capital markets event - rolls-royce holdings/media/files/r/rolls... · key engine types 4 use in...

Capital Markets Event - June 2018 © 2018 Rolls-Royce

Capital Markets

Event 15 June 2018

Capital Markets Event June 2018


Warren East Chief Executive


Notices

Safety Safe Harbour

Mobile Phones


Agenda for today

4

Warren East Introduction

Andreas Schell Power Systems

Harry Holt

Coffee Break

Restructuring

Delivering Returns Stephen Daintith

Warren East Closing Remarks


5

Key messages

Fundamental Restructuring

Delivering the Returns

Change required

Preparation complete

Leadership team primed

Simpler structure

Continuous improvement

Peak investment phase complete

Narrowing the performance gap

Ambitious medium term return targets

Example of a business in transformation

Improved returns already delivered

Further to go

Power Systems


6

Trent 1000 update

Q4 2018 <50 AOG 3x Peak AOG now

Repeat inspection regime established

Pack B inspections started

Trebled maintenance capacity

MRO cycle time reduced (now logistics)

Acceleration of permanent fix for compressor rotor blade

Turbine blade capacity growing fast

Initial inspections complete (Pack C)

MRO capacity Permanent Fix

Unacceptable level of customer disruption

Closely working with affected airlines


7

Trent 1000 update

Financial impact

2017

£170m

“broadly double”

7 March 2018 Guidance

Pack C & B

Better AoG, MRO response

~£100m incrementally

higher

Actions already underway on mitigations offset this incremental cost

– Rephasing / reduction of non-critical R&D and capex

– Cuts to discretionary spend i.e. travel etc

FY18 FCF guidance unchanged - mitigations outside new restructuring plan

15 June 2018 Guidance

Trent 1000 / 900 in-service cash costs

• Mitigations offset incremental cost

• FY18 FCF guidance unchanged

WHITE page number and reference – adjust title slide on main master slide No 2


8

Introduction

01


9

Achieved top end of our original estimates

Initial transformation programme completed

£200m Progress, more to follow

Achieved

Run-rate cost savings at top end of previous guidance

Simplicity

Completed our transformation originally outlined in November 2015


10

Today we’re at a pivotal moment for Rolls-Royce “Started laying foundations immediately”

Stabilised businesses

Delivered a ramp-up in widebody production capacity

01 04 05 Started portfolio restructuring

02 Established a new leadership team

03 Brought new products to market

Transformation c.300 to c.500 Five to three 90% change 4 new engines

Solid foundations in place

Now is the time to deliver


11

Restructuring Simpler, leaner and more agile

Net savings of £400m by end of 2020, implementation costs of c.£500m

Proposed reduction of 4,600 FTEs

Culture change through pace, simplicity, efficiency and empowerment

Driving improving returns

Transforming our business to support our world-leading technologies


12

Longer term context

Exceed £1 per share of free cash flow

Mid-term ambition

2000 2010 2018 pre 2000 Pioneered Total Care product

~£11bn invested in R&D

and capex

6 new engines developed

~150 ~550

10% >90%

~14% ~35%

annual large engine production

large engine market share

new engines on Total Care packages

Generate. . .


13

Defining our ambitions

Build a simpler business

with a true performance

culture

Create or partner

in the best technology

Three high-performing businesses

each delivering materially

improved returns

Be the world’s leading

industrial technology company

Mid-term ambition

>£1 CPS 15% CROIC

Faster, more agile to focus on customers


14

To achieve this we need to optimise our resources

Our resources:

People - develop a healthy organisation culture

Assets – deliver sustainable & improved returns

Capital – disciplined allocation


15

Structure to enable change

“Creating the conditions for the businesses to solve the problems themselves”

Much smaller light-weight Head Office

Following ITP Aero acquisition in December 2017, it will operate and report as a separate business unit

Civil Aerospace

Power Systems

Defence

Significantly reduced central costs

Empowered businesses, more control of own costs

Shared vision and clear accountability

Each business to deliver improving returns


16

Accelerating culture change

“Now is the time for fundamental change”

Pace Simplicity Efficiency

Empowering framework

Clearer accountability

Minimal duplication

Empowerment


17

Efficiency

Will improve productivity and efficiency

Overhead efficiency - headcount reduction of 4,600

Capital efficiency – improved investment rigour

Operational efficiency – product cost reduction, optimisation of capacity

“Greater pace & simplicity leads to more productive use of our resources”

Maximising returns after significant period of investment


18

What success will look like

Efficient structure & operations

“The leading industrial technology company”

