Annual Report Rolls-Royce

The group conducts business on a global basis and has customers in 120 countries. It is this broad customer base, coupled with an extensive product and services portfolio, which underpins our success. we have continued to grow our order book in 2010 to ? 59. 2 billion. underlying profits before tax increased by four per cent to ? 955 million. we are proposing a final payment to shareholders of 9. 6 pence per share, bringing the full year payment to 16 pence per share. this is an increase of 6. 7 per cent and reflects the board’s continuing confidence in the group’s business.

International trade tensions, uneven growth, fiscal tightening and currency instability have combined to make the economic environment uncertain. In these circumstances it is important to have a balanced business portfolio. this annual report records that our three businesses outside civil aerospace – marine, defence aerospace and energy – have all grown underlying profits at double digit rates during 2010, adding to the resilience of the business. we continue to benefit from the high barriers to entry which are a consequence of our long-term investments and the businesses in which we are involved.

Our high-technology products and services require sophisticated systems integration and are hard to replicate. we continuously explore new ways in which technologies developed in one part of our business can be applied in others, reinforcing this strong market position. as well as meeting the challenges of the marketplace in 2010, Rolls-Royce has had to manage the high profile failure of a trent 900 engine on a Qantas airbus a380. Rolls-Royce behaved as you would expect of a highly proficient engineering company.

We identified the problem quickly, and applied ourselves to the swift return of the fleet to normal operation. I would like to thank our 02 Rolls-Royce Group plc annual report 2010 customers for their support, and recognise the tremendous efforts of Rolls-Royce management and staff in responding so professionally to this very regrettable incident. the safety of our products has always been, and always will be our first priority. we are committed to conducting business to the highest standards, and to enriching the societies in which we live and work.

as well as creating employment and generating wealth, we invest heavily and consistently in improving the environmental performance of our products. through our own research, and in collaboration with universities around the world, we are driving innovation and extending the boundaries of human knowledge. our training programmes raise levels of skills and capability and set new standards of engineering excellence. Rolls-Royce people around the world are directly involved in community projects and voluntary activities, contributing to the communities in which we operate.

this year we took further steps to embed our global Code of business ethics. Rolls-Royce is a responsible group and we are committed to ensuring that we conduct business appropriately and to the highest levels of integrity. In order to ensure that we achieve best practice, our procedures and training programmes are continually reviewed and involve all our employees. we have continued to invest in our own people through training and development programmes. these programmes operate worldwide, including from dedicated training facilities in the uK and uS.

these facilities are used to run a range of programmes for our worldwide workforce and for our customers. the board is committed to improving our environmental performance across all business sectors. Continuous investment in the gas turbine engine, the core product for Rolls-Royce, has progressively improved fuel efficiency Financial statements Governance Business review and will continue to do so. the new trent xwb for example will be 16 per cent more fuel efficient than the first trent aero engine to enter service 15 years ago. this means less cost for our customers as well as lower emissions.

the application of gas turbines and efficient diesel engines in the marine sector also offers the possibility of significant reductions in emissions at sea. as well as developing core technologies, the group is exploring other low carbon energy sources including civil nuclear power, fuel cell technology and tidal power. In 2011, we are proposing to introduce a new holding company for the group. this will enable us to continue our progressive shareholder payment policy and provide cash returns to shareholders in the most efficient manner through the issue and redemption of C Shares.

Rolls-Royce supports a wide range of charitable causes with particular emphasis on the armed forces benevolent funds and educational programmes involved with science and engineering. this year’s Rolls-Royce Science prize was won by a team from teesdale School, County durham for their design project to enhance the lives of animals in their local zoo. they received their award of ? 20,000 from John Rose at an awards dinner attended by senior industry leaders, academics and government ministers. the Science prize attracts entrants from thousands of schools across the uK.

