Sir Ralph Robins, Chairman, said: ;"Rolls-Royce has entered 1999 in a strong position. We are committed to delivering shareholder value. In 1998 the company demonstrated its ability to generate profit in the short term, while continuing to invest for long-term value. ;"We continue to target double digit earnings growth, while building embedded value for shareholders from the revenue created by aftermarket opportunities."
Delivering value ;In 1998 Rolls-Royce produced record profits, achieved its stated financial targets and continued to pursue strategies which will enhance the company's long term prospects. ;Rolls-Royce has improved the focus of the company around its world-leading gas turbine technology. This has involved the sale, over the past three years, of businesses with annual turnover of more than £700 million, including the sale of the transmission and distribution businesses in 1998. We have organised the business into a flatter structure with clearer accountabilities. ;Today, sales from continuing businesses are more than 30 per cent higher than total sales three years ago, in spite of the business disposals. This growth has arisen from market success with our broad and competitive product range in the civil aerospace, defence and energy markets. ;Rolls-Royce is investing in all areas of the company to ensure continued success. Value-based management tools are used to determine our investment decisions. ;Our future deliveries are underpinned by the investments we have made in new products. In the year 2000, around 80 per cent of our engine deliveries, across all of our businesses, will be for products developed over the last ten years. ;We introduced a company-wide improvement programme in 1996. Better Performance Faster will ensure that we can optimise our returns as we deliver our record order book, which reached £12.6 billion (£10.4 billion firm and £2.2 billion announced but not signed) at the year end. This order book endorses the business strategies followed over the past decade and is well balanced regionally and across market sectors. We are confident of excellent results from the net investment in our efficiency programme, which amounted to £96 million last year. Better Performance Faster underpins our stated target of delivering double digit earnings growth. ;We are securing a larger share of the aftermarket opportunities which arise from the long life cycle of our products. In 1998 we secured more than 100 long-term care contracts worth over £3 billion across our three market sectors. ;We have entered into four joint ventures to grow our repair and overhaul activities. In addition we formed three new companies, with leading market participants, in aero engine leasing, aircraft leasing and predictive data services. ;These partners have been attracted to Rolls-Royce as a result of our growing market position and success in gas turbine technology applications.
Rolls-Royce plc preliminary results 1998 ;The Group produced double digit earnings growth and achieved a record profit before tax of £325 million (1997: £276 million), an increase of 18 per cent. ;In 1998 the company sold its transmission and distribution businesses. Their combined sales of £170 million are reported within total sales from discontinued operations. ;Sales from continuing operations increased by 10 per cent, with growth largely arising from a 50 per cent increase in civil engine unit deliveries. ;The company's strong financial performance was achieved after increases in investment for the future. Gross research and development increased by 12 per cent to £668 million. The success of the company's development programmes attracted new risk and revenue sharing partners resulting in a fall in net research and development, to £173 million. (1997: £216 million.) ;Capital expenditure amounted to £368 million. Of this, £128 million represented investment in our project development and financing companies. ;Results from Better Performance Faster are demonstrated by continuing efficiency improvements. Sales per employee have increased by 67 per cent over the past 5 years and return on capital employed increased to 15.8 per cent in 1998. (1997: 14.2 per cent.) ;The balance sheet remains sound, with shareholders' funds of £1705 million and net cash balances of £302 million. Cash balances benefited from the proceeds from disposals and the profit on the sale to BMW of the automotive trademark registrations of the Rolls-Royce name. These payments were received near the year end. Average cash balances fell by £128 million compared to 1997, as a result of the high levels of investment during the year. ;The order book at the end of the year reached a record level of £10.4 billion firm business and a further £2.2 billion announced but not yet signed. Strong order intake from Europe and the Americas resulted in a lower proportion of the order book for the Asia Pacific region, at 13 per cent. The company captured a third of all orders for civil aero engines during the year. ;The recommended final dividend is 4.1 pence per share, making a full year dividend of 6.55 pence per share, an increase of 11 per cent. The dividend is payable on 5 July 1999 to shareholders on the register on 30 April 1999. The ex-dividend date is 26 April 1999.
