2018 Half Year Results

 

2 August 2018

ROLLS-ROYCE HOLDINGS PLC

2018 Half Year Results

Good half year progress: growing confidence for the year

                                                                    

Commenting on the results, Warren East, Chief Executive, said: "We continued to make good progress in the first half. Financial results were ahead of our expectations with strong growth from Civil Aerospace and Power Systems and we achieved a number of operational and technological milestones. Reflecting our progress to date and growing confidence for the full year, we now expect both underlying profit and cash flow for 2018 to be in the upper half of our guidance range. We continue to be impacted by the challenge of managing significant Trent 1000 in-service issues and have recognised an exceptional charge of £554m, representing the profit impact of that part of the total current and estimated costs out to 2022 that is considered to be abnormal in nature."

	Underlying1			Reported
Year to 30 June	H1 2018	H1 20172	Organic change3	H1 2018	H1 20172	Change
Group
Revenue (£m)	7,040	6,041	+14%	7,487	6,656	+12%
Operating profit (£m)	141	(84)	205	(775)	(103)	(672)
Earnings per share	2.5p	(8.1)p	n/a	(52.0)p	63.9p	n/a
Core4
Revenue (£m)	6,680	5,611	+16%
Operating profit (£m)	146	(70)	183
Earnings per share	3.1p	(6.5)p	n/a
(Net debt) / Cash (£m)5	165	(305)	n/a
Group free cash flow (£m)6	(72)	(339)	211
Core free cash flow (£m)	10	(264)	214
Payment per share	4.6p	4.6p

For notes to table see page 6

 

Group financial highlights 

·        Underlying revenue of £7,040m up 14%; reported revenue of £7,487m up 12%. Civil Aerospace revenues up 26%, Power Systems up 13% and Defence remains flat

·        Underlying operating profit up £205m to £141m; strong growth in Civil Aerospace and Power Systems; reported operating loss of £775m

·        Group free cash flow improvement of £211m on prior year outflow of £339m driven by good cash flows in Defence and reduced outflow in Civil Aerospace

·        Exceptional charge in the income statement for Trent 1000 in-service issues of £554m representing that part of the total estimated cost for the period to 2022 that is considered to be abnormal in nature

·        Estimate of FY 2018 cash costs for Trent 1000 and Trent 900 in-service issues approximately £450m, in line with 15 June 2018 guidance, FY 2019 combined cash cost now expected to be at a similar level to 2018, before declining by at least £100m in 2020; despite this we expect to deliver improved 2019 underlying free cash flow compared to our guidance for 2018

·        Since the year end net funds have improved by £470m primarily driven by proceeds from the disposal of L'Orange (€673m) completed on 1 June 2018; Commercial Marine sale (expected net proceeds £350m-£400m) announced on 6 July 2018

·        FY 2018 underlying profit and free cash flows; now expected to be in the upper half of our guidance range

 

Group operational highlights

·        Positive early progress on the restructuring plan. Target run-rate savings of £400m p.a. by end of 2020

·        Civil Aerospace widebody service revenues up 22% on an underlying basis; large engine production ramp-up continues; widebody deliveries up 24%; 259 engines sold in H1 2018; Trent 7000 certification; launch of Pearl engine for business jets, successful testing of Advance3

·        Continued strong growth at Power Systems; OE and Service growth across almost all end markets

 

2018 Half Year Results: Business units

 

	Underlying revenue (£m)	Organic change	Underlying op. profit (£m)	Organic  change
Civil Aerospace	3,600	+26%	(112)	+59%
Defence	1,415	0%	162	-3%
Power Systems	1,471	+13%	80	+193%
ITP Aero	375	-	40	-
Corporate / eliminations	(181)	-	(24)	-
Core operating business	6,680	+16%	146	183
Commercial Marine	333	-13%	(31)	+32%
L'Orange	89	-	21	-
Other / eliminations	(62)	-	5	-
Non-core business	360	-	(5)	-
Total Group	7,040	+14%	141	205

For notes to table see page 6

 

2018 Outlook: Increasing confidence

At our 2017 Full Year Results in March, we provided a 2018 full year outlook for the Group excluding ITP Aero and under our prior reporting structure. Our guidance has been updated to reflect our revised reporting structure. We are now providing guidance on the basis of our core business (which includes ITP Aero and excludes non-core operations either already sold or held for sale). For our core business, we expect 2018 underlying operating profit of around £450m +/- £100m and underlying free cash flow of around £400m +/- £100m.

 

£m	2018 Outlook	Prior guidance
Guidance on a consistent basis as provided at FY 2017 results
Group op profit (incl. non-core, excl. ITP Aero)	£400m +/- £100m*	£400m +/- £100m
Group FCF (incl. non-core, excl. ITP Aero)	£450m +/- £100m*	£450m +/- £100m
Guidance for core business only
Underlying revenue
Civil Aerospace	High single-digit growth	High single-digit growth
Defence	Stable	Stable
Power Systems	Low double-digit growth	High single-digit growth
ITP Aero	Double-digit growth	Double-digit growth
Core business
Underlying operating profit
Civil Aerospace	Losses up to a third lower	Losses up to a third lower
Defence	Margins around 150bps lower	Margins around 250bps lower
Power Systems	Margins stable	Margins stable
ITP Aero	Modest decline in profit	Modest decline in profit
Core business op. profit (incl. ITP Aero)	£450m +/- £100m*
Core business FCF7	£400m +/- £100m*

For notes to table see page 6

* Expected to be in the upper half of the guidance range

 

·     Guidance for foreign exchange, net R&D, tax charge, capital expenditure and finance charges remain unchanged for 2018

·     Percentage or absolute change figures in this document are on an organic basis (see page 6) unless otherwise stated

 

 

 

 

Commenting on the Group's outlook, Warren East, added: "Rolls-Royce is at a pivotal moment in its history. After a long period of significant investment and innovation, we are poised to become the world-leader in large aircraft engines. Now we need to deliver the fundamental changes that will enable us to realise the potential of our position, delivering improved returns while continuing to invest in the innovation needed to realise our long-term aspiration to be the world's leading industrial technology company. Our new business structure and drive for greater pace and simplicity, combined with our growing installed base, means we are well placed to exceed free cash flow of £1bn by 2020 and push towards our mid-term ambition for free cash flow per share to exceed £1.

 

This is the time for execution. In Civil Aerospace our installed widebody fleet will continue to grow and we will strive to further reduce cash deficits on engine sales, whilst working hard to minimise the disruption caused to our customers by in-service issues. The benefits of creating a single Defence operation with greater scale and the ability to offer customers a broader range of products and services, should present us with new opportunities. In Power Systems the continued expansion of our end markets is driving strong volume and this, combined with the further product portfolio rationalisation and the development of new service offerings, gives us confidence for the full year."

 

Restructuring update

Since our initial announcement on 17 January 2018, we have made progress with our plans to simplify the Group into three customer-focused business units. Our new Defence business has been formed by combining both our Naval and Submarine businesses with Defence Aerospace; Civil Nuclear has been moved into Power Systems; we successfully completed the sale of L'Orange and we announced an agreement to sell Commercial Marine.

 

While we are determined to establish a strong foundation for the future of Rolls-Royce, we are also acutely aware that this restructuring will impact 4,600 colleagues. Restructuring efforts are now focused on removing duplication and fixing the inefficient processes and interfaces across our business. All parts of the business will be managed under a radically simplified structure, alongside an operating framework that clearly outlines roles and responsibilities.

 

Communication with our people is key and since the restructuring announcement on 14 June 2018, the Executive Leadership Team has held many face-to-face discussions with thousands of employees across the Group, collecting feedback, helping us to set priorities and identifying challenges ahead. This is a tremendous opportunity to create the world's leading industrial technology company.

 

Trent 1000 in-service issues and costs

The Trent 1000 in-service engine issues have caused significant disruption for a number of our customers, which we sincerely regret. We continue to work hard to remedy this situation and have made further good progress on the implementation of long-term solutions in the first half of the year. We have significantly increased our Trent 1000 maintenance and overhaul capacity, sought ways to reduce engine shop visit turnaround times and have added approximately 50% more turbine blade capacity since the start of the year. We recently confirmed that we have now started certification testing of a redesigned intermediate compressor rotor blade for Trent 1000 Package C engines, with a redesign for Trent 1000 Package B engines to follow. In addition, as a precautionary measure, we have launched and, are in the process of testing, a redesign of the blade common to the Trent 1000 TEN and Trent 7000 engines. We continue to make good progress in addressing the other known issues affecting Trent 1000 engines.