I would like to thank all our management and employees very much for their loyalty and hard work during the past year. our results are a testament to the focus and commitment I see demonstrated in every part of the business and at all levels of the organisation. I am constantly impressed by the initiative shown by Rolls-Royce people in seizing opportunities and responding to the needs of our customers. once again the group benefited from the wise counsel of the International advisory board (Iab) during 2010.

this board, whose membership is set out later in this report, was established in 2006 to help provide a broad perspective on issues such as global political developments, business risks and opportunities and economic trends. the advice they give is extremely valuable to us as we develop our global footprint and become more international in our outlook and behaviour. I would like to thank the members of the Iab for their work during the year in providing such high-level strategic advice. I would also like to thank my fellow directors for their superb support and hard work over the past year.

there is of course one very important tribute to be paid by the board and everyone else in Rolls-Royce to our Chief 03 Rolls-Royce Group plc annual report 2010 John has also been a driving force in public policy, championing the cause of high value-added manufacturing and services. he argued for the importance of rebalancing the uK economy long before it became fashionable to do so. I am sure he will continue to be a powerful advocate for the importance of science, technology and maths, and of the importance of technical education in a nation’s ability to generate wealth.

John Rose will be succeeded as Chief executive by John Rishton, who is currently the Chief executive officer of the dutch based, global retail group Royal ahold. John Rishton has been a member of the Rolls-Royce board for four years. as well as knowing Rolls-Royce well, John has a deep understanding of the aviation industry gained as Chief Financial officer at british airways. he also has manufacturing experience gathered from a number of senior positions at Ford. I have come to know John Rishton well. he is an outstanding individual, with experience as the successful Chief executive of a global publicly listed company.

he is an instinctive team player, and was the unanimous choice of the board. I am certain he will prove himself a distinguished Chief executive of Rolls-Royce when he takes up his new role at the end of march this year. the technologies that Rolls-Royce deploys are at the frontiers of engineering. we continue to invest in the long-term growth of our group. we enjoy the long-term support of our large customer base and suppliers, and we will continue to broaden our portfolio organically or by acquisition in our core sectors.

we intend to maintain a strong balance sheet and a single a credit rating which we believe provides the foundation for the long-term growth of our businesses. a great company is built by first class, passionate and highly skilled people. we have these in Rolls-Royce and I believe that we will continue to improve our business and deliver excellent value for all our shareholders. 16. 00p Full year payment to shareholders Sir Simon Robertson Chairman February 9, 2011 Financial statements Governance Business review executive, John Rose, who has announced his decision to retire at the end of march this year.

John has been Chief executive for 15 years, during which time he has done the most extraordinary job. he has transformed Rolls-Royce into a world-class company operating on a global stage. his strategic vision has led to the construction of a resilient business with a powerful portfolio of internationally competitive products and services. his leadership and tenacity have helped establish a platform from which we expect revenues to double in the decade ahead. we owe John a huge debt of gratitude for what he has done for the Company, not only as Chief executive, but during his career of 27 years with Rolls-Royce.

Business review ChIeF exeCutIVe’S ReVIew “Rolls-Royce has maintained progress. our financial position was further strengthened in 2010. ” Business review this is my fifteenth and final Chief executive’s review, and so it is a particular pleasure to report that Rolls-Royce has delivered a strong performance in 2010 despite challenging economic conditions. underlying revenue has grown seven per cent to ? 10. 9 billion and underlying profit before tax has increased by four per cent to ? 955 million. our financial position has also continued to improve with average net cash balances reaching ?

960 million, an improvement of ? 325 million over the same period in 2009. this demonstrates once again the strength and resilience of the group and the progress that we have made in recent years. It is a measure of this progress that the civil, defence and marine businesses now each generate underlying profits of more than ? 300 million. I was an early pessimist about the condition of the world economy and I expect to be a late optimist. the situation remains fragile, recovery has been asymmetric and the global financial system retains the capacity to surprise unpleasantly.

however, our consistent investment in a broad portfolio of products and services and our strong customer relationships have given us access to a wide range of global markets. this breadth has allowed Rolls-Royce to maintain progress through the downturn and the disruption to the world economy which began in 2007. Since then the business has grown its order book, revenues, profits and average net cash, and increased payments to shareholders while at the same time we have invested more than ? 4 billion in the business.