Market leadership

Strong financial performance

Retaining & attracting the best people

Disciplined investment in innovative technology


Andreas Schell CEO, Rolls-Royce Power Systems


20

Power Systems

02


21

Agenda

Overview

Driving change

Growth strategy

Power Systems


22

Overview


23

Operational profile

Corporate Routes to market

People

~10,000 Factories

11 in 5 countries

Annual unit sales

~25,000 units

Sales partners

140 Authorised dealerships

>500

Products Customers & Service

Installed base

>100,000

Service locations

>1,200 Customer concentration Top 10 account for 17% of sales

Key engine types

4

Use in sub-applications

24 Fuels Diesel, gas, hybrid

Direct

OEM 25% distributor 25%

50%


24

Key attributes

‘A significant market presence’

High brand recognition

Strong high-speed reciprocating engines knowhow

Significant R&D expertise

Growing solutions-led capability

Diverse routes to market Financial Short-cycle order book

Double digit EBIT margin

High cash conversion


25

Market profile

‘…with strong positions in diversified end markets’

By end market

By customer geography

By type Balanced product portfolio

diversified & volume applications

Strong market positions data centre, yacht, mining, gov’tal

Diversified end markets & customers

Long-term macro-drivers supports sustained market growth

Includes Civil Nuclear, L’Orange

OE 66%

Services 34%

Marine 28%

Industrial 24%

PowerGen 31%

Defence/Other 11%

China 12%

Asia Pacific 15%

Americas 23%

Europe 45%

Other 5%

Revenue profile

Civil Nuclear 6%


26

Focused on higher value market segments

1.2m units

€27bn Industrial

PowerGen

Marine

Total addressable power markets

Serviceable available market

Power Systems OE Sales

442k units

€13bn 25k units

€2bn

5% unit share

but

15% value share

Addressable Markets and market shares in these slides are as internally defined along RRPS’ strategic objectives and capabilities.


27

Marine

1. Market share served market 2. Not disclosed Note: Served market = Unit total volume of power range between 130-10,000kW

Market growth drivers

Global seaborne trade

Fleet replacement

Market growth outlook

2017

€2.1bn

€1.7bn

+4% CAGR

Main customer types

OEMs (yacht, ferries etc.)

Government

Top 5 customer % sales: ~30%

Products

S4000/S2000/S8000

Combined systems

Diesel, Gas and Hybrid

Applications

Very strong in Naval (>25%)

Yachts in Europe / US (>25%)

Route to market

Mainly direct (70%) sales

Top 3 market position excl Government

Power Systems

CAT MAN

Cummins

Others

2022

Presence Profile Outlook


28

Power Generation



Energy demand

Uninterruptable power requirements

2017

€7.5bn

€5.3bn

+6.7% CAGR

Main customer types

OEMs

Data centres / hospitals

Industrial / energy plants

Top 5 customer % sales: 30%

Products

S4000 / S2000 / S1600

Diesel & Gas systems

Applications

Mission critical (15-20% share)

Datacentres / grid frequency response

Strong share in Gas engines

Route to market

Mainly direct (75%) sales 2022

CAT

GE

Cummins

SDMO

Others

Market growth outlook Top 3 market position


Power Systems


29

Industrial



Infrastructure spending

Emission regulations

Fleet renewals & modernisation

2017

€5.8bn €4.4bn

+5.4% CAGR

Main customer types

OEMs (85%)

Top 5 customer % sales: 40%

Products

High speed diesel

Hybrid powerpack (rail)

Applications

Construction, Agriculture (LPR engines)

Industrial, Rail

Mining (Repower)

Route to market

Direct (88%) 2022 CAT Isuzu

Cummins

Deutz

Other

Market growth outlook Top 5 market position


Power Systems


30

Defence & Other


Remains an important partner following disposal

Partnership supporting current and future products

Market growth outlook

2017

€0.5bn €0.4bn

+3% CAGR


China & Russia

Lifetime extension / efficiency pressures

€7bn served market

Market position

Present on 195 reactors in 20 countries

Focused on digital control & monitoring; through-life support solutions


Defence spending & fleet replacements

2022

Civil Nuclear Defence L’Orange


31

2017/18 Financials

Market recovery Positive outlook

Commodity-related markets

Construction & Agriculture (C&A)

PowerGen (China / US datacentre)

PowerGen – global

Yacht

Oil & Gas onshore – US / China

C&A - strong due to pre-buy

PowerGen - mission critical

Marine (ferry, yacht)

Marine (medium speed)

Results* 3% increase in revenues

+240bp gross margin

R&D down 6%; C&A down 7%

Operating profit +61%

Revenue High single-digit growth

Operating profit Margins stable

*organic change vs FY16; pre-restructuring, UK GAAP

Guidance

2017 Actuals Combination of market recovery and cost improvements

2018 Outlook Continued revenue progress, but margin stable due to product mix; especially C&A pre-buy


32

Driving Change


33

The view on arrival

Dec 2016

Strong market share in certain niches

Engineering & technology capability

Reputation for innovation

Dedication of workforce

Power Systems 2018 programme

Leadership culture

Service penetration

Understanding of core business drivers

Warranty / material costs

Absence of digitalisation

20% portfolio drives majority of profit

Sales footprint vs growth opportunities

Absence of customer- led service mindset

High inventory levels

Pace, simplicity, agility

Positive Assess Improve


34

Key focus

2017

Culture & leadership Sales & service

Product & quality Cost & cash


35

RRPS2018 transformation

2017 actions

Strategic & structural: ‘adapting the way we work’

