Interim Results

ROLLS-ROYCE PLC 26 August 1999 ROLLS-ROYCE plc INTERIM RESULTS 1999 1999 1998 _____________________________________________________________________ Sales (continuing operations) £2104m £1990m +6% Profit before tax £159m £135m +18% Earnings per share 8.17p 7.17p +14% Dividend 2.70p 2.45p +10% Order book £10.3bn £10.0bn +3% _____________________________________________________________________ Sir Ralph Robins, Chairman, said:- 'Rolls-Royce delivered another sound performance. We increased sales, profits and earnings and maintained a strong order book. 'The success of our cost reduction programme, Better Performance Faster, has enabled us to meet our financial targets whilst increasing investment in new product development. 'Our aerospace businesses performed strongly and we increased investment in our energy businesses, where we see future growth through the exploitation of our gas turbine technology. 'Based upon our market outlook we continue to target double digit earnings growth.' Enquiries Peter Barnes-Wallis Director of Corporate Communications 0171 222 9020 Rolls-Royce home page: www.rolls-royce.com ---------------------------------------------------------------------------- Delivering value Rolls-Royce is continuing to develop its leading positions in civil aerospace, defence, marine and energy markets. During 1999 the company created new opportunities in these markets, supported by investment in new products and capability. The recently announced acquisition of the rotating compression business of Cooper Cameron enhances the company's position in the energy sector. The selection of the marine Trent for Fastship, announced today, creates a broader base upon which to develop the marine business. Net research and development investment was increased, in line with plans. The company achieved key milestones in its product development programmes. Rolls-Royce has experienced a period of exceptional growth, with engine deliveries increasing by more than 40 per cent since 1996. Over this time significant improvements in operational efficiency have been achieved. The company has been able to increase investment and meet its financial targets as a result of its operational improvement programme, Better Performance Faster. An example of this investment is the new advanced turbine blade facility which was opened in April. As a result of this £41 million investment, machining costs of high pressure turbine blades will be halved. Large aircraft deliveries are reducing. However, the breadth of the company's product range will enable it to sustain its higher rate of deliveries, supported by its growing presence in the regional airline market. Year 2000 engine deliveries are expected to be at a similar level to 1999. In the defence market, positions on new programmes, such as the EJ200 for Eurofighter and propulsion systems for Joint Strike Fighter, will enable steady progress to be made. The marine power business performed well in the first half. Good progress was made with the company's two major naval defence programmes, the WR-21 and Astute submarine propulsion system. The marine business will be strengthened by the selection of the marine Trent by Fastship Group, which augments the company's position in the commercial marine sector. The company sees considerable growth potential in the energy sector. The acquisition of the Cooper Cameron businesses and the development of new products will enhance its position. The cost of developing the industrial Trent engine has been higher than originally planned. Market interest is high, driven by the growth in the distributed power market. Based upon its view of market prospects, the company continues to target double digit earnings growth. ---------------------------------------------------------------------------- Rolls-Royce plc interim results 1999 The Group achieved strong earnings growth with profit before tax of £159 million, up 18 per cent over the first half of 1998. Order intake remained strong, matching sales in the first half. The firm order book was £10.3 billion (1998 £10 billion). In addition a further £1.4 billion had been announced but not yet included in the order book (1998 £2 bn). Sales from continuing operations increased by six per cent, to £2104 million (1998 £1990 million). Aerospace sales were up by seven per cent and industrial sales were flat. Civil aerospace sales were 15 per cent higher and defence sales 10 per cent lower than in 1998. Civil spares sales, including RB211-524 G/H-T upgrade kits, grew by 11 per cent and will continue to grow as the installed base of engines grows and matures, creating embedded value for the future. Industrial sales benefited from growth in marine power (up 17 per cent) and oil and gas (up 10 per cent), offset by a decline in power generation sales. Trading profit, before research and development expenditure and including joint ventures, increased by 24 per cent, to £278 million (1998 £224 million). Trading margin improved from 11.3 per cent to 13.2 per cent. Aerospace trading profit increased by 34 per cent, to £266 million and industrial businesses' trading profit declined by £13 million to £12 million. Restructuring of the materials handling businesses and additional costs incurred in respect of the industrial Trent programme led to the decline in trading profit. In the industrial businesses both oil and gas and marine power performed strongly. The expected adverse impact of the sterling: dollar exchange rate was mitigated by the company's treasury operations. Restructuring costs, of £11 million were expensed in the first half (1998 £4 million). A similar charge is anticipated in the second half. Net research and development expenditure