Rolls-Royce Group plc 2009 Preliminary Results

Group Highlights

* Order intake of £13.4bn resulted in a record order book at the year-end of £58.3bn (2008 £55.5bn).
* Group revenues increased to £10,414m (2008 £9,082m). Revenues on an underlying basis* increased by 11 per cent to £10,108m. Services revenues increased by four per cent to £4,927m on an underlying basis.
* Profit before financing was £1,172m (2008 £862m).
* Underlying profit before taxation* increased by four per cent to £915m (2008 £880m).
* Strong financial position
o Average net cash for the period improved by £260m to £635m (2008 £375m).
o Robust balance sheet with net cash of £1,275m at the period end (2008 £1,458m).
o No major changes in pension cash funding requirements.
* Proposed final payment to shareholders of nine pence per share, an increase of five per cent over 2008, bringing the full year payment to 15 pence per share.

* see note 1

Sir John Rose, Chief Executive, said:

“Rolls-Royce has delivered a solid set of results despite difficult trading conditions. This demonstrates the resilience of our business.

“Our record order book, the breadth of the portfolio across all four sectors, our strong balance sheet and the early action we have taken to reduce costs will enable us to manage short-term difficulties and deliver long-term growth. These fundamental strengths give us the confidence to increase the final payment to shareholders by five per cent.

“In 2010 we expect underlying revenues and profits to be broadly similar to those achieved in 2009”.
Group Overview
Resilient performance:

Rolls-Royce continued to make solid progress in 2009 despite difficult trading conditions. The order book (£58.3bn), underlying revenues (£10.1bn) and underlying profit before tax (£915m) all increased. The Group has a strong financial position with average net cash balances improving by £260m to £635m.

In 2009 the business was affected by the global economic downturn and by continued delays in a number of major programmes. These include the Airbus A380, the Boeing 787 and the Airbus A400M military transport aircraft. The Group continued to focus on increasing productivity and efficiency across the business, both to improve the long-term competitive position and to mitigate the effects of the recent global downturn.

The economic environment remains challenging and it seems likely that world growth will be slower in the years ahead than it has been in the past decade. However Rolls-Royce will benefit from its ability to access the world’s faster growing markets where there continues to be demand for investment in transport and infrastructure.

Our success in winning new customers and orders, the breadth and mix of our product and service portfolio and the financial performance of the Group all demonstrate the increasing resilience of our business. Revenues generated from outside civil aerospace continued to grow strongly comprising 56 per cent of revenues in 2009. This was driven by increases of 19 per cent and 17 per cent respectively in our defence and marine segments, and 36 per cent growth in our energy business where revenues exceeded £1bn for the first time.
A consistent strategy:

Ours is a long-term business. Over the last decade the disciplined application of our strategy has delivered a better balanced and more resilient performance. We have expanded our portfolio significantly, and improved market share in all our four markets. This has led to a more than four fold increase in the order book, and a far better mix and balance of our revenues. Group revenues have grown at an average rate of eight per cent a year with profit before tax growing by close to ten per cent a year, causing both to more than double since 1999.

During the same period we have become less dependent on our traditional markets of Europe and North America. These geographies, which accounted for approximately 70 per cent of our revenues in 1999, represent 66 per cent of our revenues today. This trend is set to continue as almost half of the Group’s order book now relates to business in Asia, the Middle East and South America. Around half our revenues today come from services, compared to 40 per cent a decade ago. This represents an annual growth in services of around ten per cent.

We have become a much more international company, with new manufacturing and service facilities spread across five continents. These changes helped deliver good results in 2009 and we believe will ensure another robust performance in 2010.

2009 has been a remarkable year in which we celebrated the first flight of six new types of aircraft powered by Rolls-Royce engines – the Boeing 787, Gulfstream G650, Airbus A400M, Embraer Legacy 650, the BAES MANTIS UAV and the Lynx Wildcat helicopter. Early in 2010 the short take-off and vertical landing (STOVL) version of the F-35 Lightning II Joint Strike Fighter Lightning (JSF) deployed the unique Rolls-Royce LiftSystem™ for the first time.

