Interim Results

29 July 2004 ROLLS-ROYCE GROUP plc INTERIM RESULTS 2004 Maintaining progress "These results are in line with our expectations and are underpinned by aftermarket services revenues which grew by 16 per cent in the first half. "All our businesses have developed good market positions and, importantly, we are established on new programmes which will shape the power systems markets for the next generation. "Our order book, continuing progress with cost reduction initiatives and our performance on profit and average net debt in the first half, support our guidance for the full year." Sir John Rose, Chief Executive Rolls-Royce Group plc Profit and cash flow consistent with guidance * Underlying profit before taxation* Â£136 million (h1 2003: Â£115m) * Profit on ordinary activities before taxation Â£129 million (h1 2003: Â£59m) * Average net debt Â£550 million (h1 2003: Â£895m) * Interim payment to ordinary shareholders maintained at 3.18p per share Continuing growth in aftermarket services revenues * Revenues increased by 16 per cent to Â£1.5 billion (h1 2003: Â£1.3bn) * Revenues represent 55 per cent of Group sales (h1 2003: 50 per cent) Growing order book * Â£4.0 billion order intake (h1 2003: Â£4.0bn) * Firm and announced backlog Â£19.7 billion (h1 2003: Â£19.0bn) * Aftermarket services Â£7.1 billion (h1 2003: Â£6.5bn) *See note 3 Overview Results for the half-year ended June 30 2004 were in line with the company's expectations, underpinned by aftermarket services sales which grew by 16 per cent to Â£1.5 billion, representing 55 per cent of Group sales. Underlying profit before tax was Â£136 million, an increase of 18 per cent, and underlying earnings per share were 5.78 pence (h1 2003: 4.97p). Basic earnings per share were 5.07 pence (h1 2003: 2.09p) Average net debt for the period was Â£550 million (h1 2003: Â£895m). Rolls-Royce reinforced its market position in all its business sectors in the first half of 2004, benefiting from its strategy of investing once in technology and applying it many times. For example, technology developed for the Trent engine programme has been exploited to win positions on new programmes, which are at various stages of development in each business sector. The Trent 1000, the fifth generation of Trent aero-engine, was selected to power the new Boeing 7E7. The Trent engine family has now gained positions on both the world's next-generation large airliners, the Airbus A380 and the Boeing 7E7. Trent technology also enabled the company to strengthen its position in the defence sector, where it delivered the first fan module, using Trent fan blade technology, for the F136 Joint Strike Fighter (JSF) engine. In the marine sector, Lockheed Martin selected the Rolls-Royce MT30 gas turbine, which is 80 per cent common with the Trent 800 aero-engine, for the US Littoral Combat Ship programme. This follows the company's success in being selected to power the US DD(X) destroyer demonstrator programme with the MT30. The industrial Trent, also derived from the Trent 800, won its first application in the oil and gas sector. Dolphin Energy ordered six Trent-powered compressor sets for the export pipeline from Qatar to United Arab Emirates and also signed a Long-Term Service Agreement covering the support of this equipment. The order book remained strong and ended the period at a record level of Â£18.1 billion (h1 2003: Â£17.6bn), following an order intake of Â£4.0 billion (h1 2003: Â£4.0bn). A further Â£1.6 billion worth of business was announced (h1 2003: Â£ 1.4bn), resulting in a firm and announced order backlog of Â£19.7 billion (h1 2003: Â£19.0bn). Aftermarket services accounted for 36 per cent of the firm and announced order backlog (h1 2003: 34 per cent). The company confirmed the latest phase in its transformation programme to modernise factories, drive down costs and continue to make progress towards its target of a 10 per cent return on sales. It is investing more than Â£100 million in high value-added UK manufacturing facilities specialising in compression systems, combustion systems, component services and turbine systems. The company is on target to achieve a five per cent reduction in unit costs in 2004. Outlook Rolls-Royce has invested to build leading positions in four global markets. It addresses these markets with common technology and capabilities, producing a valuable portfolio effect for the business as a whole. Market-leading technology has enabled Rolls-Royce to gain strong positions on a new generation of programmes across all its business sectors. These