Ongoing product review

Sales & service campaigns

Benefits from partnering

R&D programme efficiency

Operational efficiency including net working capital

Digitalisation

2018 Focus

Performance push: ‘funding the journey’

Footprint consolidation / factory utilisation

H1 vs H2 activity balance

Focus on quality: reduction in warranty cost

Direct material cost reduction: (4.3% in ’17)

Greater supplier collaboration: working capital / inventory improvement

Target Operating Model


36

Transformation

Product portfolio review

2017 < 2015

850

600

Ongoing programme

Continue modularisation

Explore partnering for market access / cost improvements

Actions completed

Reprioritisation of engine roadmap

Establish ‘Product Management Organisation’

Rationalisation of engine portfolio

Reduction of complexity ~10% reduction in physical parts

Reduction in variants ~30%

Long term

~500


37

Growth strategy


38

New solutions Key market trends

Long term trends Alternative fuels and energy sources

Propulsion electrification

Lifecycle services

Regulations and green policy

Smart, connected & autonomous

System intelligence (Integrated automation, remote, autonomous)

Integrated power solutions (Diesel, gas, bio, fuel cell,

hybrid, electrical)

Lifecycle service offerings (Predictive maintenance,

service agreement, pay-per-use)


39

Reshaping core

01 02 Life cycle services

03 Implementing our 3 key themes

An empowered business

Retain competitive engine portfolio

Streamlining core business

Additional growth: JVs / Partnerships

Localisation of production

Capability build up in electrics & automation

Expand the customer proposition

New market of microgrids

Leverage experience from Civil Aerospace

Digital-enabled solutions

Enhanced service offering: ‘ValueCare’ (Long Term Service Agreement)

Become solution provider


40

India

Reshaping core

Localisation of production

Greater China

Force MTU Power Systems

Targeting rail & PowerGen

Key product: S1600 for local markets

MTU Yuchai Power

JV targeting PowerGen and oil & gas

Key product: S4000

Yulin

Pune


41

Life cycle services

Digital enabled services

Key to adding value

2017 Achievements 2018 Focus

Start Digital unit

Digital products launched

> 2,000 assets connected

Continuously connect our fleet

Leverage analytics to reduce costs

Push horizontal Digital Transformation

Doubling budget and team size

Connected assets

Advanced Analytics

Data-driven Value Care Agreements

Intelligent Customer Care Centres


42 Power Systems

Life cycle services

Services of the future

Customer VCA advert, 2018


43


Capability build up

Power Systems solution approach:

Extend product offering: integrate solutions capability

Strengthen solution sales & consulting capabilities

Increase focus on long-term service agreements: - fleet management - operation analytics

Customer consulting

Solution sales Microgrid

Project management

Operation analytics

Service agreements

E-Hybrid

Fleet mgmt.

Integrated propulsion


44

Medium term view

‘Where we aim to be on our strategic journey’

Medium term figures indicative of likely trend

Medium term 2017

11.3%

~5%

<5%

66:34

Avg. sales growth % above global GDP

Operating margin

Non-diesel production as % total

Production in Asia

OE / Services % split

3-5%

mid-teens

c.10-15%

c.15-20%

60:40

2017

2,923

2013 2014 2015 2016

2,655

2,385

2,720 2,831

10.4% 9.3%

8.1% 7.2%

11.3%

Revenue (£m) Return on sales % (operating profit)

mid-teens

Ambition

2013-17 under UK GAAP, pre-restructuring


45

Summary

4

01

02

03

04

Reshaping Power Systems

Transforming into solutions provider

Life cycle services

Strong medium term outlook


Harry Holt Chief People Officer


47

Restructuring

03

Capital Markets Event - June 2018 © 2018 Rolls-Royce Capital Markets Event - June 2018 © 2018 Rolls-Royce

48

Agenda

Our approach

Structure

Culture

Processes

People

Next steps

Restructuring


49

Our approach

‘Fit for purpose’

Fundamental change – not just structure

Focused headcount reductions

De-risking

Structure

Processes

Culture People

Principles Outcomes

• Pace

• Simplicity

• Efficiency

• Empowerment

Delivers improved sustainable returns

Achieves ‘strategic resilience’


50

Diagnostic phase complete

Leadership committed

Shifting to implementation

Continuous improvement

Our approach

Diagnosis and planning

Robust & rigorous approach:

Led by new executive leadership team

Combined Rolls-Royce and Alvarez & Marsal team

Activity analysis – stop, simplify, improve, automate

Structural analysis – spans & layers

Zero-based budgeting

Organisational Health diagnostic

Employee opinion survey analysis

Diagnostic

Design & mobilise

Finalise restructuring plan

Operational restructuring

Phase 1 Phase 2 Phase 3

2020 2019 2018


51

Proposed reduction of 4,600 FTEs in non-manufacturing related headcount by early 2020

Our approach

Proposed reductions 2018*

Corporate Centre

4,300

2020

Head Office

~100 Group Business Services

~2,600

Functional support in businesses

28,400 ~25,400

TOTAL

32,700 TOTAL

~28,100

* Excludes direct labour, ITP, Commercial Marine


52

Our previous structure

Functionally driven

Opaque accountability

Poor agility

Complex matrix

• Total c. £1.0bn costs re-charged to business units

HR, Finance, IT, Communications,

Legal, Engineering, Technology









• HR

• Finance

• IT

• Communications

• Legal

• Secretariat

• Tax

• Treasury

• Engineering

• Technology

Group Corporate

Civil Aerospace Defence Power Systems Nuclear Marine

Structure

Processes

Culture People

Duplication


53

Our new structure

Three focused businesses

Group Business Services providing value-for-money pooled transaction services

Supported by a lean head office

Lean HEAD

OFFICE

GROUP BUSINESS SERVICES

CUSTOMERS

Structure

Processes

Culture People Business driven

Civil Aerospace

Power Systems

Defence


54

Three empowered business units

Simpler customer interface

P&L accountability

Control of support services required

Exploiting inter-business synergies

Faster, responsive, proactive decision making

Productivity, quality and performance improvement

Defence Power Systems Civil Aerospace

• Civil Nuclear • Submarines • Naval Marine

Structure

Processes

Culture People


55

To achieve

Accountability

Cost control & ownership

Freedom within a framework

Agility

Supporting empowered business units

• Transactional & professional services

• Customer-supplier mindset

• Continuous improvement

• Economies of scale

• Outsource, offshore & automate

• End-to-end process capability

• Scope for growth

• Global and diverse talent

• Senior leadership

• Group strategy

• Disciplined capital allocation

• Group governance & assurance

Lean HEAD OFFICE

GROUP BUSINESS SERVICES

Structure

Processes

Culture People


56 Capital Markets Event - June 2018 © 2018 Rolls-Royce

Simplicity & clarity

Agreed service levels and focus

Performance management focus

Clear decision rights

Cost conscious mindset

Changing our culture Revels in

complexity

Achieved through our:

Changing behaviours

Performance & talent management

Reward

Processes & systems

Changing leadership model

And all led by new leadership team

Preserve: pride, loyalty, consultative, inclusive, innovative

‘Gold plating’ and duplication

Low productivity

Lack of accountability

Lack of cost awareness

Structure

Processes

Culture People

Capital Markets Event - June 2018 © 2018 Rolls-Royce Capital Markets Event - June 2018 © 2018 Rolls-Royce

57

Simplifying our processes

Stop Simplify Improve Automate

Annual budgeting

process

Indirect procurement

Rolls-Royce Management

System

Operational processes

100s of group business functional processes

Structure

Processes

Culture People


58 Capital Markets Event - June 2018 © 2018 Rolls-Royce

Our people

Our success depends on having:

The right people

With the right skills

In the right roles

At the right time

With right tools

And the right leadership

Leadership

• New model

• New expectations

• New learning & training

Capabilities Preserve: • Deep functional &

technical expertise • Innovation

Build: • Business acumen • Programme management • Electrical skills • Data science

Talent

• Leadership accountability

• Proactive

• Less conservative

• Retain key talent

Diversity

• Bigger talent pool

• More creative

• Better business outcomes

Structure

Processes

Culture People


59

Next steps

• One third of proposed reductions

• First savings in place

Proposed reduction of 4,600 positions

Diagnostic

Design & mobilise

Finalise restructuring plan

Operational restructuring

Phase 1 by end 2018

Phase 2 by mid 2020

Phase 3 2020 onwards

2020 2019 2018

• Two thirds of proposed reductions

• Phase 2 savings in place

• Continuous improvement to new structure

Throughout the process : Treat our people fairly and with respect

Involve our people and their representatives early on in change

Base our talent management on transparent assessment and merit

Recognise the value of diverse teams


60

Conclusions

A fundamental change to structure, culture, people and process

By stopping, simplifying, improving and automating work, we require less people

Better results today; better prepared for the future


Stephen Daintith Chief Financial Officer


62

Delivering the returns

04


63

Agenda for today

“Coming out of the investment cycle, now is the time to deliver the returns”