 

Having provided updated guidance on the cost of these actions in 2018 at our Capital Markets Event in June we are now clarifying the incremental cost of this dynamic situation on 2019 and beyond. Our current assessment is that the combined cash cost of both the Trent 1000 and Trent 900 in-service issues will be at a similar level in 2019 to the approximately £450m we expect in 2018, before declining by at least £100m in 2020. We still expect to deliver an improvement in 2019 underlying core free cash flow compared to our guidance for 2018, marking a further step towards our 2020 free cash flow ambition. The cash costs of the Trent 1000 and Trent 900 issues are expected to step down materially after 2020, with all technical changes expected to be fully embodied into the Trent 1000 and Trent 900 fleets by 2022.

 

In H1 2018, following the Airworthiness Directives mandating additional inspections, an exceptional charge of £554m has been taken to the income statement. It reflects the impact of the abnormal costs we are incurring to resolve the Trent 1000 in-service issues, which fall outside the scope of our normal TotalCare costs. The charge represents around 40% of the total cash costs expected to be incurred in resolving the Trent 1000 issues for the period to 2022 and is not incremental to them. The remainder of these costs will be recognised over time through our normal contract accounting margins. Cash costs on the Trent 1000 in-service issues will continue to be fully reflected in free cash flow.

 

Free cash flow improvement of £211m versus prior year

Overall Group free cash flow improved materially in H1, with an outflow of £72m (2017: £(339m)).  Our core business generated a free cash inflow of £10m (2017 H1: £(264)m). The good year-on-year cash flow improvement was driven by increased cash flows in the Civil Aerospace aftermarket from strong growth in engine flying hours and T&M aftermarket activity, better deposit inflows at Defence and a more balanced profile of Civil spare engine deliveries in H1 vs H2 than in the prior year. These more than offset the increased level of R&D cash spend and higher cash costs incurred on Trent 1000 and Trent 900 in-service issues.

 

L'Orange disposal and announcement of sale of Commercial Marine

The disposal of L'Orange to Woodward Inc. for €673m proceeds completed on 1 June 2018. We also announced the sale of Commercial Marine to KONGSBERG on 6 July 2018 for a total value of £500m, with expected net proceeds of around £350m to £400m dependent upon the final outturn working capital at completion. The proceeds from these disposals will be used to strengthen our balance sheet and provide additional capital to judiciously pursue opportunities that will drive greater returns for the Group. Both L'Orange and Commercial Marine have been reported as non-core businesses in our 2018 Half Year Results. 

 

Balance sheet, capital allocation and payments to shareholders

As we outlined at our Capital Markets Event, a disciplined approach to capital allocation and to sustaining a healthy balance sheet will play a major part in driving our long-term growth. Focusing on improving our return on capital is key and implementing a new KPI, Cash Return on Invested Capital (CROIC), will help us drive this across the Group. Through improved free cash flow generation, we aim to maintain a strong investment grade rating and ultimately return to A-grade status. In the first half net funds have improved by £470m to a net cash position of £165m. The interim payment to shareholders is held at 4.6 pence (H1 2017: 4.6 pence). Restoring our shareholder payments to an appropriate level over time as free cash flow grows will be a key capital allocation priority.

 

Financial highlights - core business data table (unless otherwise stated)

 

Financial			Civil Aerospace metrics available at Half Year
£m	H1 2018	H1 20172		H1 2018	H1 20172
Underlying op. profit	146	(70)	Large engine in-service fleet	4,567	4,4098
Underlying profit before tax	81	(126)
Underlying effective tax rate	27.2%	4.8%	Large engines deliveries	259	209
Gross R&D spend	663	620
Net R&D spend	518	442	Large engine invoiced flying hours	6.9m	5.8m
R&D capitalisation	239	84
Capex	384	427	Total service revenue growth	+22%	n/a
Free Cash Flow	10	(264)
Group net debt/cash5	165	(305)	Large engine LTSA8 major refurbs	137	91
Hedge book $/£ average5	1.55	1.55
Hedge book (US$bn)5	$37.3	$38.5	Large engine check & repair	242	158

For notes to table see page 6

 

Key drivers of increased returns:

·     Civil Aerospace OE cash deficit per engine reduced by 15% from 2017 full year average

·     Reduction in C&A cost in Civil Aerospace and Defence; Power Systems C&A costs increased as pay escalation not yet offset by headcount changes, together with phasing differences compared to 2017

·     Cash R&D costs increased as planned due to launch of new engines. Mid-term R&D still expected to fall in-line with our mid-term ambition

·     Progress on restructuring with consultations underway. Retain confidence in target run-rate savings of £400m p.a. by end of 2020

2018 Business Unit highlights

The commentary in this section relates to the core business and is provided on an underlying basis with year-on-year changes at constant currency³.

 

Civil Aerospace - underlying revenue £3,600m, growing 26%, underlying operating loss £(112m)

·     Underlying revenue growth of 26% driven by a 24% increase in sales volumes of installed engines and spare engines, including to joint ventures, and increased services activity

·     Underlying operating loss reduced by £149m to £(112)m reflecting strong aftermarket trading including increased spare parts sales, higher OE spare engine volumes and increased net R&D capitalisation of £174m, offsetting £(154)m of contract accounting adjustments

·     Continued expansion of the in-service fleet; widebody underlying engine flying hours +20%; increase in major LTSA shop visits as expected as a number of Trent 700 engine have had first overhauls

·     Continuing progress on installed OE unit deficit reduction - fell by 15% in the first half; cost reduction and pricing improvements on Trent XWB-84, where we continue to work towards break even by 2020

·     Milestone achievements in new engine programmes; launched first of a new family of engines for business aviation with the Pearl 15; Trent XWB-97 entered into service on the Airbus A350-1000; Trent 7000 achieved EASA certification

 

Defence - underlying revenue £1,415m, remaining flat, underlying operating profit £162m

·     Underlying revenue flat with modest increase in OE offset by largely stable services revenues

·     Underlying operating profit down £6m due to higher R&D spend reflecting ongoing future programme development partly offset by reduced C&A

·     Progress combining our enlarged Defence business; providing integrated customer solutions

·     The MT30 has maintained its position as a core naval engine of choice with Japan the fifth nation to select the engine for a major naval programme

·     Partner in Team Tempest, a collaboration to develop the UK's future Combat Air Strategy

·     Orders weighted to second half with a strong pipeline in Combat, Naval and Submarines

 

Power Systems - underlying revenue £1,471m, growing +13%, underlying operating profit £80m

·     Core underlying revenue increased by 13% driven by growth in both OE 14% and services 12%; following good growth in almost all applications from both market strength and management actions on sales

·     Core underlying operating profit saw a material improvement on the prior year driven primarily by higher volumes; 180bps rise in underlying gross margin to 24.1%

·     Growth in digitalisation increasing fleet connectivity; recent launch of pilot Factory of the Future and Service of the Future to better align internal processes and customer demands

·     Recent launch of pioneering Series 4000 marine gas engine demonstrates capability in meeting stringent emissions regulation

·     Full year order coverage currently over 80% versus circa 70% in prior year

·     Meaningful progress made on MTU Yuchai Power joint venture as part of wider growth strategy in China

 

ITP Aero - underlying revenue £375m, growth of 19%, underlying operating profit £40m

·     Strong revenue progress in H1 to £375m driven by higher Civil Aerospace OE and aftermarket revenues primarily on Rolls-Royce related programmes

·     Significantly improved underlying operating profit in H1, increasing £32m to £40m reflecting the higher Civil Aerospace revenues and better product mix in the period

 

·     Confidence in the full year outlook

Reported Group results

The reported loss before tax was £(1,262)m, a significant decrease compared to the 2017 half year profit before tax of £1,444m. The principal differences are: (i) the improvements in operational performances as described earlier; (ii) a positive impact from measuring revenues at spot rates rather than rates achieved on hedging of £447m (H1 2017: £615m); (iii) a loss included in profit before tax of £683m (H1 2017 gain of £1,682m) including negative FX mark-to-market adjustment on the Group's hedge books of £854m (H1 2017: gain of £1,407m) and gains on derivatives settled during the period of £240m (H1 2017: £342m); (iv) the exceptional charge of £554m relating to the Trent 1000 engine, described on page 8; (v) the amortisation of assets recognised under acquisition accounts of £124m (H1 2017 £62m); (vi) exceptional restructuring charges of £179m (H1 2017 £31m), described on page 8; and (vii) a gain of £358m on the disposal of L'Orange in June 2018 and the write down of Commercial Marine goodwill by £160m to the expected disposal value as these assets have been reclassified as 'held for sale'. Further details are shown on page 19.