This rate of new product introduction is at an unprecedented level with more entirely new aircraft taking to the skies in just three months than in the previous five years. These new product introductions combined with the volatility in load during 2009 created significant capacity challenges which were well managed by the company and our supply chain. Our abilities to meet these challenges are the direct consequence of a decade of investment and innovation.

In the marine market, in 2009 we saw the US Navy’s Littoral Combat Ship complete sea trials ready for active duty in 2010, as well as the first sailing of the Royal Navy’s Astute class submarine and the commissioning of the Royal Navy’s first Type 45 Destroyer, HMS Daring.

All these aircraft and vessels are powered by Rolls-Royce and are expected to enter active service in the next few years. Each of these programmes has a lifespan of 40 years or more, giving us exceptional visibility of future original equipment and service revenues. Our continuing level of targeted investment supports these programmes as well as the further expansion of our portfolio. This includes programmes such as the Trent XWB engine which will run for the first time in 2010, and the LiftSystem for the JSF which is already undergoing flight tests. Our strong market positions, supported by the entry into service of these major new programmes, reinforce our belief that revenues will double in the next ten years, just as they have in the last decade.

The balance of the business we have today, our operational performance and our prospects for long-term growth provide the Board with the confidence to increase the payment to shareholders by five per cent to nine pence per share, a total of 15 pence per share for the year.
Strong financial position:

Average net cash balances were £635m for the year, and year-end cash balances were almost £1.3bn. Debt maturities are well spread and were extended further during 2009 with the successful issue of a 10-year £500m GBP bond designed to refinance a maturing obligation in 2011.

The year-end IAS 19 valuation of the Group’s pension schemes revealed a modest deterioration in the net deficit to £855m. This is primarily a function of the return to more normal levels of the benchmark AA Corporate discount rate upon which this valuation is based.

More important was the completion of the triennial actuarial valuation of the Group’s largest UK pension scheme which represents around two-thirds of the Group’s forecast liabilities. This confirmed that there will be no change to funding requirements in 2010. This demonstrates the benefits of the early action taken to amend the terms of the scheme and to adopt an investment strategy that reduces volatility.

Despite challenging financing markets and a strong year for aircraft and engine deliveries there has been no significant change in the outstanding amount of financial or contingent support to customers.
Strengthening productivity, and investing for long-term growth:

We have maintained our focus on costs and improving operational efficiency. This is demonstrated by a further improvement in underlying revenue per employee which increased last year by ten per cent to £233,0001 . We have improved this key metric every year for more than a decade. During this time we have doubled our revenues whilst employing 2,000 fewer people.

As our market share and the scale of the aftermarket grows, and as major new programmes move into serial production, it remains crucial that we continue to invest to meet our customer’s needs. In 2009 we expanded our global services network with six new marine service centres in the USA, Brazil, Canada, UAE and Italy. We also expanded two civil overhaul bases in Asia. Looking forward we announced investments in new world-class facilities in the UK, Singapore and the USA. These will come on line over the next three years to meet demand and to improve operational effectiveness.

The Group’s ability to identify and pursue new options for global growth is further illustrated by two developments in the year. In July the Marine business broadened its involvement in the offshore oil and gas sector by taking a 33 per cent shareholding in ODIM ASA. Further progress has been made in the Group’s civil nuclear business with the announcement that Rolls-Royce will build a new civil nuclear manufacturing facility, and will take the leading role in the UK Government-supported Nuclear Advanced Manufacturing Research Centre.

Over the last decade Rolls-Royce has invested more than £2.7bn in capital expenditure including new facilities, plant and equipment. This includes more than £1.8bn to upgrade its UK operations.

1 Revenue per employee is stated on a three year rolling average basis

Trading Summary:

The broad portfolio of products and services that the Group delivers, an improving market position and access to a broad global customer base helped secure orders worth £13.4bn in 2009. At the year-end the order book reached £58.3bn, approximately £16.5bn of which relates to service contracts.

Revenues increased by 15 per cent to £10.4bn. This strong performance was aided by weaker average GBP exchange rates, mainly against the USD and Euro. Underlying revenues improved by 11 per cent, with double digit increases in all divisions other than civil aerospace where revenues were stable.