Key drivers of increased returns

Capital allocation priorities

Measuring our success – KPIs Cash flow return on invested capital

Cash flow per share

Delivering the returns


64

Key drivers of increased returns


65

Increased returns

Three key drivers

Reduced OE cash deficit per engine

Improved aftermarket cash margin

Bending the fixed cost curve

01 02 03

“underpinned by significantly increased returns across our 3 businesses”

Improved CROIC & CPS


66

Key factors:

Pricing

Cost

Mix

OE cash deficit reduction

- Sourcing

- Engineering change

- Commercial terms / partnering

- Manufacturing method

01 02 03

“Trent XWB-84 OE will be break-even by 2020”

Three key drivers


67


Engineering change Sourcing Transfer to lower cost countries Move to slim-lining removes cost

Trent 7000

Transfer of pipe supply from Spain into Mexico

Over £50k benefit per engine

Trent XWB-97

Significant reduction in forging size, weight and cost on front fan case

Closer to size forging consumes significantly less material; final weight almost 2 tonnes lower

Over £50k benefit per engine

01 02 03

Rigorous process to plan, implement and embed lower costs into our OE products

Tangible examples:

• Sourcing

• Engineering


68


Method of manufacture

Commercial terms and partnering

Partnering with suppliers to drive improved terms

Strategic investment in internal manufacturing capability

Trent XWB-84 and -97

Combination of joint workshops, benchmarking, and machining changes enabling improved commercial terms to be agreed

£20k benefit per engine

Across Trent portfolio: Trent XWB-84 and -97, Trent 1000 TEN and Trent 7000

Major investment in manufacturing capability for shafts, discs & blisks

50% reduction in machining operations and manual intervention, quality right first time >97%

£30k benefit per engine

01 02 03

Tangible examples:

• Commercial

• Manufacturing method


69

• £500m benefit to cash flow by 2022

• Equally driven by price and cost


444

c.600

2017 2022

Widebody installed deliveries Widebody avg loss per engine

(£1.6m)

(£0.4m)

2017 2022

Cost 2017 2022 Price

£0.4m

£1.6m

Reduce average cash deficit from £1.6m to £0.4m by 2022,

incremental cash flow benefit of c. £500m p.a.

01 02 03


70

Aftermarket cash margin

“Aftermarket cash margin – one of the largest drivers of growth”

01 02 03

Key factors:

Installed base growth

Flying hours

Shop visits

In-service issues

RRSP programme shares


71

Widebody active installed engine base


• Widebody installed fleet should rise from 4,409 to c.6,500 engines by 2022

• Should drive c. 10% CAGR in EFH by 2022 to reach c. 20m hours

In production

In service

On order

Trent 700 1,606 94

Trent 7000 - 428

Trent XWB 344 1,346

Trent 900 364 208

Trent 1000 482 346

Growth underpinned by widebody order book

01 02 03

4,409

c.6,500

+550 to 600 avg deliveries p.a.

>2,400 widebody engines on order

-100 to 150 avg retirements p.a.

2017 2022


72


Drivers out to 2022

• Cash costs: shop visit growth as fleet matures

• Trent 1000 / 900 in- service costs will fall

240

c.650

2017* 2022

Additional levers - Maximise time on wing - Drive down shop visit costs

*Includes Trent 1000/900 exceptional C&R visits, ends 2022

Widebody LTSA major shop visits

Widebody LTSA check & repair visits 01 02 03

2017 2022

350 c.350


73


Ambition

Aftermarket cash margin to exceed £2bn by 2022

And continued growth through 2020s

01 02 03

Aftermarket cash margin to deliver by 2022 Incremental annual cash flow of c. £750m

>£2bn

2017

In-service fleet

Major refurbs

Check & repair

Other AM costs

2022

£1.3bn 4,409

engines

12.6m EFHs

240 SVs 350 C&R £400m

~6,500 engines

~20m EFHs

~650 SVs

~350 C&R

~£550m

Widebody aftermarket cash margin

Invoiced EFH

Product in-service costs

Note chart illustrative. Not to scale


74

Bending the cost curve

Three key drivers

“coming out of the investment cycle”

01 02 03

Key factors:

Restructuring

Investment cycle

Capacity built-in


75

Fixed cost curve, 4 components (2017):

C&A costs

Net R&D cash spend

Certification & participation costs

Capital expenditure

Total


Three key drivers

“£3.1bn of fixed costs in 2017”

