospace side of the business, we will still see growth on the civil side and we'll still see strong revenue and margins on defense. We've guided a little bit lower on the Marine and Power Systems sides of the business. And that really reflects I think the uncertainty around the oil price at the moment. Marine in particular has a reasonable exposure to the oil and gas sectors particularly in the offshore markets. And we have seen already and we expect probably to see further deferrals of orders and particularly I think around the servicing of equipment in that sector, a reduction in discretionary spend. So as we then try and translate that in cash flow guidance, we've got a couple of things going on. In the Civil side of the business, the growth that we will see during 2015 is primarily on products that are being launched, XWB engine and the Trent 1,000. And they are not cash generative at the moment in terms of the initial OE sale. In fact, will be cash losses on some of those engines. And therefore, when we think about our mix of business that is a negative on cash. We also have the majority of our restructuring spend in 2015, some of which was booked as an accrual last year, but that will really occur mainly in the first half of this year. And then thirdly, around our Marine business, because again we see some risk of deferral of orders, we've been quite cautious around deposits from customers and what we would expect to come. So all of that really impacts on our cash guidance. Around the pensions deficit, we have updated obviously the data within the balance sheet. Surplus on The U. K. Funds, fairly significant surplus on The U. K. Funds, which are primarily defined benefit funds. On the overseas funds, some of those are funded, of those are not, but there is a deficit of about $1,100,000,000 I think it is on that side. So our net pension surplus is still around 600,000,000 In terms of the next actuarial assessments of those, I'm just going to turn to my colleagues, but Right. Hope that answers your question Sam. Sorry, think that was off Mike the second comment. So if you could just repeat or paraphrase what was said that So would be the largest U. K. Pension fund, there is an actuarial assessment update this year. Okay. That's great. Thanks a lot. As there are no further call questions at this stage, may I please pass the call back to you to close? Well, thank you very much for your attention, and I hope the material that we sent out also will be very helpful to you. Thank you very much, and I'm sure we'll talk again in the interims. Thank you. This now concludes the call. Thank you all very much for attending. You may now disconnect your lines.