Capital Markets Event 15 June 2018 Capital Markets Event June 2018 Capital Markets Event - June 2018 © 2018 Rolls-Royce Warren East Chief Executive Capital Markets Event - June 2018 © 2018 Rolls-Royce Safety Safe Mobile Harbour Phones Notices Capital Markets Event - June 2018 © 2018 Rolls-Royce Agenda for Introduction Warren East today Power Systems Andreas Schell Restructuring Harry Holt Coffee Break Delivering Returns Stephen Daintith Closing Remarks Warren East 4 Capital Markets Event - June 2018 © 2018 Rolls-Royce Key messages Power Fundamental Delivering the Systems Restructuring Returns . Example of a . Change required . Peak investment business in phase complete transformation . Preparation complete . Narrowing the . Improved returns . Leadership team performance gap already delivered primed . Ambitious medium . Further to go . Simpler structure term return targets . Continuous improvement 5 Capital Markets Event - June 2018 © 2018 Rolls-Royce . Unacceptable level of customer disruption Trent 1000 update . Closely working with affected airlines Initial inspections MRO capacity Permanent Fix complete (Pack C) <50 AOG 3x Q4 2018 . Peak AOG now . Trebled maintenance . Acceleration of capacity permanent fix for . Repeat inspection compressor rotor blade regime established . MRO cycle time reduced (now logistics) . Turbine blade capacity . Pack B inspections growing fast 6 Capital Markets Event - June 2018 started © 2018 Rolls-Royce Trent 1000 / 900 in-service cash costs 7 March 15 June Trent 1000 2017 2018 Guidance 2018 Guidance update Financial impact £170m • Mitigations offset incremental cost • FY18 FCF guidance unchanged “broadly double” ~£100m Pack Better AoG, incrementally C & B MRO response higher . Actions already underway on mitigations offset this incremental cost – Rephasing / reduction of non-critical R&D and capex – Cuts to discretionary spend i.e. travel etc 7 Capital Markets Event - June 2018 © 2018 Rolls-Royce . FY18 FCF guidance unchanged - mitigations outside new restructuring plan 01 Introduction 8 Capital Markets Event - June 2018 © 2018 Rolls-Royce WHITE page number and reference – adjust title slide on main master slide No 2 Initial transformation Completed our transformation programme originally outlined in November 2015 completed Achieved top end of our original estimates Achieved Simplicity £200m Progress, more to follow Run-rate cost savings at top end of previous guidance 9 Capital Markets Event - June 2018 © 2018 Rolls-Royce Today we’re at a pivotal moment for Rolls-Royce “Started laying foundations immediately” 01 02 03 04 05 Stabilised Delivered a Brought new Started Established businesses ramp-up in products to portfolio a new widebody market restructuring leadership production team capacity Transformation c.300 to c.500 4 new engines Five to three 90% change Solid foundations in place 10 Capital Markets Event - June 2018 © 2018 Rolls-Royce Now is the time to deliver Restructuring . Simpler, leaner and more agile . Net savings of £400m by end of 2020, implementation costs of c.£500m . Proposed reduction of 4,600 FTEs . Culture change through pace, simplicity, efficiency and empowerment . Driving improving returns . Transforming our business to support our world-leading technologies 11 Capital Markets Event - June 2018 © 2018 Rolls-Royce Generate... Longer term 6 new engines context developed ~£11bn invested in R&D Mid-term and capex ambition Pioneered Total Care pre 2000 2000 2010 2018 Exceed £1 per product share of free ~14% large engine ~35% market share cash flow new engines on 10% Total Care packages >90% annual large ~150 engine production ~550 12 Capital Markets Event - June 2018 © 2018 Rolls-Royce Defining our ambitions Faster, more agile to focus on customers Build a simpler Three high- Create or Be the business performing partner world’s leading with a true businesses in the best industrial performance each delivering technology technology culture materially company improved returns Mid-term ambition >£1 CPS 13 Capital Markets Event - June 2018 © 2018 Rolls-Royce 15% CROIC To achieve this Our resources: we need to optimise . People - develop a healthy our resources organisation culture . Assets – deliver sustainable & improved returns . Capital – disciplined allocation 14 Capital Markets Event - June 2018 © 2018 Rolls-Royce Structure to enable change “Creating the conditions for the businesses to solve the problems themselves” . Significantly Much smaller Civil light-weight Aerospace reduced central Head Office costs . Empowered businesses, more Power Defence control of own costs Systems . Shared vision and clear accountability Following ITP Aero acquisition in December 2017, it will operate and report as a separate business unit 15 Capital Markets Event - June 2018 © 