programmes will shape the power systems market for the next generation. The long-term nature of product programmes leads to sustainable returns over many years as a result of the high value-added aftermarket services opportunity created each time a gas turbine is sold. The successful strategy to capture this opportunity is demonstrated by the consistent growth of aftermarket services in recent years. The company's confidence in the business model is supported by the visibility provided by its order book. Its continuing progress with cost reduction initiatives and its performance on profit and average net debt in the first half support 2004 full year guidance for profit growth and a reduction in average net debt. Enquiries Peter Barnes-Wallis Maria Darby-Walker Director of Financial Communications Head of Corporate Media Relations Tel: 020 7222 9020 Tel: 020 7227 9239 www.rolls-royce.com An interview on the results with Rolls-Royce Chief Executive, Sir John Rose, is available on video, audio and text on www.Rolls-Royce.com . Photographs of directors and products are available at www.newscast.co.uk Sector reviews Civil aerospace: Sales Â£1,453m (h1 2003: Â£1,198m); underlying profit before interest Â£67m (h1 2003: Â£46m) Highlights - original equipment * Civil engine deliveries increased by 9 per cent to 384 and included delivery of the 1000th Trent engine. Full year deliveries are expected to be a little higher than in 2003. * The Rolls-Royce Trent 1000 engine was selected as one of the two engines to power the Boeing 7E7. Air New Zealand, the first airline to choose engines for the 7E7, selected the Trent 1000 and also ordered Trent 800s for eight Boeing 777s. * The Trent 900, which will be the first engine into commercial service on the Airbus A380, successfully completed its first flight. * AirTran Airways ordered six BR715 powered Boeing 717 airliners. * IAE, Rolls-Royce's joint venture with Pratt & Whitney, MTU and JAEC, received orders for V2500 engines to power 30 A320s for Jet Blue Airlines. Highlights - aftermarket services * Rolls-Royce fleet flying hours increased by 16 per cent to the end of June compared to the same period last year. * Civil aerospace aftermarket revenues grew by 22 per cent and represented 58 per cent of civil aerospace sales in the first half. * Rolls-Royce and American Airlines announced a five-year contract that could be worth over $1.6 billion in repair and overhaul work for their joint venture, Texas Aero Engine Services LLC. * Singapore Airlines signed a ten-year TotalCare agreement covering in-service support for the Trent 500 engines powering the airline's fleet of Airbus A340-500 aircraft. * The company continued to win new customers for CorporateCareÂ®, its engine care programme for corporate aircraft. It now has more than 315 aircraft under flight hour agreements, with contract values exceeding $630 million. Defence: Sales Â£638m (h1 2003: Â£642m); underlying profit before interest Â£66m (h1 2003: Â£60m) Highlights - original equipment * Testing of the first short take off and vertical landing propulsion system for the Joint Strike Fighter (JSF) was completed successfully. * The first fan module was delivered for the F136 engine for the JSF programme. This is the most powerful combat engine programme in which the company has participated. * Orders were received for 10 Pegasus engines for the Spanish and Italian navies for their Harrier aircraft. * The Light Helicopter Turbine Engine Company (LHTEC), a 50:50 joint venture between Honeywell and Rolls-Royce, announced that the CTS800-4N turboshaft engine had received a Type Certificate from the Federal Aviation Administration. * The first production NH90 helicopter, powered by Rolls-Royce Turbomeca RTM322 engines, made its maiden flight. Highlights - aftermarket services * Rolls-Royce continued to develop its aftermarket services, which represented 57 per cent of defence sales in the first half. * The company announced that ST Aerospace Engines PTE, LTD., a Singapore based repair and overhaul provider, had joined its global network of Authorized Maintenance Centres for the T56-501D engine. Marine: Sales Â£443m (h1 2003: Â£495m); underlying profit before interest Â£28m (h1 2003: Â£40m) Highlights - original equipment * Following a long period of growth, sales in the offshore support vessel market slowed in the second half of 2003. This market has now stabilized. As a consequence sales in the first half of 2004 were lower than reported in 2003. However, the Company has made progress in the naval market, securing positions on