Operating review
Civil aerospace ;Rolls-Royce forecasts demand for 83,000 civil aero engines worth $350 billion over the next 20 years with a further $150 billion for associated spare parts. Following a record order intake in 1998 of £5 billion (firm and announced), it is expected that the rate of new orders will slow in 1999. However, the company's increased market share will enable its higher level of engine deliveries to be sustained. In 1998 the company delivered 500 large civil engines and a further 400 small engines, representing an increase in unit deliveries of nearly 50 per cent over 1997. This compares to an average of 400 civil engine deliveries a year in the first half of the 1990s and 200, in the late 1980s. ;Our increased market share has resulted in original equipment deliveries representing an increasing proportion of total sales. We have managed the impact upon trading margin and continued to produce bottom line growth, whilst also building a future embedded value in the form of the aftermarket opportunity. ;A third of all civil aircraft ordered in 1998 will be powered by Rolls-Royce engines. This success has been achieved across the product range, which is the broadest on offer in the industry. Rolls-Royce engines have been chosen by eight of the top ten airlines in the world and by 38 of the top 50. ;Airline customers continue to choose the Trent engine family for their wide body aircraft. This engine secured 68 per cent of the orders placed in its target market during 1998. ;The largest member of the family is the Trent 8104, under development for future versions of the Boeing 777. In December the engine ran for the first time, achieving 110,000lb thrust. This programme is proving technologies that will benefit all new members of the Trent family. Innovative features include the new swept fan, which enables higher thrust to be generated without increasing the diameter of the fan. ;The Trent 800, in service on the Boeing 777, and the Trent 700, on the Airbus Industrie A330, performed well in 1998. These engines have now accumulated 700,000 service hours and are enhancing the company's reputation for reliability. New orders were received for both engine types during the year, from customers in Europe, North America, the Middle East and Far East. ;The Trent 500, currently the only powerplant for the A340-500/600 aircraft, secured new orders from Singapore Airlines, Emirates and Aerolineas Argentinas. Engine business worth more than $5 billion has now been announced, making this the most successful launch of any Rolls-Royce product. Seven new risk and revenue sharing partners joined the programme in 1998. ;Trent technology is also incorporated in the RB211 family. British Airways, Cathay Pacific, South African Airways and Qantas have all committed to the new RB211-524 GH/T for their new Boeing 747s and to improve their existing aircraft. ;The RB211-535 confirmed its position as the world's most reliable large turbofan, achieving more than 35,000 hours on the wing on an Icelandair Boeing 757. This engine has played an important part in building the company's international customer base. Since ordering the engine ten years ago, American Airlines has ordered five different aircraft types powered by four different Rolls-Royce engines with a potential fleet size of around 500 aircraft. ;International Aero Engines, a collaboration in which Rolls-Royce has a major shareholding, had an outstanding year, announcing new orders worth $6 billion for the V2500 engine, including orders from a group of Latin American carriers and from British Airways which each exceeded $1 billion.
;The company's corporate and regional airline business grew rapidly in 1998. The BMW Rolls-Royce BR715 engine flew for the first time in September, powering the Boeing 717. New orders taken during the year brought the total order book to 215 firm and option aircraft. ;The Embraer RJ-135 and -145 aircraft continued to sell well, both powered by AE3007 engines. More than 750 of these twin-engined aircraft have now been ordered. Customer highlights included the delivery of the 100th RJ-145, which went to Continental Express, and American Eagle's first RJ-145. ;For corporate operators, BMW Rolls-Royce certificated the BR710 engine on the Bombardier Global Express and won a $500 million order for the same engine from Gulfstream for its GV.
Defence ;Rolls-Royce produces one of the widest ranges of military engines for aircraft and helicopters and powers the ships of 30 navies. Defence business represents a market opportunity of $300 billion over the next 20 years and Rolls-Royce is well placed on mature and new programmes. ;In the United Kingdom, the Strategic Defence Review confirmed the major programmes in which Rolls-Royce participates and offered new opportunities for future growth through the provision of new services for our customers. ;In the combat sector, Rolls-Royce participates in two major new programmes. ;In Europe, good progress was made with the development of the EJ200 engine for the Eurofighter Typhoon and production contracts were signed for the aircraft, paving the way for production of up to 1,500 EJ200 engines. An initial firm order was placed for 363 EJ200 engines worth over £400 million to Rolls-Royce. ;In the United States, Rolls-Royce is participating in the Joint Strike Fighter programme, through our unique short take off and vertical landing (STOVL) expertise. In 1998 we made progress on the remote LiftfanTM for the Lockheed Martin aircraft concept and we continue to work with both General Electric and Pratt & Whitney on the main propulsion engine proposals for both the Boeing and Lockheed Martin aircraft. ; Rolls-Royce Turbomeca is developing the latest variant of the successful Adour family. The Adour 900 offers enhanced reliability and durability for trainer aircraft. The engine incorporates new features, such as the latest single crystal turbine blade technology, a longer-life combustion chamber and a new design of high pressure compressor drum, building upon the experience gained from more than five million hours of Adour flying experience, creating a highly competitive derivative engine. ;Rolls-Royce has a strong market position on transport aircraft. The C-130J, powered by the AE2100 engine, received its type certificate in 1998 and the first aircraft were delivered to the Ministry of Defence. The unique V-22 Osprey tiltrotor, powered by the AE1107C, entered production for the United States' forces. ;The first of 44 EH101 Merlin helicopters, powered by RTM 322 engines, entered full operational service with the Royal Navy. In addition 22 support variants of the three-engined helicopter have been ordered by the Royal Air Force. The British Army Air Corps has selected the RTM 322 engine to power its Apache attack helicopters. This helicopter completed its first RTM 322-powered flight in 1998. ;In the marine sector the advanced WR-21 gas turbine completed its programmed tests and remains the only large marine gas turbine currently under development in the world. Rolls-Royce was confirmed as the sole supplier of the nuclear steam-raising plant for the Royal Navy's new Astute class of nuclear submarine. Firm orders were placed for three submarines.
