Transcription
IFRS 15Teach-in2017PropertyFull Yearinformation,Results strictly private and confidentialProperty information, strictly private 2018andRolls-Royceconfidential, 2018 Rolls-Royce
Agenda for today2Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce0102030405IntroductionIFRS 15 Impact on OEIFRS 15 Impact on ServicesDeeper dive into LTSAsBalance sheet0607Summary andmodellingimplicationsQuestions
013Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceIntroduction
Overview:1 OE2 Serviceslevers to3 Keythe economiccaseIFRS 15 is simply anaccounting change –economic/businesscase unchanged4Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce Sell installed OEwidebody enginesbelow costInstalled base andhigh LTSA*coverage drivesengine flying hourbased cash inflows Reduce cashdeficits on OE Keep the fleetflying Shop visits are anintermittent cost Reduce servicingcost and frequency Additional regularcosts are incurredon serviceprovision Manage fixed costs Sell business jet OEengines at a profit*Long term service agreement
What we are going to coverAgenda5Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce It’s all about Civil Aerospace OE is straightforward Services see the greatest change Regular vs intermittent costs Understand RRSP* dynamics Metrics we will provide to drive your models Considerations for modelling approach- need to disconnect cash flow from P&L modelling*Risk and revenue sharing partner
IFRS 152017 analysisCurrentaccounting2017ChangeIFRS 152017OE revenue ( m)7,687(928)6,759Principal Groupimpact is at CivilAerospaceService revenue ( igger profitadjustment thanexpected due tohigher margin ‘linked’Trent 700 salesReserves ( bn)6.2(5.2)1.062017 Full Year ResultsProperty information, strictly private and confidential, 2018 Rolls-RoyceGroup underlyingTotal revenue ( m)Operating profit / (loss) ( m)Key drivers of difference- 0.7bn of Widebodycash deficit2017 IFRS 15 figures are preliminary and as processes and proceduresare further embedded during 2018 it is possible that some changes may result
OE revenue and marginP&L now recognises the loss or profit at the time of OE saleMajordriversIFRS 15OE is greatlysimplified and easy tomodel Unit volumes Sales prices- Concessions no longer spread across OE and service contract Unit costs In widebody, installed vs spare engine OE have different dynamics Business Aviation OE and Spare engines unchangedService revenue and marginService has changedfor LTSA basedactivityRecognise revenue on long term service contracts as cost is incurred Two core types of service related costs- Intermittent / lumpy overhaul events- Regular, ongoing costs e.g. EHM, lease engine provision Overall LTSA margin % still keyTime and materialservice activityunchanged7Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce
028Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceIFRS 15 Impact on OE
Illustrative IFRS 15 OE calculationIFRS 15 OEaccounting isstraightforwardCash mGross revenue100Concession(60)Net revenue1Engine costRecognise a losswhen the costexceeds the priceRRSP (25%) share of net revenue2(10)Cash margin3(10)Net revenueProperty information, strictly private and confidential, 2018 Rolls-RoyceIFRS 15 revenue netcash revenue (priceafter concession)2RRSP share ofrevenue is treated aspart of the “cost ofsale”3The cash deficit isrecognised in the P&Lwhen the OE saleoccursTotal1Cost of sales: engine costPresentation title1(40)IFRS 15 income statement m94040(40)Cost of sales: RRSP2(10)Margin3(10)
Current accountingOE revenue: 3.8bnCivilAerospace:Underlying OE 1.3bnrevenue 1.3bn of OErevenue unaffectedby the transition positive cash marginIFRS 15OE revenue: 2.9bn0.50.50.20.20.61.62.5 0.9bn lower Largeengine installed OEunder IFRS 15 0.9bnLarge engine installed OEBusiness aviation OEV2500 OESpare engines102017 Full Year ResultsProperty information, strictly private and confidential, 2018 Rolls-Royce0.6 0.7bn of Large engine cashdeficits 0.2bn Large engine “linked”profit
0311Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceIFRS 15 Impact onServices
Simplified illustrative exampleCurrent vIFRS 15revenuefrom LTSAsRevenue deferredunder IFRS 15Secondoverhaul cost 1.2x first2nd overhaulmargin1st ost12Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceCurrent accountingcumulative revenueIFRS 15 cumulative revenue