 

Notes to financial tables on pages 1-4:

¹ Underlying: for definition see Note 2 on page 30

² All prior year comparatives have been restated for IFRS15 see Note 16 on page 45

³ Organic change at constant translational currency ('constant currency') by applying 2017 rates to 2018 numbers and excluding M&A, specifically ITP Aero and L'Orange

⁴ Core Group includes Civil Aerospace, Defence, Power Systems and ITP Aero and excludes L'Orange and Commercial Marine

⁵ Comparators at FY 2017 position

⁶ Free cash flow is defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders and acquisitions & disposals. The derivation of free cash flow from the cash flow statement is shown on page 43

⁷ Free cash flow outlook includes in-service engine costs as outlined on page 3

⁸ LTSA is long-term service agreement

 

This announcement has been determined to contain inside information.

 

Enquiries:

 

Investors:			Media:
Jennifer Ramsey	+44 20 7227 9087		Richard Wray	+44 20 7227 9163

 

 

Photographs and broadcast-standard video are available at www.rolls-royce.com.

A PDF copy of this report can be downloaded from www.rolls-royce.com/investors.

This Half Year Results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law.

Results presentation

A presentation will be held at 09:00 (BST) today. Details of how to join the event online are provided below. Downloadable materials will be available on the Investor Relations section of the Rolls-Royce website from the start of the event.

 

Online webcast registration details for 2 August presentation

To register for the live webcast, including Q&A participation, please visit the following link:

 

https://edge.media-server.com/m6/p/8wxstddj

 

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

Core Trading Summary

 

The P&L table below and all commentary relate to the underlying performance of the core business, and percentage or absolute change figures in this document are on an organic basis, unless otherwise stated.

 

Summary income statement: Core business

£m	H1 2018	H1 2017	Change	Organic change*
Underlying revenue	6,680	5,611	+19%	+16%
Underlying OE revenue	3,247	2,594	+25%	+19%
Underlying services revenue	3,433	3,017	+14%	+14%
Underlying gross profit	870	712	+22%	+12%
Gross margin %	13.0%	12.7%	+30bps	-50bps
Commercial and administration costs	(479)	(436)	+10%	+4%
Research and development costs	(296)	(396)	-25%	-28%
Joint ventures and associates	51	50	+2%	+8%
Underlying operating profit	146	(70)	216	183
Underlying operating margin	2.2%	-1.2%	+340bps	+300bps
Financing costs	(65)	(56)	+16%	+2%
Underlying profit before tax	81	(126)	207	182
Tax	(22)	6	-	-
Underlying profit for H1	59	(120)	-	n/a
Underlying earnings per share	3.1p	(6.5)p	n/a	n/a
Free cash flow	10	(264)	274	-

*Organic change - 2018 excludes ITP Aero in order to be comparable to 2017

 

Underlying revenue up 16%  

Underlying revenue rose 16% led by good growth in both Civil Aerospace and Power Systems. Civil Aerospace revenue increased 26% driven by higher invoiced volumes of both installed and spare engines together with increased services activity. Strong growth in engine flying hours continued. Power Systems delivered good progress, up 13%, with growth across almost all of its end markets driving double-digit growth in both OE and services revenues. Defence revenue remained stable in H1, with modest growth in OE offsetting a small decline in aftermarket due to Submarines. Civil Aerospace production ramp up continues. Widebody invoiced volumes rose by 50 engines to 259, reflecting good growth in both installed and spare engines, including higher sales to joint ventures - with a much more balanced delivery profile of spare engines H1:H2 this year relative to 2017.

 

Underlying gross profit up 12%

Underlying gross profit rose 12% to £870m, with gross margins of 13% driven by Power Systems, reflecting volume growth and improved factory utilisation. Civil Aerospace gross profit was broadly flat, with strong aftermarket trading including increased sales of spare parts for mature engines and higher OE spare engine volumes offsetting a large negative contract accounting adjustment of £(154)m (vs £(90)m in H1 2017).

 

Self-funded R&D cash spend up 14%; P&L charge down 28%

Gross research & development expenditure grew £44m to £663m. After funding from customers and other third parties, self-funded cash R&D spend rose 14% to £518m, reflecting increased investment on new engine demonstrators and technology for future products including the new business aviation Pearl family of engines and UltraFan / Advance3 in Civil Aerospace. Capitalisation of R&D rose from £84m to £239m consistent with the revised R&D policy application as outlined at our FY17 results (see Note 1). This led to a reduction in R&D charge to the income statement of £113m to £296m.

 

C&A costs up 4%

Commercial & administration costs were £479m, up £18m on the prior year driven by Power Systems where pay escalation was not yet offset by headcount changes, together with phasing differences compared to 2017. Within our other businesses, C&A costs were modestly lower in Defence and Civil Aerospace reflecting good discretionary spend control. Over the mid-term, as restructuring benefits start to accelerate, we continue to target a reduction in C&A costs.

 

 

 

 

 

 

Underlying operating profit up £183m

Group underlying operating profit saw a material £183m improvement on the prior year to £146m, reflecting good profit growth at Power Systems of £52m to £80m led by higher volumes and an improvement at Civil Aerospace, where the operating loss reduced by £149m to a £112m loss in H1, reflecting a number of factors:

·     Good aftermarket growth led by higher spare parts sales for mature widebody engines

·     Increased spare engine deliveries (reflecting a better H1:H2 balance to these than in prior year) which more than offset increased volumes of loss making installed OE engines

·     The increased level of net capitalised R&D contributed £173m more than the prior year driven primarily by the policy application change which was absent from H1 2017

·     These more than offset the impact of higher negative contract accounting adjustments, with a £(154)m impact in H1 vs £(90)m in the prior year

 

Interest

Interest and other financial costs marginally increased year-on-year by £1m to £65m. Net interest payable increased by £4m whilst other underlying financing costs reduced by £3m.

 

Taxation

Core underlying income statement tax charge was £22m vs a £6m credit in H1 2017, a core underlying rate of 27.2% compared with 4.8% in H1 2017.

 

Exceptional charge on Trent 1000

In H1 2018, an exceptional charge of £554m has been taken to the income statement. It reflects the income statement impact of the abnormal costs we are incurring to resolve the Trent 1000 in-service issues, which fall outside the scope of our normal TotalCare costs. The charge represents around 40% of the total cash costs expected to be incurred in resolving the Trent 1000 issues for the period to 2022 and is not incremental to them. The remainder of these costs will be recognised over time through our normal contract accounting margins. Cash costs on the Trent 1000 in-service issues will continue to be fully reflected in underlying free cash flow.

 

Exceptional restructuring charge

An exceptional restructuring charge of £179m was recognised in the first half (H1 2017: £31m), of which £47m relates to restructuring programmes that are already in place at Power Systems and Defence, reflecting actions to remove cost and improve operational efficiency. £132m relates to the cost of restructuring already disclosed at the Capital Markets Event and reflects the maturity of the restructuring plans. As we disclosed, the total cash cost to implement this restructuring is expected to be around £500m with approximately 25% of that in 2018 and the remainder in 2019 and 2020.