increased, as expected, to £109 million (1998 £80 million), reflecting continuing development of the Trent aero engine family and reduction of emissions for industrial engines. Expenditure will be lower in the second half of the year. Capital expenditure during the first half was £101 million (1998 £110 million). Around half of this expenditure related to the company's manufacturing operations, ten per cent to project development and finance activities and nearly 20 per cent related to Better Performance Faster, including associated information technology. ---------------------------------------------------------------------------- An additional £88 million expenditure was incurred on three Boeing 757 aircraft which have been leased to an airline customer. During the second half year these will be transferred to the company's aircraft leasing joint venture. The customary first half cash outflow was exacerbated by a reduction in customer advances, the temporary ownership of three Boeing 757 aircraft and a planned increase of inventory, to support the higher level of deliveries to customers. Inventory will reduce in the second half. Achievement of world-class levels of inventory turnover will be enabled by the introduction of SAP during 2000. Net debt was £325 million, equivalent to 18 per cent of shareholders' funds (1998 net cash £27 million). The company expects to report positive net cash balances at the year end, on a comparable basis. Shareholders' funds were £1,813 million (1998 £1,530 million). The interim dividend is 2.70 pence per share, an increase of 10 per cent over 1998. The dividend is payable on 10 January 2000 to shareholders on the register on 22 October 1999. The ex-dividend date is 18 October 1999. ---------------------------------------------------------------------------- Review of operations The company has continued to develop its strong civil aerospace product portfolio, achieving important milestones on new programmes. The Trent 500, under development for the Airbus Industrie A340- 500/600 aircraft, ran for the first time, in June. The initial testing has been very successful, a thrust of 68,000 lb being achieved. The planned certification take-off thrust of the engine is 60,000 lb. The Trent 895 achieved certification ahead of schedule and the first engines have been delivered for the British Airways extended range Boeing 777-200s. Trent 700 and 800 engines, in service respectively on the A330 and B777, reached one million hours of service in June. The company continues to achieve market success. New civil customers have been won at the rate of more than one every month during the 1990s. In the airline market sector CIT Group, Air Lanka and Singapore Airlines all ordered Trent engines. The company now has achieved a 44 per cent share of Boeing 777 orders, with 10 customers and a 40 per cent share of the Airbus Industrie A330 with 15 customers. The International Aero Engines' V2500 achieved an order intake of $2 billion, representing 35 per cent of the A319, 56 per cent of the A320 and 77 per cent of A321 orders in the first half. Plans for an improved version of the engine were announced in June. In the corporate and regional airline sector, the AE3007- powered Embraer ERJ 135 and 145 continued to win new customers. Orders of these aircraft now exceed 900, of which 140 have been delivered. The BMW Rolls-Royce BR710 powers the latest generation of long range executive jets. The 50th Gulfstream GV was delivered in the first half and the Bombardier Global Express entered service. In defence markets, Rolls-Royce forecasts a steady demand for military aero engines over the next ten years. Large numbers of military aircraft will reach the end of their operational lives, creating a replacement demand. Rolls-Royce is represented in all of the major military aircraft sectors In the combat sector, progress was made with the company's participation in two of the world's major new programmes. In Europe the company is a leading partner in the EJ200 engine for Eurofighter Typhoon. Flight testing has proceeded on schedule for the planned completion of initial certification testing in November. The first production components are now being built. For the US Joint Strike Fighter programme, a $440 million contract was awarded to the JSF-F120 team, in which Rolls-Royce is a major partner. ---------------------------------------------------------------------------- The Adour engine secured business valued at £250 million, powering Hawk aircraft for the Royal Australian Air Force and for the NATO Flight Training Canada programme. In each case the contracts included through life support of the Adour 871 engines, reflecting the Rolls-Royce strategy of developing its aftermarket presence. Helicopter highlights included first flight of the RTM 322- powered Apache, scheduled to enter service with the British Army in 2000. The same engine successfully completed ground runs for the NH90 naval and transport helicopter. France and Germany signed a contract for 160 Tiger anti-tank helicopters, powered by the MTR390 engine. The BR710 completed its 150 hour endurance test for the Nimrod MRA4, the next generation maritime reconnaissance aircraft. Strong progress was made with marine power, where sales increased by 17 per cent, as work proceeded on the powerplant for the new Astute-class submarine programme. HMS Ocean, Britain's new helicopter carrier, powered by Rolls-Royce (Crossley Pielstick diesels), entered service and the WR-21 testing programme made good progress. This month, Rolls-Royce announced the selection of the marine Trent by Fastship Group. The requirement for engines for four fast, transatlantic cargo ships could result in business worth more