01 02 03

£1,124m

£1,035m

£160m

£764m

£3,083m


76


Restructuring

• Targets delivery of net £400m reduction in costs

• Savings focused on C&A & Engineering spend

Costs – £500m cash costs to implement

− Redundancy costs

− Cost of enabling systems

Timing – around 25% in 2018, remainder in 2019/20

Treatment – outside underlying profit & FCF

P&L timing & impact – to be confirmed with H1 results

Savings – £400m net saving run rate by end of 2020

Reduced fixed costs & headcount

Simpler, more responsive business structure

Improved efficiency and effectiveness

Benefits £400m

annualised net savings

Implementation £500m

cash costs 01 02 03


77


C&A

Restructuring a key enabler to deliver reduction in annual C&A costs

01 02 03 Since 2010 C&A has been between

7-9% of sales

Commercial & admin (C&A) costs

Reduce costs to

c.5% of sales

* 2010-12 data is pro forma and includes RRPS pre acquisition

2010* 2011* 2012* 2013 2014 2015 2016 2017 Ambition

1,323 1,298 1,276

1,097 1,069 1,004

1,158 1,124


78


R&D

• Wave of new civil engines been funded. Civil NPI been 50% of group R&D since 2010

• Ambition: decline to c. 6% of sales as pace of Civil NPI slows

01 02 03 Net R&D, certification & participation spend


Net R&D Certification & Participation

2010* 2011* 2012* 2013 2014 2015 2016 2017

6 new civil aero engines introduced over past decade

Up from

£700m to £1.2bn (5% to 9% of sales)

931

770 731 704

978 904

1,091 1,195

Civil NPI been on average

50% of group R&D spend

Ambition


79


Capex

• 60% increase since 2010, up from 3% to 6% of sales. Funded facility renewal & production growth

• Spending to fall as OE growth moderates & Defence renewal completes

01 02 03 Group capex


2010* 2011* 2012* 2013 2014 2015 2016 2017

611 668

494

627

764

60% growth over last 7 years More than doubling of Civil large OE engine volumes

Capex to decline to

c.4% of sales

687 639

484

Ambition


80


In summary

• Fixed / investment costs risen materially since 2010 from 17% to 23% of sales

01 02 03 Total Fixed & Investment Costs (Net R&D, Certification, Capex and C&A)


Net R&D Certification & Participation

2010* 2011* 2012* 2013 2014 2015 2016 2017

2,941 2,707 2,617

2,284

2,715

2,402

2,876 3,083

Capex C&A

Ambition


81


• Reduction in fixed costs to drive improved returns

01 02 03 Total Fixed & Investment Costs - Conclusion

Reduce fixed / investment costs by around

£500m p.a.

Reduce from

23% to c.15% of sales

C&A costs

Net R&D / certification & participation

Capital expenditure

Total

8%

9%

6%

23%

c.5%

c.6%

c.4%

c. 15%

% of sales 2017 Ambition


82

Increased returns Three key drivers

Reduced OE cash deficit per engine

Improved aftermarket cash margin

Bending the fixed cost curve

01 02 03

Improved CROIC & CPS

Augmented by significantly improved performances in Power Systems & Defence Working capital - a key consideration


83

Capital allocation


84

Capital allocation priorities

Four key priorities

Fund organic Investment: drive growth & technology leadership

Strong balance sheet: improve credit rating

M&A: disciplined & selective

Payment to shareholders: increase dividend as FCF grows

01 02

03 04


85

• Credit rating matters for three key reasons

• Ambition to return to a single A rating

$39bn FX hedge book with 10 year duration

Financial counterparty confidence

Strong credit rating allows hedging without posting collateral

Long term investment cycles for Civil & Defence programmes

Multi-year service contracts

Assurance to customers and suppliers to be a long-term partner

Credit rating alignment with airframe OEMs desirable (single ‘A’)

Supports ability to acquire competitive financing

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Moody's

S&P

A+

A

A-

BBB+

BBB

BBB-

Credit rating history & aspiration

Ambition

Strong balance sheet

Customer confidence Competitive position Hedging

01


86

• More rigorous internal processes

• Return metrics more thoroughly applied and analysed

Increased rigour on all R&D and Capex

Projects prioritised in line with strategic intents and target rate of return

Suite of metrics provide a balanced appraisal

Mandatory minimum contingencies included

Demand & cost scenarios assessed to measure sensitivity

Investments reviewed quarterly to monitor progress, costs, benefits

Projects must demonstrate a return 5% above our WACC of 10%

15% CROIC target

New internal process

Fund organic investment

02

Max negative cash flow

IRR NPV CROIC


87

• Lessons learnt

• What went well?