several new programmes. * The MT30 marine gas turbine completed a major development milestone, receiving DNV (Det Norske Veritas) design approval, certifying the engine at 36MW for High Speed, Light Craft and Naval Surface Vessels. * Rolls-Royce was selected by Lockheed Martin to provide MT30 gas turbine engines and waterjets for up to two ships of the Littoral Combat Ship programme (LCS), the next generation of US Navy warship. The US Navy's current shipbuilding plan calls for a total of 57 ships, for which the MT30 would be a candidate. * The company took full ownership of the WR-21 programme from its partner, Northrop Grumman. It increased provisions by Â£10 million for additional costs associated with the programme. The first two WR-21 gas turbines for the Royal Navy's Type 45 destroyer completed factory acceptance testing. * The UK Ministry of Defence, acting on behalf of partner nations UK, France and Norway, selected Rolls-Royce to provide the NATO Submarine Rescue System. Under the Â£47 million contract, Rolls-Royce will create and lead a team, which will design, build and support the system over the next ten years. * In the commercial marine sector, Rolls-Royce won coastal protection vessel design contracts for new Norwegian and French coastguard vessels. Highlights - aftermarket services * Aftermarket services represented 44 per cent of marine sales in the first half. * The company completed the overhaul of Tyne and Olympus engines to extend the life of Type 22 frigates acquired by the Romanian Navy. Energy: Sales Â£186m (h1 2003: Â£237m); underlying profit before interest Â£1m (h1 2003: Â£7m) Highlights - original equipment * Sales declined in the first half as a result of the phasing of engine deliveries, which are weighted towards the second half of 2004. * Rolls-Royce announced a $107 million contract from Dolphin Energy Limited, the oil and gas exploration company, to supply six mechanical drive industrial Trent Dry Low Emission (DLE) compression packages for the $3.5 billion Dolphin Gas Project in the Middle East. * The company won a contract to provide pipeline compression equipment for the prestigious West-East China Gas Pipeline Project (WEPP). The contract is valued at over $150 million. * An order was received for pipeline compressors, which will be used to move gas along the sub-sea Interconnector Pipeline from mainland Europe to the UK. Highlights - aftermarket services * Aftermarket services represented 42 per cent of sales. * Rolls-Royce signed a Long-Term Service Agreement with Dolphin Energy supporting six Trent-powered compressor sets for the export pipeline from Qatar to United Arab Emirates. The initial agreement is worth more than $40m over six years. If further renewal options are exercised the agreement could last 30 years and be worth $300m. Financial Services: Sales Â£26m (h1 2003: Â£27m); underlying profit before interest Â£8m (h1 2003: Â£7m) The Financial Services businesses comprise engine leasing, aircraft leasing and power project development. * Rolls-Royce and Partners Finance, the company's engine leasing joint venture, owned 269 engines, of which 98 per cent by value were on lease to 36 customers. * Pembroke Group, the company's aircraft leasing joint venture, owned 28 aircraft, which were all on lease. * Rolls-Royce Power Ventures is the company's power project developer. It had a portfolio of 13 projects in operation and a further two in construction or commissioning. Financial review The firm order book was Â£18.1bn (h1 2003: Â£17.6bn). In addition, a further Â£ 1.6bn had been announced (h1 2003: Â£1.4bn). Aftermarket services represented 36 per cent of the firm and announced order book (h1 2003: 34 per cent). Sales increased by six per cent to Â£2,746m (h1 2003: Â£2,599m). Underlying profit before tax was Â£136m (h1 2003: Â£115m). Underlying earnings per share increased by 16 per cent, to 5.78p. Gross research and development investment was Â£291m (h1 2003: Â£304m). Net research and development investment was Â£129m (h1 2003: Â£145m). Net research and development investment for the full year is expected to be at a similar level to investment in 2003. Risk and revenue sharing partners' (RRSPs) contributions to development programmes, shown as other operating income, were Â£15m (h1 2003: Â£74m). Payments to RRSPs in respect of sales achieved by the relevant engine programmes were charged in cost of sales and amounted to Â£112m (h1 2003: Â£53m). Arrangements with industrial RRSPs include their provision of free of charge components. A successful programme will