CivilAerospace:Current accountingIFRS 15Recognise LTSA revenue on aflying hour basisRecognise LTSA revenue ona cost incurred basisUnderlying servicerevenueLTSA vs T&M bn 1.3bn of other/T&Mrevenue unaffectedby the transitionAround 90% of Trentengine fleet coveredby LTSAs and 70%of the businessaviation fleet13Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce2017 0.5bn bn2017Services revenue4.2Services revenue3.7LTSA: 70% ofrevenues2.9LTSA: 65% ofrevenues2.4Other/T&M revenues1.3Other/T&M revenues1.3IFRS 15 delays LTSA revenue recognition vs current accounting:- young fleet of large engines: average age 7 years- business jet engines often on wing for many years prior to first overhaul
Current accountingService revenue: 4.2bnCivilAerospace:Underlyingservice revenueBy categoryIFRS 15Service revenue: 3.7bn0.70.70.40.50.32.6IFRS 15 Servicerevenue 0.5m lower0.42.3 0.3bnTiming – cost event vs EFHNo concession amortisationPrincipal changes:Contract accounting adjustments- TimingLarge engine- ConcessionsBusiness aviationTiming – cost event vs EFH- ContractaccountingadjustmentsRegionalContract accounting adjustmentsV2500 0.1bn 0.1bnTiming – cost event vs EFH14Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceContract accounting adjustments
0415Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceDeeper dive intoLTSAs
mIFRS 15LTSAaccountingrevenue [cost/( 1 – margin % )]Margin1stoverhaulCombination ofregular andintermittent costs2ndoverhaulRefurbishmentoverhauls drivesignificantproportion ofindividual contractcostCumulative cash received16Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceCumulative cash spendCumulative IFRS 15 revenue
Simplified LTSA accounting example – no RRSPCashLTSAaccountingIFRS 15Low revenuesrecognised in earlystages of serviceagreements underIFRS 15Overhauls drivesignificant revenuerecognition17Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceYear mNet revenueOverhaul costOther costsTotal costsCash marginCash margin %IFRS 151100–(10)(10)902100–(10)(10)90345100 100 100– (200) –(10) (10) (10)(10) (210) (10)90 (110) 906100–(10)(10)90789100 100 100– (200) –(10) (10) (10)(10) (210) (10)90 (110) Overhaul 1Year m12345678910 TotalNet revenue202020 420 202020 420 2020 1000Cost of sales(10) (10) (10) (210) (10) (10) (10) (210) (10) (10) (500)Margin1010102101010102101010 500Margin (%)50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%Completion (%) 2%2%2% 42% 2%2%2% 42% 2%2% 100%Annual cashrevenues (constantEFH)Cost peaks drivenby overhaulsRegular lower levelof other contractcostRevenue isrecognised on costCost recognised asincurred.Margin recognisedwhen cost activityoccurs.NB: In practice, costs will be spread more evenly as not all the engines in a fleet will be overhauled in the same periodRefurbishment overhauls generally take place every 5-7 years. Shorter periods have been used above to simplify thecalculations
2017 Large engine LTSA cost: 1.1bnLarge engineLTSA costdriversRefurbishmentoverhaul cost0.4bnCashcostIntermittentcheck and repairactivityCombination of regularand intermittent cost0.2bnRRSPPro rata RRSP costacross regular andintermittentRegularOther contractcostsRRSP18Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce m0.4bnCashcost
2017 Large engine LTSA costLarge engineLTSA costdriversIntermittentcostsRefurbishmentoverhaul costcheck and repairactivityRRSPservice cost variability:- engine type- fleet operation- 1st v 2nd overhaul19Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce mCashcostIntermittentRefurbishmentoverhauls generallyevery 5-7 yearsMajority of the 170mTrent 1000 and 900in-service costs withinLTSA check and repairactivity0.4bn0.2bn
2017 Large engine LTSA cost: 1.1bnLarge engineLTSA costdriversOther contractcostsOther contract costs includes spare engines,transportation, tooling, engine health monitoring andon-wing supportThese costs are incurred on an ongoing basis across theLTSA engine portfolioRegularOther contractcostsRRSP20Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce m0.4bnCashcost