Energy ;A number of businesses were sold in 1998, improving the company's focus on gas turbine technologies, for use in electrical power generation and the oil and gas industry. ;In September the company announced the agreement to sell its transmission and distribution businesses to VA Tech Elin, of Austria, and to seek purchasers or partners for the materials handling businesses. This followed the earlier disposal of Kennicott Water Systems and the announcement that Allen Steam Turbines was for sale. ;Our activities in power generation address the market with a range of products from 3MW to 50MW and up to 150MW in combined cycle. Opportunities for high efficiency, high power density electricity generation equipment have been stimulated by the deregulation and privatisation of power generation activities in many countries, creating a demand for distributed or embedded power that favours aero-derived gas turbine solutions. ;The industrial Trent has 60 per cent commonality of parts with the Trent 800 aero engine. During 1998 the first industrial Trent engines entered into commercial operation. The first installation at Whitby Cogen, in Canada, completed 4,000 hours of successful operation by the year end and units at Derby, Fort Dunlop and Seal Sands in the UK were completing commissioning trials. Emissions technology continues to present technical challenges and technology acquired in 1998 will result in improved capability being introduced during 1999 to support future engine deliveries. Market interest in this product remains strong. ;During 1998 we introduced an improved version of the industrial RB211, producing higher power with lower emissions. The RB211 power station at Samarinda, in Indonesia, has been commissioned and we launched and secured first orders for the dry low emissions (DLE) version of the industrial Avon engine, for gas compression duties in the UK. The 601K, which is rated at 6.7MW, entered service in November. ;We also introduced a new diesel engine, the Allen 5000, in 1998. This engine is a leader in its class, using latest technology and materials to produce an outstanding product. ;In the oil and gas sector we are a world leader in the provision of power for pumping and compression duties. Order intake in 1998 was affected by the downturn in the oil and gas market. The long-term prospects are strong. Expanding customer relationships ;Rolls-Royce is developing a comprehensive range of services for customers to ensure that we are their supplier of choice in the aftermarket. ;In 1998 we continued to grow our aero repair and overhaul activities. New partners included American Airlines and Singapore Airlines, which complemented existing partnerships and overhaul facilities to double the share of Rolls-Royce civil engines which we repair. We secured long term contracts in the defence sector for the overhaul of RB199 engines for the Ministry of Defence and for the upgrade of the Royal Air Force's Adour engines in their Jaguar aircraft. ;We announced three joint ventures to expand the services we provide to customers. ;Rolls-Royce and Partners Finance (RRPF) is the world's largest, specialist, aero gas turbine leasing company with a portfolio of 91 engines. During the year, GATX Capital became a 50 per cent partner in this business. GATX, is a major international financial services company with a strong reputation in the aviation industry. ;Pembroke Group Limited was formed through the merger of our existing aircraft leasing business with that of Pembroke Capital, the Dublin-based aircraft leasing and financial services company. The new company will own a portfolio of 60 aircraft, including those on order and manage a further 65 aircraft on behalf of third party owners ;Data Systems & Solutions was formed as a joint venture with SAIC, of the United States. This is a further development of our capability to provide enhanced services to our customers, offering a range of predictive data management tools to enable customers to use our products most effectively. ;These ventures are consistent with our strategy for the development of new business opportunities, the management of risk, working with strong partners and the most effective use of capital.