 

 

Summary funds flow: Group

£m	H1 2018	H1 2017	Change
Underlying profit before tax - Group	73	(143)	216
Depreciation & amortisation	313	331	(18)
Movement in net working capital	129	324	(195)
Expenditure on PPE & intangible assets	(669)	(599)	(70)
Other	128	(169)	297
Trading cash flow - Group	(26)	(256)	230
Taxation paid & pensions*	(46)	(83)	37
Free cash flow - Group	(72)	(339)	267
Of which: Free cash flow - Core business	10	(264)	274
Shareholder payments	(85)	(85)	-
Payment of financial penalties & other**	13	(262)	275
Foreign exchange	30	(20)	50
L'Orange disposal proceeds	584	-	584
Change in net funds	470	(706)

*Includes contributions to defined benefits pensions in excess of underlying PBT charge

**Includes net funds acquired/acquisitions and Other Items

 

Group free cash flow improvement of £211m versus prior year

Overall Group free cash flow improved materially in H1, with an outflow of £72m (H1 2017: £(339m)). Our core business generated free cash flow of £10m (H1 2017: £(264)m). The good year-on-year cash flow improvement was driven by increased cash flows in the Civil Aerospace aftermarket from strong growth in engine flying hours and T&M aftermarket activity, better deposit inflows at Defence and a more balanced profile of Civil spare engine deliveries in H1 versus H2 than in the prior year. These more than offset the increased level of R&D cash spend and higher cash costs incurred on Trent 1000 and Trent 900 in-service issues.

 

Working capital contribution

The working capital contribution was £129m positive to cash flow in H1, well below the prior year of £324m. Key drivers were the strong growth in engine flying hour receipts in advance of revenues being recognised, more than offsetting the growth in inventories in the period.  A full description of working capital movement is provided on page 21.

 

Payment to shareholders held flat at 4.6p per share

For H1 2018 the final payment to shareholders is held at 4.6 pence (H1 2017: 4.6 pence), a cash cost of £86m. Restoring our shareholder payments to an appropriate level over time as free cash flow grows will be a key capital allocation priority.

 

Group net debt

At H1 2018 the Group moved to a net cash position of £165m (2017 Full Year: £(305)m) largely reflecting the €673m proceeds from the sale of L'Orange which was completed on 1 June 2018, group free cash outflow of £72m and shareholder payments of £85m.

 

Credit rating

The Group is committed to maintaining a robust balance sheet with an investment-grade credit rating. We aim to maintain stable ratings in the single A rating. We believe that this is important for our customers given that we deliver high-performance products and support for equipment which will be in operation for decades. 

 

IFRS 15

Following transition to IFRS 15 on 1 January 2018 on a 'full retrospective' basis the financial results for both the current and comparative period are disclosed on an IFRS 15 basis. The impact of IFRS 15 on our accounting policies and our financial results in 2017 are shown on pages 28 and 45, respectively.

 

Foreign exchange

The Group hedges transactional foreign exchange exposures to reduce volatility of revenues and costs. The most significant exposure is net US dollar income which is converted into GBP (currently approximately $5-6bn per year and forecast to increase over time). The Group has a hedge book of $37.3bn (at an average rate of USD:GBP 1.55) covering this exposure. We expect the achieved £/$ hedge rate to remain unchanged at around USD:GBP 1.54 through to 2020.

 

Board update

During the first six months of the year we have appointed one new Non-Executive Director to the Board. Nick Luff was appointed with effect from the close of the Annual General Meeting on 3 May 2018 and joined the Nominations & Governance and Audit Committees.

 

 

Civil Aerospace overview

 

Financial overview

£m	H1 2018	H1 2017	Change	Organic change
Engine deliveries (volume)	365	308	+19%	+19%
Underlying revenue	3,600	2,858	+26%	+26%
Underlying OE revenue	1,530	1,151	+33%	+32%
Underlying services revenue	2,070	1,707	+21%	+22%
Underlying gross profit	148	137	+8%	+12%
Gross margin %	4.1%	4.8%	-70bps	-50bps
Commercial and administrative	(157)	(155)	+1%	+1%
Research and development cost	(152)	(280)	-46%	-46%
Joint ventures and associates	49	48	+2%	+6%
Underlying operating profit	(112)	(250)	138	149
Underlying operating margin %	-3.1%	-8.7%	+560bps	+590bps

 

Underlying revenue

£m	H1 2018	H1 2017	Change	Organic change
Original Equipment	1,530	1,151	33%	32%
Large engine	1,157	763	52%	51%
Business aviation	305	284	7%	5%
V2500	68	104	-35%	-35%
Services	2,070	1,707	21%	22%
Large engine	1,328	1,061	25%	25%
Business aviation	201	175	15%	18%
Regional	151	138	9%	14%
V2500	390	333	17%	17%

 

Underlying revenue increased 26% to 3,600m, reflecting growth in OE, up 32% to £1,530m, and in services, up 22% to £2,070m. This was driven by the continued ramp up of large engine production with deliveries growing to 259 from 209 in the prior year and strong year-on-year growth in spare engine OE sales to support the growing in-service fleet. Revenue growth from increased sales of spare engines to joint ventures contributed £141m to revenue growth in H1. The rise in OE deliveries includes higher sales of Trent 1000 engines for the Boeing 787 and Trent XWB, including the new Trent XWB-97 for the Airbus A350-1000, which entered into service earlier in the year.

 

Large engine service revenue increased 25% to £1,328m (H1 2017: £1,061m) driven by higher shop visit volumes, with 137 major LTSA shop visits (H1 2017: 91) as expected as a number of Trent 700 engine have had first overhauls combined with growth in spare parts sales and increased repair activity on engines not covered by LTSAs, notably RB211-535s.

 

Within business aviation, OE sales were 5% higher largely driven by increased engine sales to Bombardier and Gulfstream for large cabin aircraft. The 18% increase in service revenue reflects the impact of lower servicing costs for long-term support contracts which generated a positive contract accounting impact on revenue. The level of service activity on business aviation engines has remained broadly stable.

 

The 14% increase in regional revenue was driven by higher sales of spare parts to third party MRO bases. On the V2500, OE revenue was 35% lower, reflecting production slowdown on the Airbus A320ceo. The 17% increase in V2500 service revenue to £390m was driven by increased servicing and higher spare part sales. The payment from IAE for flying hours remained broadly stable.

 

 

 

 

 

Underlying operating profit

The underlying operating loss of £(112)m improved by £149m. Gross profit increased 12% to £148m with gross margins falling 50bps to 4.1%. Strong servicing activity driving increased spare part sales and higher profit from increased spare OE sales was partly offset by a materially higher negative impact from long-term contract assumption changes. Under long-term accounting, a variation in revenue or cost assumptions, up or down, can lead to contract accounting adjustments, positive or negative, for profits that have already been recognised over the life of a programme to date. In the period there was a negative contract accounting impact of £(154)m (2017: £(90)m) which comprised three components:

·     Life-cycle cost benefits of £19m primarily reflecting lower servicing costs for business aviation

·     Higher technical costs of £(71)m to reflect the reassessed costs of technical issues across various engine programmes including the additional inspection requirements on the Trent 1000

·     Higher costs of £(102)m reflecting the latest information around future aircraft utilisation patterns and the resultant effects on shop visit cost and efficiency

 

£m	H1 2018	H1 2017
Life-cycle costs	19	(14)
Technical costs	(71)	(9)
Operational changes	(102)	(67)
Total contract accounting adjustments	(154)	(90)

 

Investment in self-funded R&D rose by £44m, reflecting increased investment in the new family of engines for business aviation engines and next generation technology, including for the UltraFan demonstrator. This was more than offset by an increase in R&D capitalisation and amortisation of £174m largely reflecting the stage of capitalisation of a number of development programmes which were applied from H2 2017. Overall the expensed R&D charge in the first half reduced from £(280)m in 2017 to £(152)m in H1 2018. While C&A charges of £(157)m were 1% higher, this reflected higher restructuring costs. Excluding such restructuring, C&A costs were £1m lower year-on-year. Profit from joint ventures and associates of £49m was 6% higher due to higher shop visit volumes and a change in the mix of work in joint venture overhaul bases. 2017 profit from joint ventures included £8m from ITP Aero when it was a still a joint venture and reported within Civil Aerospace.

 

Trent 1000 in-service update

Since 2016, we have been undertaking a proactive maintenance programme on the Trent 1000 to address lower than expected durability of a small number of parts. This has caused disruption to customers which we sincerely regret. On 7 March 2018, with our FY 2017 results, we provided further detail as we progressed our understanding of the technical issues impacting compressor rotor blades, and intermediate and high pressure turbine blades within the Trent 1000. We reported that £119m of cash costs were incurred in 2017 in relation to accelerated maintenance activities on the Trent 1000.