result in incremental future revenues and higher payments to RRSPs. Restructuring costs of Â£16m (h1 2003: Â£3m) were charged within cost of sales. The taxation charge was Â£44m (h1 2003: Â£25m). The tax charge on an underlying basis was Â£39m, representing 29 per cent of underlying profit before tax. (h1 2003: Â£34m, representing 30 per cent of underlying profit before tax). Cash inflow during the first half was Â£35m (h1 2003: outflow Â£80m). Average net debt was Â£550m (h1 2003: Â£895m). Net debt at the half year was Â£288m (h1 2003: Â£675m). Total borrowing facilities amounted to Â£2.4 billion at the half year, following the successful issue of a â‚¬750 million Eurobond and the retirement of Â£282 million of facilities. Net working capital was Â£500m (h1 2003: Â£523m), an increase of Â£117m in the first half (h1 2003: Â£129m); inventory increased by Â£79m (h1 2003: Â£85m); debtors reduced by Â£187m (h1 2003: Â£79m); and creditors reduced by Â£225m (h1 2003: Â£123m). During the first half, there was no change in debtors relating to long-term contract accounting for TotalCare Packages (h1 2003: Â£52m increase) and an Â£11m increase in associated creditors (h1 2003: Â£19m). Provisions were down Â£21m in the first half at Â£774m (h1 2003: Â£782m), largely reflecting foreign exchange adjustments. There were no material changes to the Group's gross and net contingent liabilities during the first half of 2004. Rolls-Royce announced the divestment of Rolls-Royce Gear Systems, Inc to Triumph Group Inc. The consideration for the divestment is $36 million, giving rise to a profit that is treated as a non-operating item in the 2004 accounts. The company made progress with the management of aircraft on the balance sheet. At the half-year all four Boeing 757 aircraft were on lease to customers; one A310 aircraft was on lease, one was under agreement for lease in the second half and an offer to purchase the remaining A310 had been received (a small impairment charge was taken against this aircraft). The company has also agreed the disposal of its 50 per cent interest in four Boeing 747 aircraft. A specific provision, which will cover any loss on disposal, had already been made in respect of these aircraft. As at June 30 2004, the FRS17 deficit relating to the UK pension schemes had not changed materially from the valuation carried out at the end of December 2003. The company is continuing to study the implications of the implementation of International Financial Reporting Standards (IFRS). It plans to report 2004 full year results under UK GAAP and to provide a separate reconciliation to IFRS in the period between the full year results and 2005 interim results, which will be the first set of results for which reporting under IFRS is mandatory. The interim payment to ordinary shareholders is 3.18 pence per share (2003: 3.18p) and will be paid in the form of `B' shares. The interim payment is payable on January 4 2005 to shareholders on the register on October 15 2004. The ex-entitlement to `B' shares date is October 13 2004. Payment of the non-cumulative preferential dividend on B Shares in respect of the calculation period commencing on July 1 2004 will be paid on January 4 2005 to B Shareholders on the B Share register on November 26 2004. The dividend rate will be 3.778125% being 75% of the LIBOR rate on June 30 2004 in accordance with the Scheme Circular dated March 22 2004 and the Company's Articles of Association. Enquiries Peter Barnes-Wallis Maria Darby-Walker Director of Financial Communications Head of Corporate Media Relations Tel: 0207 222 9020 Tel: 020 7227 9239 www.rolls-royce.com Group Profit and Loss Account For the half year to 30 June 2004 Half Year Half Year Year to to to 31 December 30 June 2004 30 June 2003 2003 Â£m Â£m Â£m Turnover: Group and share of joint 2,842 2,665 6,038 ventures Sales to joint ventures 447 487 936 Less share of joint ventures' turnover (543) (553) (1,329) Group turnover (note 1) 2,746 2,599 5,645 Cost of sales and other operating income (2,493) (2,371) (5,141) and costs* Research and development (net)** (129) (145) (281) Group operating profit 124 83 223 Share of operating profit of joint 24 23 52 ventures Total operating profit 148 106 275 Operating profit before exceptional item 148 135 329 Exceptional item (note 2) - (29) (54) Profit on sale of businesses 11 (2) 6 Profit on sale of fixed assets 4 - (11) Profit on ordinary activities before 163 104 270 interest (note 1) Net interest payable - Group (24) (33) (66) - joint ventures (10) (12) (24) Profit on ordinary activities