m Cash123YearNet revenue100 100 100RRSP share of revenue (20) (20) (20)RR retained revenue80 80 80Overhaul costOther costsTotal costs% cost completeLTSAaccounting(RRSP)STEP ONERRSP share of costIFRS 1521Presentation titleProperty information, strictly private and confidential, 2018 09100(20)8010100(20)80Total1000(200)800– (200) ––– (200)–– (400)(10) (10) (10) (10) (10) (10) (10) (10) (100)(10) (210) (10) (10) (10) (210) (10) (10) (500)6% 48% 50% 52% 54% 96% 98% 100%22242222422Net RRSP share(18)(18)(18)22(18)(18)(18)22(18)(18) (100)Cost incl. RRSP(28) (28) (28) (188) (28)(28)(28) (188)(28)(28) (600)Cash marginCash margin lIFRS 15Recognise RRSP netrevenue/cost sharewithin cost of sales“pro rata” acrossother costs––(10) (10)(10) (10)2% 4%4100(20)8012Year mNet revenueOverhaul costOther costsTotal costsRRSP shareTotal “cost” incl. RRSPMarginMargin %Completion %––(10) (10)(10) (10)– (200) –(10) (10) (10)(10) (210) (10)–(10)(10)– (200)(10) (10)(10) (210)–(10)(10)– (400)(10) (100)(10) (500)(2)(2)(2)(2)(2)(42)(2)(2)(12) (252) (12)(12)(12) (252)(12)(12) (600)(2)(12) (12)(42)(100)20% RRSPpartner receivesa share of RRrevenues andcontributes 20%of the costs‘Total cost’includes netRRSP share1 Calculate2total “cost”excludingRRSPIn the P&Lrecognisethe netpaymentsmade toRRSPs in linewith othercontract costactivity
m Cash123YearNet revenue100 100 100RRSP share of revenue (20) (20) (20)RR retained revenue80 80 80Overhaul costOther costsTotal costs% cost completeLTSAaccounting(RRSP)STEP TWORRSP share of costIFRS 15As revenue isrecognised on cost,including pro rataRRSP, overhauls aremajor drivers ofrevenue recognition22Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce––(10) (10)(10) (10)2% 8010100(20)80Total1000(200)800– (200) –(10) (10) (10)(10) (210) (10)2% 42% 2%–(10)(10)2%– (200)–(10) (10) (10)(10) (210) (10)2% 42% et RRSP share(18)(18)(18)22(18)(18)(18)22(18)(18) (100)Cost incl. RRSP(28) (28) (28) (188) (28)(28)(28) (188)(28)(28) (600)Cash marginCash margin %IFRS 1534100(20)8072Year mNet revenueOverhaul costOther costsTotal costsRRSP cost of saleTotal cost of saleMarginMargin %% of total cost of sale7272(88)727272(88)727220% RRSPpartner receivesa share of RRrevenues andcontributes 20%of the costs‘Total cost’includes netRRSP share40040%31220 20––(10) (10)(10) (10)34520 420 20– (200) –(10) (10) (10)(10) (210) (10)620–(10)(10)7820 420– (200)(10) (10)(10) (210)920–(10)(10)10 Total20 1000– (400)(10) (100)(10) (500)(2)(2)(2)(2)(2)(2)(2)(42)(2)(42)(12) (12) (12) (252) (12) (12) (12) (252) (12)888168888168840% 40% 40% 40% 40% 40% 40% 40% 40%2% 2% 2% 42% 2%2%2% 42% 2%(100)(12) (600)840040% 40%2%Apply contractmargin to total“cost” includingRRSP pro ratato calculaterevenueRevenue total “cost” /( 1 - 40%)(600)/60% 1000
Risk &RevenueSharingPartners(RRSPs)RRSP participationon newer engineprogrammes ishigher than for moremature programmesRRSP in-service fleetcoverage willincrease in future23Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce mProgrammesin-serviceRRSP % engines in 2017in-serviceengine % in2017RB211, Trent 700 andTrent 800 10%3,01568%Trent 500 and Trent 90015-20%64015%Trent 1000, Trent 7000and Trent XWB-84 andTrent XWB-9725-30%75417%in-serviceengine % in2020
Current accountingContractaccounting“catch upadjustments”Adjustments willremain a featureunder IFRS 15Impact will changebecause timing ofrevenue recognitionchanges24Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce mIFRS 15LTSA Main principles:LTSA Main principles:-EFH drives revenue recognition--Margin based on overall contractmargin % x revenueCost event drives revenuerecognition-Revenue calculated from costusing overall contract margin %-cost of sales is balancing figureLTSA “catch up”adjustments affect cost ofsales and profit“Linked” adjustmentsaffect revenue and profitLTSA “catch up”adjustments affectrevenue and profit
0525Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceBalance sheet