 

At the time of our FY 2017 results, we provided details of the anticipated future annual cash impact of the in-service issues with the Trent 1000 and issues with the durability of high pressure turbine blades for Trent 900. The impact was expected to broadly double in 2018 from the £170m incurred in 2017 across both the Trent 1000 and Trent 900, before falling by around £100m in 2019. The majority of the work is expected to have been undertaken in 2018 and 2019 and be fully complete by 2022.

 

On 13 April 2018, we announced the decision to undertake more frequent inspections of the compressors of our fleet of 386 Trent 1000 Package C engines. This was followed by EASA and the FAA issuing airworthiness directives related to repeat inspection requirements for Package C compressors. We said that we would mitigate the incremental cash cost of this accelerated inspection regime by reprioritising various items of discretionary spend. On 11 June 2018 we reported that a similar durability issue had been identified on a small number of high life Package B engines and we had agreed with the regulatory authorities to carry out a one-off inspection of the whole fleet of 166 Package B engines. We have since agreed with the authorities to carry out a regular inspection regime which we will manage as part of our ongoing maintenance programme.

 

On 15 June 2018, at our Capital Markets Event, we reported that our current assessment was that the further issues encountered since our FY 2017 results could lead to combined additional 2018 cash costs for both the Trent 1000 and Trent 900 in-service issues of around £100m on top of the doubling we had already guided, thus taking the total to approximately £450m. We added that we had successfully enacted a number of short-term discretionary cost mitigation actions and free cash flow guidance for 2018 was maintained unchanged at around £450m +/- £100m.

 

Having provided updated guidance on the cost of these actions in 2018 at our Capital Markets Event in June we are now clarifying the incremental cost of this dynamic situation on 2019 and beyond. Our current assessment is that the combined cash cost of both the Trent 1000 and Trent 900 in-service issues will be at a similar level in 2019 to the approximately £450m we expect in 2018, before declining by at least £100m in 2020. We still expect to deliver an improvement in 2019 underlying core free cash flow compared to our guidance for 2018, marking a further step towards our 2020 free cash flow ambition. The cash costs of the Trent 1000 and Trent 900 issues are expected to step down materially after 2020, with all technical changes expected to be fully embodied into the Trent 1000 and Trent 900 fleets by 2022.

 

The Trent 1000 in-service engine issues have caused significant disruption for a number of our customers, which we sincerely regret. We continue to work hard to remedy this situation and have made further good progress on the implementation of long-term solutions in the first half of the year. We have significantly increased our Trent 1000 maintenance and overhaul capacity, sought ways to reduce engine shop visit turnaround times and have added approximately 50% more turbine blade capacity since the start of the year. We recently confirmed that we have now started certification testing of a redesigned intermediate compressor rotor blade for Trent 1000 Package C engines, with a redesign for Trent 1000 Package B engines to follow. In addition, as a precautionary measure, we have launched and, are in the process of testing, a redesign of the blade common to the Trent 1000 TEN and Trent 7000 engines. We continue to make good progress in addressing the other known issues affecting Trent 1000 engines.

 

Trent 1000 exceptional charge

In H1 2018, an exceptional charge of £554m has been taken to the income statement. It reflects the impact of the abnormal costs we are incurring to resolve the Trent 1000 in-service issues, which fall outside the scope of our normal TotalCare costs. The charge represents around 40% of the total cash costs expected to be incurred in resolving the Trent 1000 issues for the period to 2022 and is not incremental to them. The remainder of these costs will be recognised over time through our normal contract accounting margins. The treatment of such a charge as exceptional reflects a number of factors, primarily:

·     The unprecedented nature of the issues with the Trent 1000 - being a fleet-wide issue of an unusual and abnormal scale, impacting multiple airline customers and resulting in a significant level of aircraft on the ground

·     The fact that this technical issue has resulted in a number of separate airworthiness directives and non-modification service bulletins - a highly abnormal situation for Rolls-Royce

 

The costs which have been included in the exceptional charge cover those which we would not typically incur, such as responding to customer claims in connection with the significant disruption caused and wastage costs related to remediation shop visits, i.e. wasted material and labour to fulfil the contract that are not reflected in the price of the contract.

All other normal course of business costs associated with TotalCare service provision on Trent 1000 engines will continue to be expensed through the income statement within underlying profit in each financial period, in line with our normal contract accounting approach. Cash costs on the Trent 1000 in-service issues will continue to be fully reflected in underlying free cash flow.

 

Operational and strategic review 

The long term trends driving demand for growth in passenger aircraft remain strong, in particular, a growing aspirational and mobile middle-class. We continue to expect strong widebody airframe demand, with an increased focus on newer, more fuel-efficient aircraft, which will support our continued growth in market share and installed base, delivering strong service revenues for decades. The total widebody engines on order is 2,416. In H1 2018, there were 259 widebody engines delivered and 185 orders were placed, including 106 Trent XWB engines and 46 Trent 7000 engines.    

 

Our in-service large engine fleet grew by 4% in the first half to 4,567 and wide-body engine flying hours increased 20%, driven by growth in our Trent 700, Trent 1000 and Trent XWB fleets. The Trent 700 fleet, which now represents 35% of our in-service fleet with over 1,600 engines in service, achieved its 50 millionth flying hour in June. The Trent 700 engine which is known for its dependability and has become the engine of choice for Airbus A330ceo customers, helping us increase our in-service widebody passenger aircraft market share from 14% in 1995, when it was introduced, to 34% today. Our Trent XWB-84, which now represents 8% of our in-service widebody fleet, and has achieved over 2 million flying hours with excellent levels of reliability. With over 1,300 engines on order, our Trent XWB engines will be a key driver of the continued growth in our market share to over 50% in the early 2020's.

 

Our strong position in new widebody aircraft was underpinned by progress with three new engines in the period. We powered the first test flight and entry into service of the Boeing 787-10 Dreamliner with delivery of the first Trent 1000 TEN powered Boeing 787-10 to Singapore Airlines. The Trent XWB-97 is now powering three Airbus A350-1000 aircraft with full ETOPs capability and we achieved full certification of the Trent 7000 which will power the Airbus A330neo, with entry into service expected later this summer.

 

We have seen positive signs of recovery in the business aviation market and are well placed to respond with our new family of engines, launched earlier this year with the announcement of the Pearl 15, which will power the new Bombardier Global 5500 and Global 6500 aircraft. This supports our strategy of regaining market share and reaffirms our position as the top engine supplier in the long range, large cabin sector of the market.

 

We have made good progress on our future technology programmes, including successfully starting icing tests on our new lean burn and low emission combustion system (ALECSys), which will be used in our UltraFan engine, as well as running our Advance3 engine demonstrator at full power for the first time. 

 

We have taken steps to increase our capacity for engine testing in the first half. We signed a lease with American Airlines for a testbed in Texas which will be used for endurance testing on large engines. We also entered into an agreement with Thai Airways International to support maturity testing on our Trent XWB engines. In addition, we have started work to support the construction of a new testbed in Derby which will provide testing capability for the next generation of engines.

 

We continue to design and deliver new digital services for our customers, under the banner of our IntelligentEngine vision. With the support of our newly-established R² DataLabs team we are able to combine our pioneering technology with advancements in the digital realm to deliver greater reliability, efficiency and value for our customers.

 

 

 

 

Defence overview

 

Financial overview

£m	H1 2018	H1 2017	Change	Organic change
Aero engine deliveries (volumes)	258	273	-5%	-5%
Underlying revenue	1,415	1,478	-4%	-
Underlying OE revenue	608	629	-3%	+1%
Underlying services revenue	807	849	-5%	-1%
Underlying gross profit	281	292	-4%	+1%
Gross margin %	19.9%	19.8%	+10bps	+30bps
Commercial and administrative	(77)	(83)	-7%	-5%
Research and development cost	(44)	(32)	+38%	+41%
Joint ventures and associates	2	3	-33%	-33%
Underlying operating profit	162	180	-10%	-3%
Underlying operating margin %	11.4%	12.2%	-80bps	-40bps

 

Underlying revenue

Underlying revenue of £1,415m was broadly flat compared to the prior year on a constant currency basis.  OE revenue remained broadly unchanged as combat volumes reduced after the completion of the Oman EJ200 production contract in 2017. This was offset by increased demand for transport engines such as the Multi-Role Tanker Transport (MRTT) aircraft and AE2100 variants and an OE contract for the UK's Dreadnought submarine programme. Service revenue was largely flat as increased Long Term Service Agreement (LTSA) revenues driven by EJ200 and Adour were offset by lower service revenue related to the phasing of work on UK submarines. 

