28 02 2019 Rr Holdings Plc 2018 Full Year Results

Solid progress: results ahead of expectations

Warren East, Chief Executive commented: “Despite the challenges we faced on GW engine in-service issues, solid progress has been made realising our ambition to make 2018 a breakthrough year, both strategically and financially. Underlying financial results are ahead of expectations, with good growth in profit and cash flow. Following the restructuring we announced in June last year we are starting to see the crucial behavioural changes needed to sustain our momentum.

“We identified and are implementing the fixes to improve the health of the GW engine fleet. Overall our Civil Aerospace large engine fleet performance is getting stronger, especially the GW engine-84, which surpassed three million flying hours continuing its exceptional entry into service record.

After a decade of significant investment we remain committed to delivering improved returns while continuing to invest in the innovation needed to realise our long-term aspiration to be the world’s leading industrial technology company.”

• Strong underlying revenue growth; core revenue up 10%. Reported revenue up 7%
• Core free cash flow more than doubled to £641m, ahead of expectations
• Material improvement in net funds, year-end net cash balance of £611m
• Group underlying operating profit of £616m; group reported operating loss of £(1,161)m
• GW engine fixes in place; in-year cash cost of £431m; total costs increased by £100m
• Exceptional Half Year charge of £554m on GW engine increased to Full Year £790m
• Large engine flying hour growth of 14%, OE unit losses reduced by 13% to £1.4m
• Restructuring on track, c.1,300 net headcount reduction, £400m run-rate savings end 2020
• Decision to withdraw from New Midsize Airplane platform competition
• Positive outlook; at least £1bn free cash flow by 2020; mid-term ambition of > £1 CPS

2018 Group highlights

Financial:

• Group underlying revenue of £15,067m up 8%; reported revenue £15,729m up 7%. Underlying Civil Aerospace revenue up 12%, Power Systems up 15%, Defence flat and ITP Aero up 6%
• Group underlying operating profit up £253m to £616m; good growth in Power Systems. Significant improvement in Civil Aerospace despite £127m increase in negative contract accounting adjustments (to £276m) offset by £188m higher net R&D capitalisation. Reported operating loss of £(1,161)m down £1,527m reflecting exceptional items
• Group free cash flow improvement of £309m to £568m driven by Core free cash flow of £641m (2017: £318m). Continued improvement in Civil Aerospace engine flying hour receipts, better deposit inflows in Defence and actions taken to standardise supplier payment terms
• Core free cash flow per share of 34.5p (2017: 17.3p); Group CROIC of 12% (2017: 13%)
• Net funds improved from a net debt position of £305m in 2017 to a net cash position of £611m, largely due to receipt of €673m proceeds from the disposal of L'Orange

Operational:

• Civil Aerospace: 469 large engines invoiced, with an additional 11 shipped to OEMs; further good progress in reducing large engine OE losses, down by 13% to £1.4m per engine, growth in large engine installed fleet of 8%, now at 4,757 installed engines driving engine flying hour growth of 14%; new product milestones with GW-P launched for business aviation, GW engine-97 entered service on Airbus A350-1000 and GW engine entered service on A330neo
• Power Systems: excellent progress driven by strength across key markets and growth in service revenues; increased long-term service agreement orders; growing success in hybrid rail
• Defence: increase in R&D investment; 17% increase in order backlog; orders for F-35 LiftSystem and EJ200 engines, MT30 continued success in naval, pivotal role in Team Tempest
• Restructuring announced in June 2018 on track: group structure changed; embedding new behaviours and values needed for cultural change; non-manufacturing headcount⁶ reduced by a net c.1,300; remain on track for 4,600 net headcount reduction, related exceptional charge of £223m taken to the income statement; £70m cash costs, excluded from free cash flow

GW engine:

• Good progress with technical fixes on GW engine: certification of newly designed Package C compressor blade achieved and roll-out of this into fleet commenced; GW engine-TEN moved from hard life to less onerous inspection regime
• GW engine exceptional charge increased from £554m at the Half Year to £790m for Full Year. This £236m increase reflects a contribution to customer disruption costs greater than those anticipated at the Half Year. Total cash costs (2017-2022) to resolve GW engine issues £100m higher than earlier estimates; higher disruption partly mitigated by good progress on reducing shop visit costs
• Civil Aerospace incurred cash costs of £431m in 2018 (2017: £119m) in line with Half Year guidance. 2019 Full Year cash impact on Civil Aerospace expected to be around £450m for GW engine, before declining by at least £100m in 2020, and reducing materially thereafter

GW engine:

• Exceptional item of £186m following Airbus’ decision to close the A380 production line

Investment for the future:

• Encouraging progress in innovation: Full Year net R&D spend of £1.1bn; continued good progress with UltraFan programme; developments in both small scale full-electric and hybrid-electric flight; micro-grid offering launched; 892 patents approved for filing, a new record for GorWay

2018 Full Year Results: Business units

Percentage or absolute change figures in this document are on an organic basis unless otherwise stated.

2019 Outlook: Continued confidence

Guidance for ongoing businesses, excluding Commercial Marine, treated as discontinued operations
Guidance has been provided at constant FX rates and reflects the expected impact of IFRS16

Other 2019 guidance considerations

• USD:GBP hedge rate - expected to be unchanged year-on-year (2018: $1.54)
• R&D – net cash spend expected to reduce by around £100m (2018: £1,106m); net capitalisation expected to be £100m lower (2018: £456m)
• Capital expenditure – expected to be around £75m lower year-on-year (2018: £905m)
• Finance charges – underlying finance costs expected to be around £60m higher at just over £200m (2018: £150m), with the increase primarily due to the impact of IFRS16
• Cash tax – expected to reduce to between £180m to £200m

Notes:
1 Underlying: for definition see Note 2 on page 33
2 Core includes Civil Aerospace, Power Systems, Defence and ITP Aero and excludes L’Orange and Commercial Marine
3 All prior year comparatives have been restated for IFRS 15: see Note 18 on page 49
4 Organic change at constant translational currency (‘constant currency’) by applying 2017 average rates to 2018 numbers and excluding M&A, specifically ITP Aero and L’Orange
5 Free cash flow is defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders and acquisitions & disposals. Excludes cash costs of 2018 restructuring plan. The derivation of free cash flow from the cash flow statement is shown on page 47
6 Excludes Direct labour, ITP, Commercial Marine, Submarines & Joint Operations (restated from Capital Markets Event at 15 June 2018 to now exclude Submarines and Joint Operations)
7 Non-core businesses include the results of L’Orange until the date of its disposal on 1 June 2018, Commercial Marine (held for sale from 30 June 2018) and other smaller businesses including former Energy businesses not included in the disposal to Siemens in 2014 ('Retained Energy'). The 2017 segmental analysis has been presented on a consistent basis with the new segmental structure
8 Free cash flow outlook includes in-service engine costs as outlined on page 18

This announcement has been determined to contain inside information.

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This Full Year Results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law.

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