CurrentaccountingIFRS 15DeltaContractual Aftermarket Rights0.8-(0.8)Participation Fees – Intangible Asset0.4-(0.4)Participation Fees – Contract Asset-0.40.42.5(2.7)(5.2)Other(0.6)(0.3)0.3Risk and revenue sharing partnerparticipation fees(0.3)(0.8)(0.5)Total reserves impacted (pre-tax)2.8(3.4)(6.2) bnEstimated CivilAerospaceBalance SheetimpactMost significantimpact is the netcontract balanceReflects-26Reversal of linkedprofitEFH to cost eventbased revenuerecognitionPresentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceNet Contract Debtor/(Creditor)TaxTotal reserves impact (post tax)1.1(5.1)Change in accounting of cash contributions received from RRSPs at thestart of a programme-IFRS 15: recognised as reduction to cost of sales-Current accounting: recognised as reduction to R&D charge
OpeningbalanceCash received inadvance of marginExpect continuedgrowth in creditorfor a number ofyears – EFH cashrevenues will begreater than IFRS 15cost-event drivenrevenue27Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceRevenuerecognisedClosingbalanceCreditor balanceNetcontractbalanceCashrevenueNet cashvs marginContract creditor represents future revenues –not Rolls-Royce overdue debt!
Simplified LTSA accounting example – no RRSPCashLTSAaccounting28YearIFRS 15 mNet revenueOverhaul costOther costsTotal costsCash marginCash margin %Cash received aheadof margin is reflectedon the balance sheetas a creditorIFRS 15Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce mNet revenueCost of salesMarginMargin (%)Completion 90345100 100 100– (200) –(10) (10) (10)(10) (210) (10)90 (110) 906100–(10)(10)90789100 100 100– (200) –(10) (10) (10)(10) (210) (10)90 (110) In year 1cash margin is 90Overhaul 1Year12345678910 Total202020 420 202020 420 2020 1000(10) (10) (10) (210) (10) (10) (10) (210) (10) (10) (500)1010102101010102101010 50050% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%2%2%2% 42% 2%2%2% 42% 2%2% 100%(80) (160) (240)800(80) (160) 160800p&l margin only 10 so 80 of cashreceived ahead of p&lmargin goes onto thebalance sheet as acontract balancecreditorNB: In practice, costs will be spread more evenly as not all the engines in a fleet will be overhauled in the same periodRefurbishment overhauls generally take place every 5-7 years. Shorter periods have been used above to simplify thecalculations
0629Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceSummary and modellingimplications
Metrics we will provideConclusions30Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce OE volumes Average OE cash deficit LTSA shop visits Installed fleet Invoiced flying hours Reminder: IFRS 15 changesLTSA revenue; T&M still thesame Contract accountingadjustments remain a fact oflife LTC balance is growthindicator of future revenue(and doesn’t mean buildingoverdue debt!) Not just about the lumpycosts
CashModelling OE/ spares volumes OE/ spares volumes Average OE cash deficits Average OE cash deficits Invoiced flying hours RR will providecertain metrics &direction to helpboth elements In-service fleetNo. of LTSA engineoverhauls No. of LTSA engineoverhaulsOther metrics willreflect yourassumptions EFH revenueEFH yield EFH revenueLTSA margin %Recurring costsNeed to maintainseparate driverbased cash and p&lmodels31P&LPresentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce m
IFRS 15no changeto cashNo changeto in-yearcashNo change tototal profit orcash over thelife of a longterm contractThe first year ofadoption – still learningSignificantlyimprovestransparencyon CivilAerospace OE– much closerto cashContinue longterm contractaccounting –accountingadjustmentsremain afeatureCivil Aftermarket:greater forecasting challengefirst year of adoption in-service vs regular overhauls impact of overhaul deferrals 322017 Full Year ResultsProperty information, strictly private and confidential, 2018 Rolls-Royce
0733Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceQuestions
0834Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceAppendicesDetailed adjustments
Underlying RevenueEstimated IFRS 15changes - 2017Civil AerospaceOENo profit on linked OE sales (194)mTotal OE deficit (704)m includes:No capitalisation of linked enginecash deficit (418)mNo CARs on unlinked contracts (286)mcTreatment of guarantees andpenalties (13)mTotal OE deficit (704)m includes:No capitalisation of linked enginecash deficit (418)mNo CARs on unlinked contracts (286)mTreatment of participation fees (22)mNo amortisation of CARs 57mOther timing differences 20mRRSP participation fees 23mNote: All adjustments shown pre-tax effects35Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceTreatment of guarantees andpenalties 5mOther timing differences (14)These estimated figures are preliminary and, as processes and procedures are further embedded during 2018, itis possible that some changes to the impact may result (827)mNo profit on linked OE sale (194)m (913)mNo change to cashflows from any of therevenue and profitchangesUnderlying Profit