 

Underlying operating profit

Underlying operating profit of £162m was £6m lower than the prior year. Gross profit of £281m grew 1% driven by increased sales of MRTT engines and higher LTSA margin improvements of £28m (2017: £21m). This is reflective of cost improvements and increased flying hours on combat and patrol contracts, partially offset by lower OE combat volumes and lower margin on a bridging contract following completion of a submarine service agreement in the prior year.

 

An increase in R&D spend of £13m largely reflects ongoing future programmes across our Defence portfolio. C&A costs were £4m lower as a result of actions taken across the business to manage discretionary spend.

 

Operational and strategic review

Following the Group's restructuring announcement in January of this year, Tom Bell, previously Global Sales & Marketing for Defense, Space & Security at The Boeing Company, was appointed to lead the enlarged Defence business comprising Defence Aerospace, Submarine and Naval operations. During the first six months, meaningful progress has been made on integration in order to identify and pursue cost efficiency, leveraging our technology and operational experience across this enlarged business to provide integrated solutions to better serve our customers.

 

As part of this restructuring, Defence has streamlined to a five-layer organisation from top to bottom, focused upon Defence Programmes, Services and Submarine activities with aligned functional support. Opportunities have been actively pursued to incorporate elements of work previously done by central functions. An example of this is a move to combine the former head office function of the US Government Relations and the US Customer Business team within Defence in order to better serve one of the business' key customers. 

 

Outlook for full year orders is positive, with a strong pipeline of expected opportunity in Combat, Naval and Submarines. Orders secured in the first half of 2018 reflect activity across markets to secure aftermarket contract renewals such as with the US Department of Defense to support in-service fleets, ongoing work related to the UK's submarine programmes and other smaller contracts. Notable orders include £300m of contracts in Submarines representing orders for decommissioning, development and sustainment activity in the near-term, and a sustainment agreement worth up to $420m over six years to support both US Air Force and Navy AE3007H engines. This is part of our innovative public-private partnership first formed in 2016 at Tinker Air Force Base in Oklahoma, US, which enables closer collaboration with our customer to maximise engine availability.

 

Naval continues to see good demand for its MT30 marine gas turbine with an initial MT30 powered Daegu-class frigate delivered to the Republic of Korea Navy, marking the first deployment of this engine outside the UK and US markets. In June, Japan was the fifth nation to select the MT30 engine for a major naval ship programme, while the Australian government's selection of the Type 26 Global Combat Ship as the preferred design for the SEA 5000 Future Frigate program presents further opportunity to provide a naval propulsion system with the MT30 engine at its core.

 

Operationally, there was solid progress across Defence. LiftSystem™ continued its good in-service fleet performance with the Royal Air Force deploying the first four F-35B Lightning II aircraft to the UK. EJ200 production volumes remain at a lower level; although the expectation remains for further orders following agreement of a contract to purchase 24 aircraft in December 2017 from the State of Qatar, and the signing of a memorandum of understanding to purchase a second batch of 48 aircraft for the Kingdom of Saudi Arabia.

 

We continue positioning the business to maximise the strengths of our teams to develop strong long-term relationships with current and future customers. This includes the modernisation of the Indianapolis facility, which continues on track to achieve its 2018 milestones, including substantial completion of construction and refurbishment and a quarter of manufacturing relocation. In addition, the business made good progress towards securing a substantive role to deliver a new combat power and propulsion system through its position as one of four partner companies in Team Tempest, a collaboration set up to explore a range of concepts as part of UK's Future Combat Air strategy. The signature of a contract during the Farnborough Airshow allows us to further advance our combat R&D activities and mature key next generation power and propulsion capabilities.

 

 

 

 

 

 

 

Power Systems overview

 

Financial overview

£m	H1 2018	H1 2017	Change	Organic change
Underlying revenue	1,471	1,275	+15%	+13%
Underlying OE revenue	945	814	+16%	+14%
Underlying services revenue	526	461	+14%	+12%
Underlying gross profit	354	283	+25%	+23%
Gross margin %	24.1%	22.2%	+190bps	+180bps
Commercial and administrative	(188)	(172)	+9%	+8%
Research and development cost	(86)	(84)	+2%	0%
Joint ventures and associates	-	(1)	n/a	n/a
Underlying operating profit	80	26	+208%	+193%
Underlying operating margin %	5.4%	2.0%	+340bps	+330bps

 

Underlying revenue

Underlying revenue was £1,471m, an increase of 13%. This excludes L'Orange which is now treated as non-core following its disposal in June. OE rose 14% with good growth in almost all segments, notably led by improved commodity end markets, Medium Speed Land, Rail and Marine / Government project wins. Power Generation was the only end market not to experience growth in H1, solely due to the tough comparison base after the high level of demand seen in 2017 from Chinese Telecoms related sales. Services revenue increased 12% with improved commodity markets driving higher engine running hours and hence improved spare parts and engine remanufacturing demand, particularly in the US.

 

Underlying operating profit

Overall, excluding L'Orange, underlying operating profit rose by £52m to £80m, 193% growth, reflecting the benefits of higher volumes. This also drove an increase in gross margin, up 180bps to 24%.

 

C&A costs were 8% higher with pay escalation not yet offset by headcount changes, together with phasing differences compared to 2017. Ongoing discipline around R&D investment saw costs held broadly flat despite continued investment in future engine platforms and in support of our electrification strategy and engineering capabilities.

 

Operational and strategic review

In the first half of 2018, market conditions remained robust across Power Systems' diverse end-markets. There was continued demand in Power Generation, particularly for diesel powered solutions to support infrastructure projects in emerging markets and for gas-engine power solutions driven by increasing availability of gas and requirements for fast response capability to support time-critical operations. Industrial end markets remain supported by higher commodity prices and rising demand for solutions tailored to offshore wind markets, however challenges remain in offshore markets, and Civil Nuclear faced some headwinds from project delays.

 

Order intake was up year-on-year primarily driven by the recovery of key markets, such as Oil & Gas, Mining and Agriculture, and also as some customers brought forward their orders into 2018 ahead of new emissions standards coming into effect in 2019. Bergen land engines are notable as all sales year-to-date have been accompanied by long term service contracts, contributing to further growth in services. Demand for Power Generation also continued to grow driven by an agreement signed in July to deliver 475MW of backup capacity for Chile's national electricity grid as part of a consortium led by TSK. Continued strong interest from naval customers has generated a pipeline of opportunity. Our confidence in full year delivery is underpinned by over 80% order coverage for the full year compared to circa 70% at the same time in the prior year.

 

Following the Group's restructuring announcement in January of this year, Power Systems has achieved milestones such as the integration of the Civil Nuclear operations and also completed the sale of L'Orange, a fuel injector business, to Woodward Inc. for total proceeds of €673m. L'Orange will remain an important partner and supplier for Power Systems in the future through a long-term supply agreement. Other key activities include projects to enable greater digitalisation, increasing fleet connectivity to support growth in the level of long-term Value Care Agreements (VCA) covering our in-service engines. This demonstrates the strong drive from the leadership team to transform the business into a solutions-provider and achieve a greater share of the engine service opportunity.

 

The business is implementing MTU customer service 4.0, a service and digital strategy to transform the Power Systems service and distribution networks is focused on improving customer interfaces such as the opening of a new Customer Care Centre's based in Friedrichshafen, Novi in the US, and Singapore. The recent launch of pilot programmes will explore concepts for both the Factory of the Future and Service of the Future, informing how the business will align its internal processes more closely to meet customer needs. This highlights the commitment by the business to achieving strengthened service offerings and is complemented by further optimisation of inventory levels to increase availability of spare parts at the point of sale beyond 80%.