than $1 billion to Rolls-Royce, including through life support. This agreement marks a significant milestone as the company expands its position in the commercial marine market, building on its long experience in the defence sector. In energy markets the company has continued to focus upon gas turbine and diesel technology in the power generation and oil and gas sectors. The oil and gas business performed well with sales growing by 10 per cent. The recent announcement of the acquisition of the rotating compression equipment interests of Cooper Cameron, for $180 million, will enable Rolls-Royce to strengthen its position in this market and increases the scope for aftermarket services. The industrial RB211 is a leading product in this sector. The Dry Low Emissions version of this engine, which offers significant reductions in nitrous oxides and carbon monoxide emissions, reached a total of 250,000 hours of operation in the first half. Sales in the power generation business fell by 20 per cent, reflecting reduced sales activity on the industrial Trent programme, as the company resolved operational issues. Currently five industrial Trent power stations are in service and have accumulated over 10,000 hours operating experience. Market interest is high, driven by the growth in the distributed power market. Two further Trent power stations will be commissioned in the UK in the second half of 1999. The company is making good progress towards achieving competitive emissions performance necessary for current and future environmental requirements, across all of its products in the energy sector. ---------------------------------------------------------------------------- Development of Rolls-Royce aftermarket services continued in the first half of 1999. Aftermarket sales now represent 38 per cent of Group sales. The company plans to double its repair and overhaul sales over the next five years. The aftermarket is important for all of the company's businesses. It provides a growing opportunity to meet the needs of customers throughout the long service lives of Rolls-Royce products. The company's strategy is to build upon its growing success with original equipment sales and to expand the scope of activities in the aftermarket. Milestones in the first half included the formation of Data Systems and Solutions, a joint venture with Science Applications International Corporation (SAIC). The joint venture specialises in predictive data management in the aerospace and energy sectors. In May it won a $17 million contract to carry out independent verification of the safety system software at the Temelin nuclear power station in the Czech Republic. Recently, the company announced its first civil aerospace contract, for a real-time engine condition monitoring system for German charter airline, Condor. Rolls-Royce has expanded its aerospace repair and overhaul activities with a global network which now comprises 14 facilities, on four continents, handling 48 engine types. Each year 400 operators put more than 1300 engines through Rolls-Royce facilities for repair and overhaul Year 2000 readiness The company's Year 2000 correction, replacement and upgrade programmes are now almost complete. These programmes encompass its products, machine tools and other shop floor assets, buildings and environmental controls. A series of verification tests has been completed, to confirm that the computer hardware, systems and other products of material importance to the businesses, will operate in a Year 2000 environment. The company has undertaken a review of its supply chain, concentrating on key suppliers to ensure continuity of supply. Contingency planning is well advanced, to ensure that, in the unlikely event that problems are encountered, the company is able to continue without significant disruption to normal operations. The incremental cost of ensuring Year 2000 compliance will amount to approximately £27 million by the end of 1999. Of this, the spend in 1999 will be around £12 million. In addition the company has invested more than £100 million over the past three years under a programme of information technology infrastructure renewal, as part of its Better Performance Faster programme. ---------------------------------------------------------------------------- Group Profit and Loss Account For the half year to 30 June 1999 Half Year Half Year Year to to to 31 December 30 June 1999 30 June 1998 1998 £m £m £m Turnover: Group and share of joint ventures 2,197 2,179 4,687 Sales to joint ventures 401 326 701 Less share of joint ventures' turnover (494) (406) (892) __________________________________________________________________________ Group turnover (note 1) 2,104 2,099 4,496 Cost of sales and other operating costs (1,839) (1,890) (4,019) Research and development (net)* (109) (80) (173) Utilisation of provision for loss on sale/termination of businesses - 9 12 __________________________________________________________________________ Group operating profit 156 138 316 Share of operating profit of joint ventures 13 6 17 Loss on sale of businesses (4) - (40) Profit from the sale to BMW of the automotive trademark registrations of the Rolls-Royce name - - 40 Profit on sale of fixed assets 8 - 9 __________________________________________________________________________ Profit on ordinary activities before interest (note 1) 173 144 342 Net interest payable - Group (7) (7) (12) - joint ventures (7) (2) (5) __________________________________________________________________________ Profit on ordinary activities before taxation 159 135 325 Taxation (35) (27) (65) __________________________________________________________________________ Profit on ordinary activities after taxation 