Underlying RevenueEstimated IFRS 15changes – 2017Civil AerospaceServicesNo amortisation of prior yearsconcession deferral 353mNo amortisation of prior yearsconcession deferral 353mContract accounting adjustmentsdifference (341)mContract accounting adjustmentsdifference (131)mCorporateCare and regionalcost incurred vs engine flyinghour impact (165)mLarge engine cost incurred vsengine flying hour impact (127)mCorporateCare and regionalcost incurred vs engine flyinghour impact (118)mNote: All adjustments shown pre-tax effects36Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceThese estimated figures are preliminary and, as processes and procedures are further embedded during 2018, itis possible that some changes to the impact may result (23)mLarge engine cost incurred vsengine flying hour impact (344)m (497)mNo change to cashflows from any of therevenue and profitchangesUnderlying Profit
Other parts of thegroup (34)m LTSA marginimpact offset by 30mfavourable timingbenefit from sparesdistribution contractin Defence Aerospace- LTSA margin impactexpected to recur inthe short term; timingbenefit from thespares distributioncontract is notThe overall net impactacross the rest of thegroup is insignificant.37Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce mRevenueCivilDefencePower SystemsMarineNuclearOtherTotal revenueOperating profitCivilDefencePower SystemsMarineNuclearOtherTotal operating profitCurrentaccountingIFRS 4)1(1)(854)
ContactsJennifer RamseyRichard FosterHead of Investor RelationsTel: 44(0)207 227 9087Jennifer.Ramsey@rolls-royce.comManager, Investor RelationsTel: 44(0)207 227 9141richard.foster2@rolls-royce.comHelen HarmanElena PrenticeAssistant Director, Investor RelationsTel: 44(0)207 227 9339helen.j.harman@rolls-royce.comProgramme Coordinator, Investor RelationsTel: 44(0)207 227 9237elena.prentice@rolls-royce.comRoss HawleyAssistant Director, Investor RelationsTel: 44(0)207 227 9282ross.hawley@rolls-royce.comFor more information: www.rolls-royce.com/investors38Presentation titleProperty information, strictly private and confidential, 2018 Rolls-Royce
Safe harbourstatement39Presentation titleProperty information, strictly private and confidential, 2018 Rolls-RoyceThis announcement contains certain forward-looking statements. These forwardlooking statements can be identified by the fact that they do not relate only tohistorical or current facts. In particular, all statements that express forecasts,expectations and projections with respect to future matters, including trends inresults of operations, margins, growth rates, overall market trends, the impact ofinterest or exchange rates, the availability of financing to the Company, anticipatedcost savings or synergies and the completion of the Company's strategictransactions, are forward-looking statements. By their nature, these statements andforecasts involve risk and uncertainty because they relate to events and depend oncircumstances that may or may not occur in the future. There are a number offactors that could cause actual results or developments to differ materially fromthose expressed or implied by these forward-looking statements and forecasts. Theforward-looking statements reflect the knowledge and information available at thedate of preparation of this announcement, and will not be updated during the year.Nothing in this announcement should be construed as a profit forecast. All figuresare on an underlying basis unless otherwise stated - see note 2 of the 2017 full yearresults statement for the definition.
IFRS 15 delays LTSA revenue recognition vs current accounting: -young fleet of large engines: average age 7 years - business jet engines often on wing for many years prior to first overhaul bn 2017 Services revenue 4.2 LTSA: 70% of revenues 2.9