before 129 59 180 taxation *** Taxation (44) (25) (64) Profit on ordinary activities after 85 34 116 taxation and attributable to ordinary shareholders Payments to shareholders (see note 6) (54) (53) (137) Earnings per ordinary share (note 3) Underlying 5.78p 4.97p 12.20p Basic 5.07p 2.09p 7.04p Diluted basic 4.90p 2.08p 6.94p * includes Other Operating Income 15 74 153 ** Research and development (gross) (291) (304) (619) *** Underlying profit before taxation 136 115 285 (note 3) Group Statement of Total Recognised Gains and Losses Profit attributable to ordinary 85 34 116 shareholders Exchange adjustments on foreign currency (81) 18 (3) net investments Total recognised gains for the period 4 52 113 Summary Group Balance Sheet Restated* Restated* Half Year Half Year Year to to to 31 December 30 June 2004 30 June 2003 2003 Â£m Â£m Â£m Fixed assets Intangible 798 870 863 Tangible 1,662 1,848 1,750 Investments - joint ventures 209 202 202 share of gross assets 1,088 1,123 1,113 share of gross liabilities (884) (927) (916) goodwill 5 6 5 - other 59 64 63 ________________________________________________________________________________________ 2,728 2,984 2,878 Current assets Stocks 1,041 1,243 962 Debtors 2,419 2,334 2,606 Short term deposits and investments 356 216 174 Cash at bank and in hand 1,115 454 794 ________________________________________________________________________________________ 4,931 4,247 4,536 Creditors Amounts falling due within one year - (151) (365) (94) Borrowings - Other Creditors (2,475) (2,590) (2,759) Amounts falling due after one year - Borrowings (1,608) (980) (1,197) - Other Creditors (485) (464) (426) Provisions for liabilities and charges (774) (782) (795) ________________________________________________________________________________________ Net assets 2,166 2,050 2,143 ________________________________________________________________________________________ Capital and Reserves Equity shareholders' funds 2,163 2,048 2,140 Equity minority interests in subsidiary 3 2 3 undertakings ________________________________________________________________________________________ 2,166 2,050 2,143 ________________________________________________________________________________________ Reconciliation of Movements in Shareholders' Funds Â£m Â£m Â£m At 1 January (restated) * 2,140 2,032 2,032 Total recognised gains for the period 4 52 113 Ordinary dividends (net of scrip dividend 20 (38) (8) adjustments) New ordinary share capital issued (net of 3 - 1 expenses) Relating to own shares (2) 2 2 Goodwill transferred to the profit and loss (2) account in respect of disposals of businesses - - ________________________________________________________________________________________ At period end 2,163 2,048 2,140 ________________________________________________________________________________________ * see note 9 Summary Group Cash Flow Statement Restated* Restated* Half Year Half Year Year to to to 31 December 30 June 2004 30 June 2003 2003 Â£m Â£m Â£m Net cash inflow from operating activities 192 140 673 Dividends received from joint ventures 2 4 11 Returns on investments and servicing of finance (42) (42) (56) Taxation paid (40) (22) (43) Capital expenditure and financial investment (50) (94) (198) Acquisitions and disposals 13 - (16) Equity dividends paid (33) (36) (88) _________________________________________________________________________________________ Cash inflow/(outflow) before use of liquid 42 (50) 283 resources and financing Management of liquid resources (185) (133) (90) Financing 417 (52) (17) _________________________________________________________________________________________ Increase/(decrease) in cash 274 (235) 176 _________________________________________________________________________________________ Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash 274 (235) 176 Cash outflow from increase in liquid resources 185 133 90 Cash (inflow)/outflow from (increase)/decrease in borrowings (416) 54 20 _________________________________________________________________________________________ Change in net funds resulting from cash flows 43 (48) 286 Borrowings of businesses acquired - - 33 Finance lease additions - (9) (10) Amortisation of zero-coupon bonds (2) (2) (4) Exchange adjustments (6) (21) (33) _________________________________________________________________________________________ Movement in net funds 35 (80) 272 Net debt at 1 January (323) (595) (595) _________________________________________________________________________________________ Net debt at period end (288) (675) (323) _________________________________________________________________________________________ Reconciliation of operating profit to operating cash flows Operating profit 124 83 223 Amortisation of intangible assets 30 28 63 Depreciation of tangible fixed assets 93 96 223 Increase in provisions for liabilities and 1 10 3 charges (Increase)/decrease in working capital/ (56) (77) 161 creditors due after more than one year _________________________________________________________________________________________ Net cash inflow from operating activities 192 140 673 _________________________________________________________________________________________ * see note 9 Notes Restated* Restated* Half Year Half Year Year to to to 31 December 30 June 2004 30 June 2003 2003 Â£m Â£m Â£m 1. Analysis by business segment Group turnover Civil aerospace 1,453 1,198 2,694 Defence 638 642 1,398 Marine** 443 495 1,003 Energy** 186 237 508 Financial services 26 27 42 _________________________________________________________________________________________ 2,746 2,599 5,645 _________________________________________________________________________________________ Profit before interest Civil aerospace 74 20 82 Defence 66 53 132 Marine** 17 23 39 Energy** (2) 3 23 Financial services 8 5 (6) _________________________________________________________________________________________ 163 104 270 _________________________________________________________________________________________ Underlying profit before interest*** Civil aerospace 67 46 131 Defence 66 60 147 Marine** 28 40 78 Energy** 1 7 23 Financial services 8 7 (4) _________________________________________________________________________________________ 170 160 375 _________________________________________________________________________________________ ***before exceptional and non-trading items Net assets/liabilities - excluding net debt Civil aerospace 1,122 1,294 1,099 Defence 47 (4) 69 Marine** 567 620 577 Energy** 376 365 346 Financial services 342 450 375 _________________________________________________________________________________________ Net assets**** 2,454 2,725 2,466 _________________________________________________________________________________________ * See note 9 **The Diesels business, which was previously included in the Energy segment is now included in the Marine segment. The impact of this change is; turnover Â£37m (2003 half year Â£39m, full year Â£76m); profit before interest Â£7m (2003 half year Â£3m, full year Â£7m); underlying profit before interest Â£3m (2003 half year Â£3m, full year Â£7m); net assets Â£34m (2003 half year Â£36m, full year Â£30m). **** Net assets excludes net debt of Â£288m (2003 half year Â£675m, 2003 full year Â£323m) 2. Exceptional items Exceptional items in 2003 related to rationalisation costs, largely comprising the continuation of previously announced severance programmes. 3. Earnings per ordinary share Basic earnings per ordinary share are calculated by dividing the profit attributable to ordinary shareholders of Â£85 million (2003 half year Â£34m, full year Â£116m) by 1,677 million (2003 half year, 1,629 million, full year 1,647 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 had been cancelled. Underlying earnings per ordinary share have been calculated as follows. Half Year to 30 June 2004 Â£m Â£m Pence Profit before taxation 129 Profit attributable to ordinary shareholders 85 5.07 Exclude: Net profit on sale of (11) (11) (0.66) businesses Net profit on sale of fixed (4) (4) (0.24) assets * Amortisation of goodwill 22 22 1.31 Related tax effect - 5 0.30 ________________________________________________________________________________________ Underlying profit before taxation 136 Underlying profit attributable to 97 shareholders Underlying earnings per share 5.78 * excluding lease engines and aircraft sold by financial services companies Half Year to 30 June 2003 Â£m Â£m Pence Profit before taxation 59 Profit attributable to ordinary shareholders 34 2.09 Exclude: Exceptional rationalisation 29 29 1.78 Net loss on sale of 2 2 0.12 businesses Amortisation of goodwill 25 25 1.53 Related tax effect - (9) (0.55) ________________________________________________________________________________________ Underlying profit before taxation 115 Underlying profit attributable to 81 shareholders Underlying earnings per share 4.97 Year to 31 December 2003 Â£m Â£m Pence Profit before taxation 180 Profit attributable to ordinary shareholders 116 7.04 Exclude: Exceptional rationalisation 54 54 3.27 Net profit on sale of (6) (6) (0.36) businesses Loss on sale of fixed assets 9 9 0.55 * Amortisation of goodwill 48 48 2.91 Related tax effect - (20) (1.21) ________________________________________________________________________________________ Underlying profit before taxation 285 Underlying profit attributable to 201 shareholders Underlying earnings per share 12.20 * excluding lease engines and aircraft sold by financial services companies Diluted earnings per ordinary share, are calculated by dividing the profit attributable to ordinary shareholders of Â£85m (2003 half year Â£34m, full year Â£ 116m) by 1,735 million (2003 half year 1,636 million, full year 1,671 million) ordinary shares, being 1,677 million (2003 half year 1,629 million, full year 1,647 million) as above, adjusted by the bonus element of existing share options of 58 million (2003 half year 7 million, full year 24 million). 4. Group employees at the period end 30 June 30 June 31 Dec 2004 2003 2003 Number Number Number Civil Aerospace 19,800 20,300 19,800 Defence 5,100 5,100 4,900 Marine* 7,100 7,400 7,300 Energy* 2,900 3,300 3,100 Financial services 100 100 100 _________________________________________________________________________________________ 35,000 36,200 35,200 * 2003 half year and full year restated to reflect the inclusion of the Diesels business in the Marine segment - previously included in Energy. Gas Turbines operations personnel are allocated to the businesses on the basis of level of activity. 5. Sales financing contingent liabilities In connection with the sale of its products the Group will on some occasions provide financing support for its customers. The Group's contingent liabilities related to financing arrangements are spread over many years and relate to a number of customers and a broad product portfolio. The contingent liabilities represent the exposure the Group has in respect of delivered aircraft, regardless of the point in time at which such exposures may arise. Exposures are not reduced to a net present value. During the first half of 2004 there were no material changes to the maximum gross and net contingent liabilities. 6. B shares Under arrangements approved by the Annual General Meeting on 5th May 2004, the Company will issue B shares to shareholders in place of a dividend. These can be redeemed for cash or converted into ordinary shares in the Company. As this is not classed as a dividend, no accrual has been made for this in the financial statements. 7. Pensions The Accounting Standards Board has deferred the full implementation of FRS 17, pending the introduction of International Financial Reporting Standards. The Group's funding requirements for its schemes are derived from triennial independent actuarial valuations. For the Vickers Group Pension Scheme and the Rolls-Royce Group Pension Scheme the 2004 actuarial valuations (applicable in March 2004, and April 2004 respectively) are in progress. The Group is currently undertaking consultations with employees over a number of mitigating actions in connection with the provision of pension benefits under these two schemes in order to contain the additional funding costs. 8. International Financial Reporting Standards All European Union listed companies are required to adopt International Financial Reporting Standards (IFRS) for their financial statements from 2005, which will include comparative information for 2004. The Group has been evaluating the impact of IFRS on its published financial statements and an assessment was provided in the 2003 annual report. Preparatory work continues, to enable the Group to report under IFRS for the first time when it announces its interim 2005 results. Prior to this it is the Group's intention to restate its 2004 year-end results - which under existing UK accounting standards will be announced in February 2005 - to allow time for the impact of IFRS to be interpreted and adequately understood. 9. Preparation of interim financial statements Throughout these financial statements, the 2003 comparatives have been restated to reflect the adoption of UITF 38 - Accounting for ESOP trusts. This has resulted in the reclassification of own shares as a deduction from shareholders' funds. The results for each half-year are unaudited. The comparative figures for the year to 31 December 2003 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 s237(2)or (3) of the Companies Act 1985. The interim financial statements for the six months ended 30 June 2004 were approved by the Board on 28 July 2004.

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