 

Good progress has been made to establish production capability in lower cost locations closer to key end markets. In early 2018, the joint venture MTU Yuchai Power began localised production of the MTU Series 4000 diesel engines under license as the business took receipt of the first engine from the production line in the city of Yulin, China, and production continues to ramp up. In April, an agreement was signed with Goa Shipyard Limited to assemble Series 8000 engines, further reinforcing a commitment to 'Make in India' after an earlier agreement to assemble Series 4000 naval engines in the country.

 

R&D activity focused on delivering efficient and disciplined investment in the current and future product portfolio. The business continued to reprioritise its product roadmap, with a reduction in product variants of around 30% achieved since 2015, and positioning of future products towards growth markets to reflect the structural shift away from traditional engine solutions. Investments focused on hybrid and gas technology with the first prototype of a 1MWh battery storage container for micro-grid solutions or off-grid power supply, while the launch of the pioneering Series 4000 marine gas engine demonstrates our capability to enable operators to meet stringent emissions regulation.

 

ITP Aero overview

 

Financial overview

£m	H1 2018	H1 2017*	Change	Organic change
Underlying revenue	375	309	+21%	+19%
Underlying OE revenue	336	-	-	-
Underlying services revenue	39	-	-	-
Underlying gross profit	85	50	+70%	+67%
Gross margin %	22.7%	16.2%	+650bps	+650bps
Commercial and administrative	(31)	-	-	-
Research and development charge	(14)	-	-	-
Joint ventures and associates	-	-	-	-
Underlying operating profit	40	8	+400%	+400%
Underlying operating margin %	10.7%	2.6%	+810bp	+820bps

* ITP Aero was acquired on 19 December 2017. Prior year comparatives are unaudited and are presented for comparison purposes only

 

Underlying revenues

Underlying revenue was £375m, an increase of 19% versus H1 2017. Growth was led by higher engine volumes, with significant ramp-up across various Civil Aerospace programmes in ITP Aero's portfolio. Civil Aerospace aftermarket growth was strong, with Defence sales modestly lower and flat revenues in MRO and services.

 

Underlying operating profit

Operating profit of £40m was a £32m improvement versus H1 2017 driven by significantly improved gross margins. Civil Aerospace was the key driver of progress driven mostly by Rolls-Royce programmes, with a combination of higher volumes, improved mix of engine types and a better aftermarket performance.

 

Operational and strategic review

The long-term trends driving demand for growth in passenger aircraft remain strong. The business continues to expect strong airframe demand for both narrow and wide body aircraft, with an increased focus on newer more fuel efficient aircraft. This, coupled with ITP Aero's presence on newly launched platforms which are currently ramping up, provides a solid base for ongoing growth, particularly in Civil Aerospace.

  

The business continued to deliver good operational progress underpinning production ramp-up. Production volumes have now reached a record level, driven by the considerable increases across Rolls-Royce and Pratt & Whitney civil engine programs, with a solid volume base from GE and Honeywell and also at Defence. In order to support this growth, we have continued to successfully execute on its capital investment plans, with expansion of production facilities in Spain and Mexico and across various products including turbo-machinery, externals and castings.

 

Execution continued on our Research & Technology plan, which includes among others, new technologies for future low pressure turbines (both conventional and high speed designs suitable for use in future geared drive systems). We also continue to invest in advanced manufacturing processes, including additive manufacturing and digitalisation.

 

Financial review

Reported results

The changes resulting from underlying trading are described on pages 7 to 18.

Consistent with past practice and IFRS, we provide both reported and underlying figures. As the Group does not generally hedge account for forecast transactions in accordance with IFRS 9 Financial Instruments, we believe underlying figures are more representative of the trading performance by excluding the impact of year-end mark-to-market adjustments. In particular, the USD:GBP hedge book has a significant impact on the reported results. In 2018, the USD:GBP rate fell from 1.35 to 1.32 while the EUR:GBP remained stable at 1.13. The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the condensed consolidated financial statements. This basis of presentation has been applied consistently. 

	Reconciliation between underlying and reported results
	Six months to 30 June	Revenue		Profit before financing		Financing		Profit/(loss) before tax
	£m	2018	2017	2018	2017	2018	2017	2018	2017
	Underlying	7,040	6,041	141	(84)	(68)	(59)	73	(143)
1	Revenue recognised at exchange rate on date of transaction	447	615	-	-	-	-	-	-
1, 2	Mark-to-market adjustments on derivatives and related foreign exchange adjustments	-	-	103	78	(786)	1,604	(683)	1,682
3	Trent 1000 exceptional charge	-	-	(554)	-	-	-	(554)	-
4	Effects of acquisition accounting	-	-	(124)	(62)	-	-	(124)	(62)
5	Exceptional restructuring	-	-	(179)	(31)	-	-	(179)	(31)
6	Disposal of L'Orange	-	-	358	-	-	-	358	-
7	Impairments of Commercial Marine	-	-	(160)	-	-	-	(160)	-
	Other	-	-	(2)	(4)	9	2	7	(2)
	Reported	7,487	6,656	(417)	(103)	(845)	1,547	(1,262)	1,444

 

The most significant items included in the reported income statement, but not in underlying are summarised below.

¹     The impact of measuring revenues and costs at spot rates rather than achieved hedge rates increased revenues by £447m (2017: £615m) and profit before financing by £103m (2017: £78m).

² There was a mark to market loss on the Group's hedge book of £854m (2017: gain of £1,407m).  These reflect: the large hedge book held by the Group (eg USD $37bn); and the weakening of sterling, against the US dollar.  At each period end, our foreign exchange hedge book is included in the balance sheet at fair value ('mark to market') and the movement in the year included in reported financing costs.

  Adjustments are also included to recognise the gain on derivatives settled during the period (2018: £240m, 2017: £342m) and the impact of valuation of assets and liabilities using the spot exchange rate rather than the exchange rate that is expected to be achieved by the use of the hedge book.   

³ As described on page 8 and the accounting policy on page 28, the exceptional charge relating to the Trent 1000 aero engine has been excluded from the underlying results.

⁴     The effects of acquisition accounting £124m (2017: £62m) principally relate to the amortisation of intangible assets arising on the acquisition of Power Systems in 2013 and ITP Aero at the end of 2017.

⁵     Exceptional restructuring costs of £179m (2017: £31m).  These are costs associated with the substantial closure or exit of a site, facility or activity related to the significant transformation project that the business is currently undertaking. A number of the projects within the transformation programme are spread over several years. Of the 2018 costs £132m relates to the Group Restructure announced in June 2018.

⁶ The disposal of L'Orange in June 2018 gave rise to a gain of £358m.

⁷ As described on page 4, the sale of the Commercial Marine business was announced on 6 July. It has been reclassified as 'held for sale', and written down to its expected disposal value, resulting in a loss of £160m.   

Appropriate tax rates are applied to these additional items included in the reported results, leading to an additional tax credit of £327m (2017: charge £267m), the most significant components being the mark to market adjustments (tax effect £134m and £(249)m in 2018 and 2017 respectively), the effect of acquisition accounting (tax effect £52m and £18m in 2018 and 2017 respectively), and the abnormal Trent 1000 costs (tax effect £100m in 2018). In 2018, a gain of £54m was also recognised in respect of changes in the Basque tax rates, applying to ITP Aero.

Funds flow

Summary funds flow statement 1	Half-year to 30 June
£m	2018	2017	Change
Opening net (debt)/funds	(305)	(225)
Closing net funds/(debt)	165	(931)
Change in net funds	470	(706)
Underlying profit before tax	73	(143)	216
Depreciation and amortisation	313	331	(18)
Movement in net working capital	129	324	(195)
Expenditure on property, plant and equipment and intangible assets	(669)	(599)	(70)
Other	128	(169)	297
Trading cash flow	(26)	(256)	230
Contributions to defined benefit pensions in excess of underlying PBT charge	31	(12)	43
Taxation paid	(77)	(71)	(6)
Free cash flow	(72)	(339)	267
Shareholder payments	(85)	(85)	-
Disposal of L'Orange	584	-	584
Other acquisitions and disposals	13	5	8
Payment of financial penalties	-	(267)	267
Foreign exchange	30	(20)	50
Change in net funds	470	(706)

¹   The derivation of the summary funds flow statement above from the reported cash flow statement is included on page 44.