Lessons learnt:

Use well proven production methods prior to moves

Ensure knowledge transfer from previous similar projects (Crosspointe)

Be dynamic on spend phasing to cope with timing changes


02

Washington Disc Facility £100m investment for critical disc components utilising High Performance Disc Manufacturing (HPDM) technology

Replaced previous facility - incapable of moving to modern disc manufacture process or handling required volume increases

Delivered under cost

50% lead time reduction

NPV 24% better than plan

Achieved despite 7 month slip

due to Trent XWB disc validation


88

2 years post launch, project revealed costs been under estimated - cost growth of £10m, 12 month delay

1 year later, further issues emerged requiring remedial building work. Further £25m cost growth. Further 12 month delay

Lessons learnt:

Increased rigour around estimation process: validate costs & contingencies

Break projects down: Use segregated phases – prove, deliver, move on

Implementation controls put in place – rigorous ongoing reviews


02

New Engine Controls Facility – Investment cost of £84m

Construction of new facility in Birmingham - replace aging facilities and enabler of volume growth

• Lessons learnt

• What did not go well?

2 year

slip to project timeline

£35m increase in costs

NPV reduced by £32m to

breakeven


89

Committed to restoring shareholder payments to an appropriate level

03 Payment to shareholders

• FCF key driver of dividend growth • Aspire to mid-term 2.5x FCF / dividend cover through the cycle

14.3 15.0 16.0 17.5 19.5

22.0 23.1

16.4

11.7 11.7

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ambition

1.9

0.8

2.7

1.8 1.7 2.2

1.1 0.4 0.3 1.3

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Payment to shareholders (pence)

FCF /shareholder payment cover (ratio)

2.5x


90

Key criteria Mergers & Acquisitions

1. Alignment with strategy

2. Synergy potential

3. Value creation – aligned with 15% CROIC Ambition

4. Cultural fit

5. Balance sheet resilience

Technology

Focus on distinct technologies and capabilities which enable Rolls-Royce to create superior customer solutions

Portfolio

Focus on activities with sustainable leading market positions, consistent business models & group-wide synergy

Growth

Focus on opportunities that drive growth to deliver the power that matters for future generations

04

Key criteria to assess acquisitions & disposals


91

Measuring our success - KPIs

CROIC

CPS


92

Cash as the key indicator of economic performance

Drive a cash flow culture across all businesses

Measuring our returns

Focus on two core cash flow based measures:

• Cash flow per share (CPS)

• Cash return on invested capital (CROIC)

Key to long-term incentive plans

Directly aligned with shareholder interests

CPS CROIC

Good measure of capital investment efficiency

Drives right behaviours

Focusses the business on cash allocation & asset efficiency


93

A key part of our entire capital allocation framework

Cash flow based

Focuses business on both cash generation & asset efficiency

Used to harness optimum value across the portfolio

Cash return on invested capital

CROIC = Annual cash return ÷ invested capital


94

CROIC approach

• Anchored in HOLT

• Directly cash flow derived

Free cash flow adjusted to remove:

15 year historic cum net R&D investment

PP&E & software (at cost)

Participation / cert costs (at cost)

Other intangibles (excl. Goodwill & M&A)

Annual cash return Invested capital

* Cash in/outflow from Civil net deferred revenue creditor change not excluded from cash flow

* Civil net deferred revenue creditor excluded from invested capital

~£1.8bn

2017 ~9% return ~£18.7bn

Net R&D spend

PP&E capex & software

Participation / certification costs

Other intangibles

Working capital & provision in / (out)flow*

Operating lease payments

Working capital* & provisions

Operating leases


95


• In-year CROIC can be distorted by businesses with long duration returns i.e. Civil

• Shorter cycle businesses deliver faster returns – an important portfolio consideration

R&D / capex cost

£1.5-2.0bn

Illustrative example – 2,000 engine programme

Installed OE losses

£3.2bn*

~£10bn aftermarket cash flow over 25 yrs

* Based on current £1.6m loss per engine

EFH income ~£1 bn p.a. net of RRSPs Less aftermarket costs of ~£0.6bn p.a.

Cash generation In-service

Typical Civil Aerospace widebody cash flows

Cash consumption

R&D

OE Build and Delivery


96


Improved future CROIC will reflect:

• Coming out of the investment cycle

• Improved cost efficiency

• Greater investment discipline

Mid-term Ambition:

Annual CROIC of 15% through the cycle

17% 16%

14%

11%

9%

2013 2014 2015 2016 2017

Annual CROIC


97

How we will embed CROIC in our planning:

Improve returns on current invested capital

- Improve asset efficiency (WC, inventory etc.)

