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Mark Morris -

Rolls Royce Holdings plc (OTCPK:RYCEY) 2011 Earnings Call February 9, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rolls-Royce 2011 Fixed Income Call. [Operator Instructions] I must advise you that this conference is being recorded today, on Thursday, the 9th of February, 2012. And I would now like to hand the conference over to your speaker today, Mark Morris. Please go ahead, sir.

Mark Morris

Thank you. Well, good afternoon or good morning or wherever you are. My name is Mark Morris, I am the Finance Director for Rolls-Royce and this fixed income call really is to go over our preliminary results for 2011. I'm not sure if any of you have managed to either read our press release or see our WebEx. So what I'll do is just give a quick summary in highlights of our results and then I'll open up the floor to questions.

So I guess the first thing to say is it's been a good year for Rolls-Royce 2011. We had a record order book, record underlying revenues and record underlying profits and the first time profits of over GBP 1 billion. I think this demonstrates an increasingly resilient business. We've had 10 years of consistent progress. And over those years, we have consistently grown the order book, our revenues and profits.

We doubled revenues in the last decade. And we're confident of doubling them again in the next decade, when we look to our order book which provides us good visibility and confidence about the growth of our business.

Order book was GBP 62.2 billion, which is up 5%. Underlying revenues at GBP 11.3 billion were up 4%. Underlying profit was up 21% and again, that included a number of but one offs, including some foreign exchange benefits, and obviously, the movement that we generally have in things like volume and mix between original equipment and aftermarket deliveries.

It's a strong financial position, we ended the year with net cash of GBP 223 million after an acquisition -- a number of acquisitions that we made to the tune of about GBP 1.5 billion. Reflecting our confidence in the business and our order book, our final payment to shareholders of 10.6p bringing the total to 17.5p providing a rise of 9%.

I guess where we are in the cycle at the moment is very much investing for the future against the large order book that we have. We had someone -- over the last 18 years, we delivered around 2,000 Trents, and we're looking to deliver 2,000 Trents over the next 5 years. So you can see it's quite a significant ramp up in load for us.

During the year, we made 3 strategically important decisions, one was our joint acquisition with Daimler of Tognum, the largest made by Rolls-Royce to date, provides highly complementary portfolios with our existing business and will create new opportunities for growth.

We also entered into an agreement with Airbus for the A350-1000, exclusive position on that aircraft, which strengthens our position on the wide-body market. And finally, in the second half of the year, we announced the restructuring of IAE, where we look to sell our equity shareholding of 32.5%, realizing the value of our investment. And we will continue to be a subcontractor in the existing arrangement. And at the same time, announcing a new JV with Pratt & Whitney for the future midsize market.

We made good progress this year on a number of programs, the Trent XWB has now over 1,500 hours tested and the number of -- sorry, hours completed. The BR725 will enter service on the new Gulfstream 650 in 2012. The LiftFan for the new JSF will be a various variant to the F-35, has performed a number of demonstrations on various carriers and on airfields and so forth. And finally, the TP400, which goes on the new aircraft, military transport aircraft, the A400M. That is of 8,000 flight test hours now and the aircraft is due to enter service in 2013.

We're becoming increasingly international. We're well-diversified by geography, markets, products and sources of revenues. Our order book, at GBP 62.2 billion, of which around 1/2 of it is from Asia, the Middle East and South America, and is larger than the entire order book in 2006. Nearly 1/2 of new orders this year are from faster growing economies, GBP 5 billion from Asia alone. We continue to keep a focus on costs and operational efficiency. Significant investments in technology facilities, tolling capability continue, reflecting the larger order book and the load rises that we're seeing at the moment.

Cross-points, opened in the U.S., now producing discs, our new facility in Singapore, Seletar, will be opening next week and production begins in the second half of this year. On top of that, we've expanded our Marine services network capability, opening up 4 new facilities and expanding one. And similarly, in our Energy business, we're opening up a new assembly and test facility in Brazil, which will open up in 2013. Again, to capitalize on both activity that's running in the Marine and Energy sectors there in the offshore markets.

Productivity, steadily improving. Revenue per person, up every year for a decade and now at GBP 274,000 per employee.

Just dipping a little bit into the results for the sectors. Civil Aerospace, the order book was up GBP 51.9 billion and that's up 7%. Revenues at GBP 5.6 billion were up 13%, and underlying profits at GBP 499 million, up 27%. The outlook for our Civil business is good and we've guided underlying -- good underlying revenue growth and strong underlying profit growth. Defence Aerospace, while the order book was down, underlying revenues were up 5% and underlying profits are up 22%, but benefiting from a one-off GBP 60 million settlement -- termination settlement from the Strategic Defense Security Review. In terms of guidance we've given this year for Defence, we've guided both a modest increase in revenues and profits.

Marine sector, again, the order book, GBP 2.7 billion, was down about 8%. But more importantly, order intake was up 15% at GBP 2.1 billion. It's important to remember that the Marine business is a much shorter cycle business, typically running the sort of 9- to 12-month period. Again, the Marine business was affected by predominantly, the downturn in the offshore market, which saw our OE deliveries fall some 23%. But again, we're expecting on the back of order intake in the lead order cycle for that to improve in 2012. Underlying profits were broadly as guided and broadly similar to 2010.

And for 2012, we are guiding a modest increase in revenues and profits broadly flat, reflecting continued price pressure in the offshore market. Finally, Energy. The order book was up 25%. Underlying revenues were down about 1.2 -- sorry, GBP 1.2 billion, down 3% and underlying profits of GBP 24 million, down about 11%.

I would characterize with you the Energy business as a mature business in the oil and gas side, which represents about 55% of turnover. And that generally generates good profits. And then less mature businesses in power generation, civil nuclear and low carbon technologies, where we continue to invest and, clearly, this suppresses our financial performance.

The main drag on underlying performance -- on underlying profits for Energy in 2011 were primarily due to higher bid costs associating starting costs of our Nuclear business. And again, in terms of guidance, we've guided both revenue and profit growth in the energy sector.

And I think with that, I will stop and allow an open forum up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We seem to have no questions from the phone lines, sir. Please continue.

Mark Morris

Well, it's nice to receive no questions sometimes. I guess one thing I didn't highlight was to give you a group level guidance although it's in our press release. And that was to say that we expect to see continued good growth in both revenues and profits at a group level and I think that just underpins the resilience of our business and the confidence we have in the size of our order book. And in relation to cash flow, we've guided around breakeven. And that's really reflecting the fact that we continue to invest and we're seeing slightly higher R&D, slightly higher CapEx and slightly higher inventory as we get ready for the rising load. However, we think these are both the right things to do when we look at our return on capital employed around 18% and shows it's a good return on our investment. We continue to invest in technology and we continue to invest in growth. And I guess with that, I will end the conference. So thank you. And no doubt, we will catch up with you later. Thanks.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.

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