124 108 260 Equity minority interests in subsidiary undertakings (1) (1) (2) __________________________________________________________________________ Profit attributable to ordinary shareholders 123 107 258 Dividends - interim 2.70p (1998 interim 2.45p final 4.10p) (41) (37) (99) __________________________________________________________________________ Transferred to reserves 82 70 159 __________________________________________________________________________ * Research and development (gross) (316) (321) (668) Earnings per ordinary share (note 2) Before exceptional and non- operating items 7.91p 7.17p 16.91p After exceptional and non-operating items 8.17p 7.17p 17.25p Diluted after exceptional and non- operating items 8.09p 7.10p 17.10p There have been no material acquisitions Group Statement of Total Recognised Gains and Losses __________________________________________________________________________ Profit attributable to ordinary shareholders 123 107 258 Exchange adjustments on foreign currency net investments 17 - (12) __________________________________________________________________________ Total recognised gains and (losses) for the period 140 107 246 __________________________________________________________________________ ----------------------------------------------------------------------------- Summary Group Balance Sheet Half Year Half Year Year to to to 31 December 30 June 1999 30 June 1998 1998 £m £m £m Fixed assets - Intangible 8 3 8 - Tangible 1,348 1,213 1,217 Investments - joint ventures 153 104 134 _______________________________________ share of gross assets 1,076 645 855 share of gross liabilities (923) (541) (721) _______________________________________ - other 21 22 15 __________________________________________________________________________ 1,530 1,342 1,374 Stocks 1,174 1,093 1,041 Debtors 1,492 1,482 1,347 Creditors - due within one year (1,647) (1,908) (1,961) - due after one year (97) (110) (63) Provisions for liabilities and charges (302) (377) (323) __________________________________________________________________________ Net assets - excluding net funds (note 1) 2,150 1,522 1,415 -------------------------------------------------------------------------- Short term deposits and investments 103 570 722 Cash at bank and in hand 381 176 297 Borrowings - due within one year (263) (349) (177) - due after one year (546) (370) (540) __________________________________________________________________________ Net (debt)/funds (325) 27 302 __________________________________________________________________________ Net assets 1,825 1,549 1,717 __________________________________________________________________________ Capital and Reserves Equity shareholders' funds 1,813 1,530 1,705 Equity minority interests in subsidiary undertakings 12 19 12 __________________________________________________________________________ 1,825 1,549 1,717 __________________________________________________________________________ Reconciliation of Movements in Shareholders' Funds £m £m £m At 1 January 1,705 1,443 1,443 Total recognised gains and (losses) for the period 140 107 246 Ordinary dividends (net of scrip dividend adjustments) (34) (34) (76) New ordinary share capital issued 2 14 14 Goodwill transferred to the profit and loss account in respect of disposals of businesses - - 78 __________________________________________________________________________ At period end 1,813 1,530 1,705 __________________________________________________________________________ ----------------------------------------------------------------------------- Summary Group Cash Flow Statement Half Year Half Year Year to to to 31 December 30 June 1999 30 June 1998 1998 £m £m £m Net cash (outflow)/inflow from operating activities (389) (51) 285 Dividends received from joint ventures - 4 11 Returns on investments and servicing of finance (6) (3) (10) Taxation paid (7) (8) (34) Capital expenditure and financial investment (189) (110) (309) (Acquisitions) and disposals - - 87 Equity dividends paid (30) (30) (65) __________________________________________________________________________ Cash outflow before use of liquid resources and financing (621) (198) (35) Management of liquid resources 619 (184) (336) Financing (share capital and borrowings) 108 49 113 __________________________________________________________________________ Increase/(decrease) in cash 106 (333) (258) __________________________________________________________________________ Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash 106 (333) (258) Cash (inflow)/outflow from (decrease)/increase in liquid resources (619) 184 336 Cash inflow from increase in borrowings (106) (36) (99) __________________________________________________________________________ Change in net funds resulting from cash flows (619) (185) (21) Loans disposed of with subsidiary undertakings - - 112 Zero-coupon bonds 2005/2007 (9.0% interest accretion) (1) (1) (2) Exchange adjustments (7) - - __________________________________________________________________________ Movement in net funds (627) (186) 89 Net funds at 1 January 302 213 213 __________________________________________________________________________ Net (debt)/funds at period end (325) 27 302 __________________________________________________________________________ Reconciliation of operating profit to operating cash flows Operating profit 156 138 316 Depreciation of tangible fixed assets 48 48 113 Loss/(profit) on disposals of tangible fixed assets 3 (2) (1) (Decrease) in provisions for liabilities and charges (21) (30) (89) (Increase) in working capital/ creditors due after more than one year (575) (205) (54) __________________________________________________________________________ Net cash (outflow)/inflow from operating activities (389) (51) 285 __________________________________________________________________________ ----------------------------------------------------------------------------- Notes Half Year Half Year Year to to to 31 December 30 June 1999 30 June 1998 1998 £m £m £m 1. Analysis by business segment Group turnover Aerospace 1,716 1,601 3,476 Industrial 388 389 850 __________________________________________________________________________ 2,104 1,990 4,326 Discontinued operations - 109 170 __________________________________________________________________________ 2,104 2,099 4,496 __________________________________________________________________________ Trading profit * Aerospace 266 199 442 Industrial 12 25 70 __________________________________________________________________________ 278 224 512 __________________________________________________________________________ *Trading profit is stated before net research and development and non operating items and after share of operating profit of joint ventures. Profit before interest Aerospace 189 139 370 Industrial (16) 8 35 __________________________________________________________________________ 173 147 405 Discontinued operations - (3) (63) __________________________________________________________________________ 173 144 342 __________________________________________________________________________ Net assets/liabilities - excluding net funds Aerospace 1,702 1,115 1,036 Industrial 448 332 400 __________________________________________________________________________ 2,150 1,447 1,436 Discontinued operations - 75 (21) __________________________________________________________________________ 2,150 1,522 1,415 __________________________________________________________________________ __________________________________________________________________________ Discontinued operations include the 3 October 1998 disposal of the Transmission and Distribution business in addition to transactions relating to the 1996 withdrawal from large steam power generation. ----------------------------------------------------------------------------- Discontinued Operations The 1998 profit and loss account comparative figures were as follows:- __________________________________________________________________________ Half Year Half Year Year to to to 31 December 30 June 1999 30 June 1998 1998 £m £m £m Group turnover - 109 170 Cost of sales and other operating costs - (118) (188) Research and Development (net) (3) (4) Utilisation of provision for loss on sale/termination of businesses - 9 12 __________________________________________________________________________ Group operating loss - (3) (10) Loss on sale of businesses - - (53) __________________________________________________________________________ Profit (loss) before interest - (3) (63) __________________________________________________________________________ 2. Earnings per ordinary share Earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of £123 million (1998 half year £107m, full year £258m) by 1505 million (1998 half year, 1,493 million) ordinary shares, being the average number of ordinary shares in issue during the period, excluding own shares held under trust which have been treated as if they been cancelled. Adjusted earnings per ordinary share, before exceptional and non-operating items, have been calculated as follows. They are presented to show the underlying earnings by excluding the effects of exceptional and non-operating items. Exceptional and non-operating items had no effect on 1998 first half figures. Half Year Year to to 30 June 31 December 1999 1998 £m £m Pence £m Pence £m Profit attributable to ordinary shareholders 8.17 123 17.25 258 Exclude exceptional and non- operating items: Net loss on sale of businesses 0.27 4 2.67 40 Profit from the sale to BMW of the automotive trademark registration of the Rolls-Royce name - - (2.67) (40) Profit on sale of fixed assets (0.53) (8) (0.61) (9) Related tax effect - - 0.27 4 __________________________________________________________________________ Earnings per ordinary share before exceptional and non-operating items 7.91 119 16.91 253 __________________________________________________________________________ Diluted earnings per ordinary share, after exceptional and non-operating items, are calculated by dividing the profit attributable to ordinary shareholders of £123m (1998 half year £107m, full year £258m) by 1,520 million (1998 half year 1,506 million, full year 1,509 million) ordinary shares, being 1,505 million (1998 half year 1,493 million, full year 1,496 million) as above adjusted by the bonus element of existing share option of 15 million (1998 half year 13 million, full year 13 million). 3. Group Employees at the period end 30 June 30 June 31 December 1999 1998 1998 Number Number Number Aerospace 29,600 29,100 30,000 Industrial 9,700 13,700 10,300 __________________________________________________________________________ 39,300 42,800 40,300 __________________________________________________________________________ 4. Preparation of interim financial statements The results for each half-year are unaudited. The comparative figures for the year to 31 December 1998 have been abridged from the Group's financial statements for that year, which have been delivered to the Registrar of Companies. The auditors have reported on those financial statements; their report was unqualified and did not contain a statement under S23(2) or (3) of the Companies Act 1985. The interim financial statements for the six months ended 30 June 1999 were approved by the Board on 25 August 1999.
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