The Group maintained its foreign exchange hedging policy and increased the hedge book over the year to $18.8bn, with an average rate of $1.63. Better rates locked into the hedge book provide visibility of improving rates over the next few years. Underlying profits in 2009 benefited by around £71m from improving exchange rates. This was made up of £16m from a one and a half cent improvement in the achieved rate, and a further £55m from translation benefits on overseas businesses, mainly in the Civil aerospace and Marine segments. 2010 achieved rates are expected to improve by between six and nine cents compared to the 2009 levels.

Unit costs of our gas turbine products increased by around three per cent. This reflects the continuing effect of operational volatility caused by programme delays and difficult trading conditions and increased commodity costs. In the Marine business, which is less focused on gas turbine products, unit costs reduced modestly in the year. In the year ahead we expect unit costs to be relatively flat.

Investment in research and development was £864m (2008 £885m), of which the Group funded around 55 per cent (£471m). The charge to the income statement declined slightly for the full year, by £24m to £379m. This was partly a function of lower cash spend, but also due to a small increase in the net level of spend capitalised in the period. The charge in 2010 is expected to increase by around £35m as more engineering time focuses on early stage programmes, such as the Trent XWB, on which research and development spending is charged rather than capitalised.

Underlying profit before tax, which excludes the non-cash impact of the hedge book and other financial instruments, increased by four per cent to £915m (2008 £880m). This growth in profit reflected a significant increase in original equipment and a more modest growth in services revenues, along with lower R&D, lower restructuring charges and improved foreign exchange rates. It also took account of increased unit costs, and the higher financing costs resulting from the new GBP bond issued in April 2009.

The Group’s reported profit before tax of £2,957m includes the effects of “mark-to-market” of its financial instruments, for which hedge accounting is not adopted. This effectively reverses much of the revaluation reported in the second half of 2008. The impact of mark to market is included within net financing in the income statement (see note 2 on page 24).

The underlying tax charge of £187m benefited from a one-off £35m credit following the successful completion of overseas tax audits and changes in legislation. This resulted in a reduction in the underlying tax rate to 20.4 per cent. The 2010 tax rate is expected to return to a more normal 24 per cent effective rate.

The Group reported a net cash outflow of £183m for the period: £141m of this was caused by the revaluation of currency balances at the end of the period. The remaining outflow reflected the combined effects of an increase in profits, a £50m increase in payments to shareholders, a slow-down in order flow and associated customer deposits, slightly increased net financial working capital and significant investment in the business. The Group invested £76m in adding capability through acquisitions in the year. This included £71m to acquire a 33 per cent holding in ODIM ASA, a Norwegian company involved in the offshore oil and gas sector.

The Group expects a modest cash outflow in 2010, reflecting a further slowdown in customer deposits, increased investment in capacity and capability and increased payments to shareholders in the period.

Basic earnings per share were 120.38p (2008 loss of 73.63p), reflecting the mark-to-market adjustments above, with underlying earnings per share increasing by eight per cent to 39.67p (2008 36.70p), partly reflecting an improved tax rate.
Group prospects:

Rolls-Royce benefits from the disciplined application of a long-term strategy. This has given us a broad, well balanced portfolio and a strong financial position.

Long-term growth is underpinned by a strong market position, a record number of major programmes, new service facilities and our expanded aftermarket service propositions. We expect these factors to lead to a doubling of revenues over the next ten years.

In the short-term the Group expects the trading environment to remain difficult, with some continuing demand and operational uncertainty. The Group expects underlying revenues, underlying profits and average net cash in 2010 to be broadly similar to those achieved in 2009 with a modest cash outflow in the year.
Review by business segment 2

* Civil Aerospace
* Defence Aerospace
* Marine
* Energy
* Financial Review - 2009 performance

2 Commentaries relate to underlying revenues and profits unless specifically noted

This Results Announcement contains certain forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing to the Company, anticipated cost savings or synergies and the completion of the Company’s strategic transactions, are forward-looking statements. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward-looking statements reflect the knowledge and information available at the date of preparation of this Results Announcement, and will not be updated during the year. Nothing in this Results Announcement should be construed as a profit forecast.