2016 Governance Event
Ross Hawley Investor Relations
Agenda for today Welcome Ian Davis Strategic review, Q&A Warren East & David Smith Governance workshop: 9am Board & governance Ian Davis Audit Lewis Booth Remuneration Dame Helen Alexander & Ruth Cairnie Round table discussions: 10am Board committees Committee chairs Finish: 11am 3
Notices Mobile phones Safe Safety Harbour 4
Ian Davis Chairman
Key topics 1. Company strategy and priorities 2. Board composition and workings 3. Board agenda and focus 6
Today’s Board attendees Warren East Lewis Booth Ian Davis Dame Helen Alexander Ruth Cairnie Sir Frank Chapman Sir Kevin Smith David Smith 7
Warren East Chief Executive
Goals for 2015 H2 Undertake Identify the Keep focus Improved Set clear thorough clear areas disclosure priorities for on delivering review of for business and 2016 profitable operations improvement transparency onwards growth 9
Strategic clarity We are a Power Systems business… VISION STRATEGIC FOCUS “… to be the market leader in high “… focus on differentiated, mission performance power systems where critical power systems markets with our engineering expertise, global high barriers to entry where we can reach and deep industry knowledge leverage our leading engineering deliver outstanding customer skills and manufacturing excellence to relationships and solutions” drive growing market shares ” 10
Goals for 2016 With pace and simplicity … Strengthen our focus Deliver a strong start Start rebuilding trust on engineering and to our transformation and confidence in our operational excellence programme long-term growth and leveraging our prospects installed base 11
Engineering excellence Pace, simplicity and flexibility Advanced Manufacturing Research Centres • Developed with other companies and key universities Advanced Blade Casting Facility in Rotherham • Opened at the beginning of 2015 • This new facility is co-located with the AMR centre set up with the University of Sheffield 12
Operational excellence Significant productivity improvements 700 600 80+% Annual Trent deliveries 500 Growth in production 400 On track for 300 20+% 200 11% reduction by 2020 Reduction in m2 100 footprint to date - 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 13
Leveraging our installed base Aerospace initiatives to drive long-term value Changing dynamics as we mature … Significant growth in installed base … Response… reorganising New structure focused on flexibility 2005 2015 2025 and competition… Installed engine count Installed engine count Installed engine count • Investing ~$200m to rebalance MRO (estimated as at Dec 15) network – HAESL, SAESL & N3 3 3 5 4 4 6 0 0 7 4 5 0 • Closing TAESL • New facility at Delta TechOps … creates a capacity limit within existing network Response … new TotalCare offerings… Maturing installed base … designed around the customer TotalCare 2005 2015 2025 TotalCare Flex SelectCare Number of Trent Number of Trent Approx number of Trent • • Pay-as-you-go Service choice engines >10 years old engines >10 years old engines >10 years old • • Guaranteed power Event based pricing • • RR choice to own engines Fixed price overhauls 0 0 3 2 0 9 7 8 2 6 0 0 • • Owner receives asset value Engine exchanges • Customisable … changes service demands as fleets age 14
Transformation Strong project management and governance Transformation team… Strong governance over all programmes – old and new Enduring process simplification and cost reductions Updating and strengthening key performance indicators 15
Transformation Legacy programmes proceeding well Incremental changes (as previously announced)* 2015 2016 2017 Aerospace Net improvement £0m £80m £0m – Headcount reduction 2,200* 400 Marine 2015 2016 2017 Net improvement £(10)m £35m £40m – Headcount reduction 600 400 * Overall benefits expected to be broadly in line with previously announced estimates 16 ** includes 545 who left the business in 2014