- Increase cash generation

Ensure returns on new investments at least achieve returns supportive of our CROIC ambition

- Prioritise investments accordingly

- Both within each business unit and between businesses


A key lens for making our investment decisions


98

CPS

Underlying FCF ÷ no. of shares

• “delivered by the three key drivers of increased returns”

• “underpinned by three high performing businesses”

Cash flow per share

38.7

31.4 29.6

41.9

13.6

9.5

5.5

14.9

2010 2011 2012 2013 2014 2015 2016 2017

Three key drivers: 1. Reduced OE cash deficit 2. Improved AM cash margin 3. Bending the cost curve

Mid-term Ambition:

Exceed £1 CPS


99

Measuring our returns

Focus on two core cash flow based measures:

• Cash flow per share (CPS)

• Cash return on invested capital (CROIC)

15% through cycle

CPS CROIC

Exceed £1 per share

Mid-term ambition


Warren East Chief Executive

WHITE page number and reference – adjust title slide on main master slide No 2


101

Closing Remarks

05


102

Execution

Drive out unnecessary costs 01

Remove complex & duplicative processes

Ownership behaviour

Develop a real performance culture

Four must do’s

02

03

04


103

Key messages

A fundamental restructuring

Empowered businesses, very small head office

Freedom within a framework

Release benefit of past investments

Rigorous investment process

A continuous journey

The leading industrial technology company


104

Power Systems Appendices

104


105

Global presence

Civil Nuclear

USA Williamson, Pittsburgh, Brattleboro, Warrenville, Chattanooga, Huntsville,

Canada Port Elgin, Peterborough

France Grenoble, Mondragon

United Kingdom Gateshead, Derby, Warrington, Barnwood, London

China Shenzen, Beijing

Czech Republic Prague i


106

Key product categories

S1000 / 1500 (LPR)

Jointly developed with Daimler

Exclusive sales rights for off-highway

High volume (~12k units p.a.) to support worldwide distribution channel

S1000

S4000

S8000

Hybrid Rail PowerPack

S1600 / 2000 / 4000

Medium volume, strong margins

Modular multi-application products across many end markets

Long product cycles with 20+ yr aftermarket

Medium speed & special engines

Bergen, S1163, S8000

Low volume but strong aftermarket margins

Long product cycles with 20+ years of aftermarket

New systems & technologies

Mobile gas (LNG) systems

Automation systems for naval & commercial

Microgrids

Hybrid systems for Marine & Rail ii


107

Marine PowerGen Industrial

Power Systems OE market shares (2017)

5-10% Construction & Industrial

>20% Agriculture

>20% Rail

>20% Mining

O&G

onshore 5-10%*

*Higher If Distribution Storage excluded

Served market share %

5-10% Continuous Generation

10-15% Standardised back up

15-20% Mission critical


15-20% Offshore

15-20% Merchant

>25% Yacht

>25% Naval / CA


iii


108

Expanding product breadth

MicroGrids Alternative fuels

Key drivers:

Higher focus on emissions

Increasing availability & low price of gas

Increasing instability of grids

Power Systems approach:

PowerGen: Extension of portfolio and launch of class-leading S4000 engine

Marine: First pilots delivered

Key drivers:

Focus on emissions and therefore renewables

Decentralisation of energy production


Combustion engines remain key & provide customer access

Extend offering with energy storage & intelligent microgrid controller

Adapt business model

Hybrid

Key drivers:

Emission regulation

Focus on operating cost

Demand for higher comfort and performance


Serial hybrid rail PowerPack already developed

Target to extend offering to other applications

First Yacht demonstrator planned for 2019

Marine gas engine Hybrid Power Pack

iv


109


Developing leading industrial technology

2012-17 R&D spend

12 13 14 15 16 175.5%

6.0%

6.5%

7.0%

Disciplined spend

2012-17: av spend £170m, 6-7% sales

2017-20: dedicated Electrical R&D: - planned spend up 1.5x

eg hybrid test bench

Capability

Engineers: 1,300 FTE

Patents: >1600 active

Focus

Engines and Subsystems

Modularisation

Hybridisation & Electrification

Digitalisation

MicroGrid & Solution consulting

Includes L’Orange but not Civil Nuclear

R&D as % sales

Actu

al sp

en

d

v


110

Lumwana trucks Hitachi Rail

Lumwana copper mine in Zambia

Customer: mine operator Barrick Gold Corp

13-year service contract; 30 MTU Series 4000 installed in Hitachi dump trucks

Regular maintenance with service after every 500 hours of operation

Growing LTSA capabilities

UK‘s Intercity Express Programme

PowerPacks for 122 Hitachi train sets

27.5 year duration; c.20,000 hours

Full responsibility for availability and reliability of PowerPacks

Preventive & corrective maintenance covered plus overhauls at 4 customer depots

Onsite technical support as well as reporting and monitoring services

vi


111

Target performance Product characteristics

New product development:

Yacht Hybrid

Combination of different sources of energy: Gas / Diesel genset; battery

Enhanced battery provision

Increased performance through electric boost power

Reducing noise & vibration

Green credentials

Low emission modes

~10 hours silent power supply

600kW electric drive (12kn)

Emissions compliant

vii


112

This 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 announcement, and will not be updated during the year. Nothing in this announcement should be construed as a profit forecast. All figures are on an underlying basis unless otherwise stated.

Safe harbour statement

capital markets event - rolls-royce holdings/media/files/r/rolls... · key engine types 4 use in...

Documents