Business Review [2122
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Jay Striegle Product Reliability Engineer A competitive portfolio We are Europe’s largest defence aero-engine company, with a product range that spans the key market sectors and a position on the world’s most important development programmes. We have 18,000 engines in service with 160 customers worldwide. Paul Markwick Test Facility Manager – Nuclear New growth opportunities Renewed global demand for civil nuclear power represents a significant growth opportunity for Rolls-Royce. We have developed a strong nuclear capability, through our experience of designing, manufacturing and supporting nuclear plant for naval submarines. We have now established a new business unit to address the civil nuclear opportunity directly. Business review (continued) Our strategy 1 As a power systems company, Rolls-Royce focuses on supplying its customers with integrated systems to meet their power and propulsion needs. Our consistent strategy has five elements: Address four global markets We are a leading integrated power systems company operating in the civil and defence aerospace, marine and energy markets. Invest in technology, infrastructure and capability Over the past five years, we have invested £3.7 billion in research and development. We invest approximately £30 million annually in training and over £300 million a year on capital projects. Develop a competitive portfolio of products and services We have more than 50 current product programmes and we are involved in many of the future projects in the markets we serve. These key projects will define the power systems market for many years. Grow market share and installed product base Across the Group, the installed base of engines in service is expected s t n to generate attractive returns over many decades. e m e t a t s l a i Add value for our customers through the provision c n a n i of product-related services F We seek to add value for our customers with aftermarket services that will enhance the performance and reliability of our products. The core characteristics which define our Technological superiority business and underpin the delivery of this Our investments in technology and capability strategy are: provide Rolls-Royce and our customers with competitive advantage. Closeness to our customers e c We develop close relationships with our Operational excellence n a n r customers over many years. This allows us to We aim to operate at the highest standards, e v o offer solutions, often in partnership with our to ensure that we continue to meet our g e t a customers, to meet their specific requirements. customers’ requirements in the quality, r o p performance, durability and delivery of r o Domain knowledge C our products, systems and services. Underpinning our sales of equipment and related services is a deep knowledge of the Organisational capability overall environment in which our equipment Because we are a global company we have is used. This allows us to provide the optimum the ability to recruit and retain capable people 8 level of service and focus our activities to meet in many locations. Our investment in training 0 0 2 our customers’ needs and grow our business. and the varied career opportunities are key t r o p to our success in retaining high-quality people. e r Integrated systems l a u We supply our customers with products, Brand n n A related services and whole systems. Our ability We have an exceptionally strong brand which | c l to integrate and optimise systems enables is recognised globally and embodies qualities p p u w us to create value for customers in all our that create a common focus for all our people, o e r i v G main markets. wherever they are located. e e r c s y s o e R n - i s l s l u o R B Business review (continued) Our business 1 Market outlook The Group operates in four long-term global markets – civil and defence aerospace, marine and energy. These markets create a total opportunity worth some two trillion US dollars over the next 20 years and: – have very high barriers to entry; – offer the opportunity for organic growth; – feature extraordinarily long programme lives, usually measured in decades; – can only be addressed through significant investments in technology, infrastructure and capability; and – create a significant opportunity for extended customer relationships, F i n a with revenues from aftermarket services similar in size to original n c i a l equipment revenues. s t a t e m The size of these markets is generally related to world Gross Domestic e n t Product (GDP) growth, or in the case of the defence markets, global security s and the scale of defence budgets. Civil aerospace As in the Group’s other business sectors, The Group publishes a 20 year global market programme lives are long and there is a outlook, which covers passenger and cargo significant opportunity to support equipment jets, corporate and regional aircraft. We predict with aftermarket services. Customers’ budget that over the next 20 years 131,000 engines, constraints and their need to increase the value worth over US$700 billion, will be required they derive from their assets have accelerated C for more than 60,000 commercial aircraft and the move in this direction. o r p business jets. The forecast predicts faster growth o r Marine a t rates for long-haul markets and those markets e g The Group forecasts demand for marine power o to, from and within Asia. These markets will v e r and propulsion systems of US$200 billion over n continue to benefit from more liberal air a n the next 20 years. Demand will be greatest c service agreements, which boost demand. e in the commercial sector, where the merchant Factors affecting demand include GDP market represents 40 per cent of the total growth, aircraft productivity, operating costs, and the offshore market, a further 40 per cent. environmental issues and the number of Commercial shipping plays a crucial role in aircraft retirements. While the market can the world economy. The need to transport be temporarily disrupted by external events, raw materials, finished goods, people, and oil such as war, acts of terrorism, or economic and gas requires a large fleet which has to be downturns, it has, in the past, always returned renewed progressively. The expansion of trade to its long-term growth trend. In addition to and technological advances means more ship the demand for engines, the Group forecasts a B construction for growth and for replacement R o market opportunity worth US$550 billion for the u l s l s as older designs become obsolete. Finding and i - n R provision of product-related aftermarket services. e o s y extracting oil and gas offshore requires a large s c r e e G Defence aerospace number of floating drilling and production v i r e o w The Group forecasts that demand for new units which, in turn, are supported by a variety u p p l military engines and through-life support will of service craft. c | be worth US$450 billion over the next 20 years. A Merchant and offshore markets are rarely n n The largest single market is expected to be u a at the same stage of the business cycle, l r the US, followed by Europe and the Far East. e which helps to reduce overall volatility. p o Within Asia, demand will be dominated by r t In naval markets, the Group expects surface 2 0 Japan, South Korea and India. Trends are driven 0 vessels to represent 15 per cent of the total 8 by the scale of defence budgets and geopolitical demand, and submarines five per cent. developments around the world. Business review (continued) Our business (continued) 14 Naval markets are driven by different The Group’s 20 year forecast values the total considerations, with customers looking to get aero derivative gas turbine sales in the oil more for their budgets, leading to increasing and gas and power generation sectors at demand for integrated systems and through-life US$70 billion. Over this period, demand for servicing arrangements. As in the Group’s other associated aftermarket services is expected markets, marine aftermarket services are expected to be around US$50 billion. to generate significant demand, forecast at While the oil and gas market is large and US$120 billion over the next 20 years. growing, demand for aero derivative gas Energy turbines in the power generation segment The International Energy Agency has forecast is four times that of oil and gas. that over the next 20 years, the worldwide demand for oil will grow by 40 per cent, for gas by more than 50 per cent and for power generation by nearly 60 per cent. To satisfy this demand, there will be a growing requirement Note: A long-term conversion rate has been used for aero derivative gas turbines. where necessary in order to present all figures in US$. Group financial highlights The Group delivered underlying organic sales growth across all businesses, s t n growth in underlying profits and a further year of positive cash flow. e m e t a t s Order book – Underlying revenues l a i £55.5bn £m £9,147m c firm and announced n a £bn n i F 55.5 9,147 7,817 45.9 7,353 6,458 5,947 24.4 26.1 21.3 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Underlying profit £919m Underlying earnings 36.70p e before financing per ordinary share c n a £m pence n r e v o g 919 36.70 e t 832 34.06 a r 748 29.81 o p 679 r 24.48 o C 417 15.62 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 8 0 0 Total shareholder 2 t r return over five years o p e r l a u n n ) Rolls-Royce x 400 A e FTSE 100 d | n i 350 ( c n l r u p t 300 e r p r u e w 250 d o l e r i o h v G e 200 e r e r a c h s s y l s 150 a o t e R o n - T i s 100 l s l u o 12/200312/2004 12/2005 12/2006 12/2007 12/2008 R B 15 Key performance indicators The Board uses a range of financial and non-financial indicators to monitor Group and segmental performance in line with the strategy described on page 12.