Transformation £150-200m cost saving programme Senior management Further management Focus on organisational software headcount reduction headcount reductions 20% of top two layers to be announced in H1 Initial benefits identified Dealing with change and • Identified cost savings of £75-100m ambiguity – ~£35-50m benefit in 2016 Improved Approval management – full run rate by end 2017 processes information • 2016 exceptional restructuring charge of The processes and behaviours that £75-100m wrap around an organisation Additional benefits Internal • Further cost savings targeted for 2017 Accountability Reporting – £75-100m driven by a focus on Ensuring the ‘organisational software’ right people have the right conversations at Update at end Q2 on progress the right time 17
Rebuilding trust Delivering on our commitment to transform and grow Clear programme of milestones for 2016 Investigate & Scope Detail & Implement Review & Refine 2015 & Q1 FY & Q2 Q4 • Plans & Priorities • Implementation update • Analyse • Progress on Financials • Costings/Timescales • Prioritise • Progress vs plans: • KPIs/Measures of Success • Engage Team More? Faster? Deeper? Strategy & Portfolio 18
Long-term growth Fuelling long-term growth critical to our success Successful product innovation • Address emerging customer needs • Drive growth in installed base which in turn drives profitability and cash • Scale efficiencies in the aftermarket help drive higher achieved returns on sales Order book reflects significant future value • Widebody order book is strong • Pricing robust – future performance is about driving cost savings on new engine programmes as we have on older ones – continuous improvement • But visibility strong for only certain elements of the business – limited foresight on balance in volatile market conditions – e.g. oil prices, Asia growth and short-term changes in aircraft utilisation 19
Portfolio to drive long-term growth Opportunities exist across the portfolio Strong mix of business 2020 • High Over 80% in attractive growth markets ~70% • Over 75% with strong competitive advantages Competitive Position Competitive advantage strengthened by investments • 2/3rds of group will benefit from transformation programme Low High Market attractiveness 20
Long-term growth Civil Aerospace: widebody installed thrust growth Installed thrust drives aftermarket revenue growth Portfolio today … 600 Cash generating RB211-535 500 Trent 700 Trent Trent 800 Trent RB211-524 Trent XWB-84 500 900 Trent Trent 7000 XWB-97 Trent 400 1000 Cash consuming 300 66 200 In 10 years … 100 Cash generating Trent XWB-84 Trent 700 Trent Trent Trent 900 7000 XWB-97 Trent 0 RB211-535 800 Trent 1990 1995 2000 2005 2010 2015 2020 2024 Indicative 1000 New Programme Trent RB211-524 500 Indicative New Programme Cash consuming Trent XWB Trent 1000 + 7000 Other Trents RB211s 68 * Installed thrust is shown net of retirements - includes parked and stored engines 21
Long-term growth Power Systems & Marine focused on driving profitable growth Restructuring, Product Provide modernisation, Development, value-added lean manufacturing, systems, intelligent products and Drive cost increased throughput, applications, competitiveness services geographic refocus pull-through sales Strengthen route to Partnerships/JVs, market geographic and product refocus 22
Conclusions Period of unprecedented change • In our mix of business and how we account for it • In our industrial footprint as we invest in a wide-ranging transformation • As we double production of our widebody engines • As we invest in technology for post-Trent product family Review underpins confidence about the future • Outlook remains very positive • Industrial transformation proceeding well • Set to gain significant market share and build a strong cash generative platform Laying the foundations for long-term profitable growth • Financially stronger, more resilient business • Restructure organisation to drive material cost and process improvements 23
David Smith Chief Financial Officer
Headline results Underlying Revenue Gross Margin Underlying Profit £ 13.4 bn £ 3,182 m £ 1,432 m 1 % 10 % 12 % ‘Dividend’ per share Operating margin Free cash flow 11.2 % 7.1p £ 179 m 130 bps 2014: £447m 2014: 14.1p 25
Group financial strength Credit S&P: A/Negative Moody’s: A3/Stable rating Maintain investment-grade rating Strong Total liquidity liquidity £5 billion Debt Spread to 2026 maturities Maturities: • 2016 - £200m bond & € 125m EIB loan • 2017 – € 75m EIB loan Risk Foreign exchange and management commodity hedging 26
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