Rolls-Royce Holdings plc, the second largest aero engine company in the world, today reported its first fall in a decade in underlying revenue. Revenue in 2014 fell 6 per cent to £14.58 billion, while underlying profit before tax also fell – by 8 per cent to £1.62 billion. The Group also warned that revenue and profit would be down again in 2015.
The main factors in the fall in underlying revenue were a sharp decline in Defence aerospace OE revenue, due to lower volumes as government spending in many countries was scaled back, and lower Land & Sea revenue due to weaker end market, largely due to the downward oil price. These falls were partially offset by continuing growth in Civil aerospace deliveries as Trent 1000 engine production ramped up, and an improvement in Defence aerospace services.
The order book rose 5 per cent to a record £73.7 billion, with increases in Civil Aerospace, Defence Aerospace and Power Systems. The order intake of £19 billion included net orders of £11.7bn in Civil aerospace, £2.5bn in Defence aerospace, £1.8bn in Marine, £0.6bn in Nuclear and £2.6bn in Power Systems. Orders are spread around the world, with 44 per cent in Asia and the Middle East, 25 per cent in North America, 25 per cent in Europe, with South America and the Rest of the World accounting for 4 per cent and 2 per cent respectively
Chief Executive Officer John Rishton, said: ”We have met guidance for 2014 revenue and profit in challenging conditions while continuing to build strong foundations for future growth.”
He attributed the fall in underlying revenue to reduced spending by defence customers, macroeconomic uncertainty, and falling commodity prices.
“In response to these headwinds, we are taking decisive action to improve the Group’s financial performance and accelerating our focus on the 4Cs: Customer, Concentration, Cost and Cash. This includes a major restructuring programme in our Aerospace Division and continued rationalisation of our Land & Sea Division,” he said.
The restructuring programme in the Aerospace Division and central functions is expected to reduce headcount by 2,600. By the end of 2014, 545 people had left the business, with the majority of the reductions expected in 2015. This programme is expected to result in restructuring charges of around £120 million, of which £56 million was recognised in the 2014 results. The company expects annualised cost benefits of around £80 million from 2016 onwards, with £50 million in benefits expected in 2015.
Rolls-Royce also said there are a number of headwinds in the Civil aerospace business associated with future growth. For example, the Group has invested in the capacity required to meet the record order book, but delay in a number of customers’ major programmes has resulted in the new capacity coming on stream before it is needed, leaving the Group with under-utilised production facilities. Coupled with the construction of a number of new, world-class facilities to replace older, less productive plants, it means the Group is carrying the cost of both the old and new facilities.
Research & development net spend increased in 2014 to £819 million, reflecting increased spending on the higher thrust Trent XWB-97k, due to enter service in 2017, and on the Trent 1000-TEN, due to enter service in 2016. Rolls-Royce continue to invest in research for its Advance and UltraFan programmes, which will create opportunities for the next generation of gas turbine engines.
On 1 December, the sale was completed of the Energy gas turbines and compressor business to Siemens for £785 million cash consideration and a further £200 million for a 25-year licensing agreement. The sale proceeds of around £1 billion are being returned to shareholders by way of the share buyback programme initiated in December 2014.
Strategically, said Rolls-Royce, its two divisions address growing markets. Strong growth in the demand for air travel is widely forecast and is reflected in the £63 billion Civil Aerospace order book. The delivery of the first Airbus A350XWB, powered by the Trent XWB engine, was described as “a significant milestone in our most important programme.’
Focus on the customer has helped enable the Rolls-Royce Trent-powered Boeing 787 Dreamliner to achieve and industry-leading 99.9 per cent engine dispatch reliability rate after more than 500,000 flying hours in service. Since launch, the Group has doubled the time on wing for both the Trent 700 (Airbus A330) and Trent 800 (Boeing 777) fleets. The Corporate and Regional business achieved a 57 per cent improvement in response times to business jet customers.
Future growth in world trade, of which 90 per cent is carried by sea, urbanisation, population growth and tighter environmental regulation places the Land & Sea division well-positioned to meet the increasing requirements for cleaner power. In 2014, the Land & Sea division introduced a new family of medium-speed reciprocating engines.
“Since we last gave guidance, the external environment has deteriorated in some of our major markets. In particular, oil prices have halved over this period, creating increased uncertainty for many of our markets and customers, particularly in Marine Offshore. As a consequence, our full-year guidance is framed within a broad range and excludes the effects of foreign currency translation.”
The Group’s guidance for the full year 2015, expects total revenue to fall from £13.9 billion to £13.4-£14.4bn; underlying profit before tax to fall from £1.6 billon to between £1.4 bn to £1.55 bn.
Mr Rishton said: “We expect near-term headwinds on cash as we invest in doubling of Trent engine deliveries and the transformation of the business. Full-year free cash flow in 2015 is expected to be impacted by the cash costs of the restructuring programmes and higher working capital as engine volumes ramp up, particularly for programmes in the launch phase.
“There will be a first-half bias in the cash cost of our restructuring efforts; we expect the benefits of restructuring to begin to be seen later in the year.”
Mr Rishton added: “Our record order book demonstrates the faith our customers continue to place in our technology and underpins our confidence in future growth.”
Martin Brodie had a career of nearly 30 years in aerospace with Rolls-Royce plc, where he held senior positions in the Corporate Communications team, covering military and civil aerospace, and in the headquarters office in London. Before joining Rolls-Royce, Martin spent a decade as a journalist wit
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