total Shareholder Return (tSR) during this period has been 27 per cent, which compares to an average tSR of four per cent for the FtSe all Share index. Investing for the long term during 2010, we have continued our programme of investment, funding world-class facilities in all major geographies, providing capacity for future growth, contributing to improved productivity and delivering products with operational lives which may well extend to half a century. we remain confident in our ability to double revenues in the coming decade through organic growth alone.

however, we also have the management and financial capability to accelerate growth through acquisition and partnership. Strategy our consistent strategy, applied over many years, has helped deliver a more broadly based, better balanced and more resilient portfolio. this strategy has five key elements: • address four global markets, civil aerospace, defence aerospace, marine and energy; • invest in technology, infrastructure and capability; • develop a competitive portfolio of products and services; • grow market share and our installed product base; and • add value for customers through the provision of product-related services.

Financial statements Governance 04 Rolls-Royce Group plc annual report 2010 Business review we have high barriers to entry as a result of the technology required for the design, systems integration, manufacture and support of our products. In addition we work hard to transfer intellectual property, products and innovation across businesses to achieve competitive advantage in the markets which we serve. An increasingly global business the business today is the consequence of decisions and investments made over many years.

when I first joined the Company in 1984, Rolls-Royce had a narrow product range and its business was mainly uK focused with some presence in the uS. this position has changed fundamentally. we are now able to trade successfully on a global basis and are developing our presence around the world. this brings us closer to customers and allows us access to funding and skills. our customer insight and our ability to develop technologies and integrate them into complex power systems, give us access to markets where demand remains strong for the products and services that we provide.

The decision to locate the head office of our marine business in Singapore will have a profound impact on our ability to develop a global view. we now manage about one third of our revenue from Singapore, a further third from North america and the balance from the united Kingdom and europe. this means that management teams, running businesses that in themselves are the size of FtSe 100 companies, will think about challenges and opportunities from a different perspective. this will be of huge benefit to the group as we respond to customer requirements and competition.

In 2010, rapid progress was made in the construction of our major new aerospace facilities at Crosspointe in the uS to manufacture discs and at Seletar in Singapore where we will assemble and test large civil engines and manufacture wide-chord fan blades. during the year, we also opened a new mechanical test complex at dahlewitz in germany to conduct testing for our businesses worldwide. we continue to expand our marine services. we already have 34 facilities around the world and the network is growing fast, ensuring that our locations match our customers’ requirements.

Of course our supply chain has also become increasingly global with around 8,000 suppliers in North and South america, europe and asia. we continue to invest in improving our supply chain management, to integrate these suppliers into our worldwide operations and to improve our quality and capabilities. Our business today our business is conducted through four major customer focused businesses: Civil aerospace we have seen signs of recovery in the civil aerospace sector, although the strength of this recovery varies between regions.

Nonetheless, we have continued to sign significant new orders, particularly with customers based in asia and the middle east. this includes two individual orders worth more than ? 1 billion from China and the middle east. In all, new orders amounted to ? 7. 5 billion during 2010, demonstrating the continued confidence of our customers in our portfolio. the two new members of the trent family continued their development programmes through 2010. the trent 1000 is powering the boeing 787 on the aircraft’s flight test schedule.

The engine for the airbus a350 xwb, which is due to enter service in 2013, ran for the first time in June. this promises to be the most successful member of the trent family with 1,150 engines already on order. across the portfolio, our order book requires us to more than double our output of trent engines by the middle of this decade. an uncontained disc release occurred on a trent 900 engine on board a Qantas operated airbus a380 in November 2010. this regrettable incident attracted widespread attention.

Uncontained disc failures happen with a frequency of about once a year on the world’s large civil aircraft fleet. however, this was the first time an event of this nature had occurred on a large civil Rolls-Royce engine since 1994. the safety of our products is our highest priority and each time a serious incident happens Rolls-Royce and the aviation industry learns lessons. these are embedded in the rigorous certification requirements, safety procedures and standards of regulation which make flying an extraordinarily safe form of transport. In line with this regime, Rolls-Royce worked closely with the regulators,