2018 Rolls-Royce Each business to deliver improving returns Accelerating culture change “Now is the time for fundamental change” Pace Simplicity Efficiency . Empowering . Clearer . Minimal framework accountability duplication 16 Capital Markets Event - June 2018 © 2018 Rolls-Royce Empowerment Will improve productivity “Greater pace & simplicity leads to more and efficiency productive use of our resources” Efficiency . Overhead efficiency - headcount reduction of 4,600 . Capital efficiency – improved investment rigour . Operational efficiency – product cost reduction, optimisation of capacity Maximising returns after significant period of investment 17 Capital Markets Event - June 2018 © 2018 Rolls-Royce What success will look like “The leading industrial technology company” Retaining & attracting Disciplined investment in the best people innovative technology Strong financial Market performance leadership 18 Capital Markets Event - June 2018 © 2018 Rolls-Royce Efficient structure & operations Andreas Schell CEO, Rolls-Royce Power Systems Capital Markets Event - June 2018 © 2018 Rolls-Royce 02 Power Systems 20 Capital Markets Event - June 2018 © 2018 Rolls-Royce Agenda Power Systems Overview Driving change Growth strategy 21 Capital Markets Event - June 2018 © 2018 Rolls-Royce Overview 22 Capital Markets Event - June 2018 © 2018 Rolls-Royce Corporate Routes to market People Factories Sales partners Direct Operational ~10,000 11 in 5 countries 140 50% profile OEM 25% Annual unit sales Authorised distributor 25% dealerships ~25,000 units >500 Products Customers & Service Key engine Use in Installed Service types sub-applications base locations 4 24 >100,000 >1,200 Fuels Customer concentration Diesel, gas, hybrid Top 10 account for 17% of sales 23 Capital Markets Event - June 2018 © 2018 Rolls-Royce Key attributes . High brand recognition ‘A significant . Strong high-speed market presence’ reciprocating engines knowhow . Significant R&D expertise . Growing solutions-led capability . Diverse routes to market Financial . Short-cycle order book . Double digit EBIT margin 24 Capital Markets Event - June 2018 . High cash conversion © 2018 Rolls-Royce Revenue profile Market By type . Balanced product portfolio OE profile diversified & volume applications 66% Services ‘…with strong 34% . Strong market positions positions in data centre, yacht, mining, gov’tal diversified end By end market Marine . Diversified end markets Civil Nuclear 28% markets’ 6% & customers Defence/Other 11% Industrial 24% . Long-term macro-drivers PowerGen supports sustained market growth 31% By customer geography China Asia Pacific 12% 15% Other 5% Americas 23% Europe 25 Capital Markets Event - June 2018 45% © 2018 Rolls-Royce Includes Civil Nuclear, L’Orange Focused on higher value market segments 5% unit share but 15% value share ​1.2m units ​442k units ​€27bn Industrial ​€13bn ​25k units PowerGen ​€2bn Marine Addressable Markets and market shares in these slides are as internally defined along Serviceable Power Systems RRPS’ strategic objectives and capabilities. Total addressable available OE Sales power markets 26 Capital Markets Event - June 2018 market © 2018 Rolls-Royce Marine Profile Presence Outlook Products Main customer types Market growth drivers . S4000/S2000/S8000 . OEMs (yacht, ferries etc.) . Global seaborne trade . Combined systems . Government . Fleet replacement . Diesel, Gas and Hybrid . Top 5 customer % sales: ~30% Applications . Very strong in Naval (>25%) Top 3 market position Market growth outlook excl Government . Yachts in Europe / US (>25%) Power Systems +4% CAGR €2.1bn Route to market Others €1.7bn . Mainly direct (70%) sales 27 Capital Markets Event - June 2018 Cummins © 2018 Rolls-Royce CAT 2017 2022 MAN 1. Market share served market 2. Not disclosed Note: Served market = Unit total volume of power range between 130-10,000kW Power Generation Profile Presence Outlook Products Main customer types Market growth drivers . S4000 / S2000 / S1600 . OEMs . Energy demand . Diesel & Gas systems . Data centres / hospitals . Uninterruptable power . Industrial / energy plants requirements Applications . Top 5 customer % sales: 30% . Mission critical (15-20% share) Top 3 market position Market growth outlook . Datacentres / grid frequency response Others Power Systems +6.7% CAGR . Strong share in Gas engines €7.5bn SDMO CAT Route to market bn GE €5.3 . Mainly direct (75%) sales 28 Capital Markets Event - June 2018 © 2018 Rolls-Royce 2017 2022 Cummins 1. Market share served market 2. Not disclosed Note: Served market = Unit total volume of power range between 130-10,000kW Industrial Profile Presence Outlook Products Main customer types Market growth drivers . High speed diesel . OEMs (85%) . Infrastructure spending . Hybrid powerpack