Movement in working capital - There was a £129m contribution to free cash flow from lower working capital in H1. The main drivers of this were:

·     inventories rose by £427m due to volume growth in Civil and Power Systems and the phasing of product deliveries in Defence;

·     trade and other receivables increased £300m primarily driven by an increase in risk and revenue sharing partner related debtor balances in Civil; and

·     trade and other payables rose by £997m due to phasing ahead of the H2 volume ramp up at Power Systems, underlying volume growth in Civil and a £715m increase in long term contract creditor balance in Civil, reflecting growth in EFH cash receipts in advance of revenues being recognised and the negative £154m prior year contract catch up adjustment.

Expenditure on property, plant and equipment and intangibles:

 

Expenditure on:

·   intangible assets of £327m intangible assets includes £241m of development costs on the Trent 1000/XWB/7000 and Pearl and software; and

·   property plant and equipment of £343m, largely investment in industrial footprint and IT infrastructure spend.

Pensions - The 2017 UK triennial actuarial valuation has reduced the contributions in the first half of 2018 by £43m; this includes the impact of a switch to making cash contributions quarterly in arrears, a one off cash flow saving in 2018.

Shareholder payments - There was no change between the 2016 and 2017 interim payments (paid in the following year).

Acquisitions and disposals - the L'Orange business (part of the Power Systems segment) was sold on 1 June 2018.

Payment of financial penalties - following the agreements reached with investigating authorities in January 2017, £286m of penalties were paid in the UK, US and Brazil. Further UK payments of £378m (plus interest) will be made in 2019-2021.

Balance sheet

Summary balance sheet £m	30 June 2018	31 December 2017			Change excluding L'Orange  and Commercial Marine
		Excluding L'Orange and Commercial Marine	L'Orange and Commercial Marine	Total
Intangible assets	5,266	5,098	567	5,665	168
Property, plant and equipment	4,494	4,482	190	4,672	12
Joint ventures and associates	717	688	-	688	29
Net working capital1	(7,082)	(7,132)	83	(7,049)	50
Net funds2	165	(305)	-	(305)	470
Provisions	(1,625)	(816)	(52)	(868)	(809)
Net post-retirement scheme surpluses/(deficits)	1,215	793	(55)	738	422
Net financial assets and liabilities2	(3,226)	(2,640)	-	(2,640)	(586)
Held for sale (Commercial Marine)	366	-	7	7	366
Other net assets and liabilities3	480	305	(2)	303	175
Net assets	770	473	738	1,211	297
Other items
US$ hedge book (US$bn)	37.3			38.5
Civil LTSA asset	1,215			1,044
Civil LTSA liability	(5,318)			(4,603)
Civil net LTSA liability4	(4,103)			(3,559)

 

 

 

¹   Net working capital includes inventories, trade and other receivables, trade and other payables and current tax assets and liabilities.

² Net funds includes £220m (2017: £227m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.

³ Other includes other investments and deferred tax assets and liabilities.

⁴ In December 2017 we disclosed a provisional LTSA net creditor of £3.5bn. In finalising our IFRS 15 reporting we have analysed all balance sheet items classifying RRSP prepayments and other smaller balances out of the LTSA liability balance^. 

Excluding L'Orange and Commercial Marine:

Intangible assets: (page 37), increase of £168m. Additions of £327m (including £241m of development costs) were partially offset by amortisation of £165m.

Property, plant and equipment: (page 38) increase of £12m. Additions of £241m are largely offset by depreciation of £244m.

Investments in joint ventures and associates: increase of £29m. This includes the Group's share of retained profit of £6m and exchange benefits of £15m.

Movements in net funds are shown on page 26.

Net working capital: increase of £50m.The £129m contribution to funds flow described on the previous page was offset by a reduction of £240m in the liability to Sener for the ITP Aero acquisition, which has been settled by the issue of ordinary shares. Other differences largely relate to movements on capital creditors.

Provisions: increased of £809m. This is largely due to the Trent 1000 provision of £649m (technical issues) and restructuring provision of £130m relating to the group restructuring programme.

Net post-retirement scheme surpluses: (page 40) increase of £422m (UK £411m, Overseas £11m). The UK increase in the surplus is primarily the result of plan assets outperforming the change in value of liabilities measured on an IAS 19 basis.

Net financial assets and liabilities: (page 39) reduction of £586m.  These principally relate to the fair value of foreign exchange, commodity and interest rate contracts. The movement primarily relates to an adverse mark to market movement on the foreign exchange book of £854m, offset by contracts settled of £237m.   All contracts continue to be held for hedging purposes. 

The US$ hedge book at $37.3bn remain broadly stable as contracts settled were replaced with new contracts.

 

L'Orange and Commercial Marine

L'Orange was sold on 1 June 2018 and, following the announcement of the anticipated sale of Commercial Marine, it has been classified as held for sale. Consequently, amounts for these businesses are not included in the 2018 balance sheet categories. To provide a more meaningful comparison, they have also been excluded from the 31 December 2017 balance sheet.

 

 

Condensed consolidated half-year financial statements

Condensed consolidated income statement

For the half-year ended 30 June 2018

						Half-year	Restated* Half-year	Restated* Year to
						to 30 June	to 30 June	31 December
						2018	2017	2017
				Notes		£m	£m	£m
Revenue				2		7,487	6,656	14,814
Cost of sales						(7,231)	(5,801)	(12,514)
Gross profit				2		256	855	2,300
Commercial and administrative costs				2		(723)	(552)	(1,222)
Research and development costs				3		(360)	(457)	(843)
Share of results of joint ventures and associates						52	51	131
Operating (loss)/profit						(775)	(103)	366
Gain arising on the acquisition of ITP Aero				14		--	-	1,066
Gain arising on the disposal of L'Orange				14		358	-	-
(Loss)/profit before financing and taxation						(417)	(103)	1,432
Financing income				4		106	1,648	2,911
Financing costs				4		(951)	(101)	(164)
Net financing						(845)	1,547	2,747
(Loss)/profit before taxation 1						(1,262)	1,444	4,179
Taxation				5		302	(272)	(515)
(Loss)/profit for the period						(960)	1,172	3,664
Attributable to:
Ordinary shareholders						(962)	1,172	3,663
Non-controlling interests						2	-	1
(Loss)/profit for the period						(960)	1,172	3,664
Earnings per ordinary share attributable to ordinary shareholders				6
Basic						(52.03)p	63.90p	199.73p
Diluted						(52.03)p	63.80p	199.08p
Underlying earnings per ordinary share are shown in note 6.
Payments to ordinary shareholders in respect of the period				7
Pence per share						4.6p	4.6p	11.7p
Total						86	85	216
1 Underlying profit before taxation				2		73	(143)	199

²   Included within cost of sales and commercial and administrative costs are exceptional charges in respect of costs relating to the Trent 1000 Civil Aerospace programme and restructuring costs, respectively. Further details can be found in note 2.

* The prior period has been restated for IFRS 15 Revenue from Contracts with Customers, an interim update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 16 for more details.

Condensed consolidated statement of comprehensive income

For the half-year ended 30 June 2018

				Half-year	Restated* Half-year	Restated * Year to
				to 30 June	to 30 June	31 December
				2018	2017	2017
			Notes	£m	£m	£m
(Loss)/profit for the period				(960)	1,172	3,664
Other comprehensive income (OCI)
Movements in post-retirement schemes			11	451	(112)	735
Share of OCI of joint ventures and associates				-	(1)	(1)
Related tax movements				(154)	42	(307)
Items that will not be reclassified to profit or loss				297	(71)	427
Foreign exchange translation differences on foreign operations				47	(55)	(136)
Reclassification to income statement on disposal of business				(19)	-	-
Share of OCI of joint ventures and associates				8	(3)	(5)
Related tax movements				-	1	1
Items that may be reclassified to profit or loss				36	(57)	(140)
Total comprehensive (expense)/income for the period				(627)	1,044	3,951
Attributable to:
Ordinary shareholders				(629)	1,044	3,950
Non-controlling interests				2	-	1
Total comprehensive (expense)/income for the period				(627)	1,044	3,951

 

* The prior period has been restated for IFRS 15 Revenue from Contracts with Customers, an interim update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 16 for more details.

 

 

 

Condensed consolidated balance sheet

At 30 June 2018

		30 June	Restated* 31 December
		2018	2017
	Notes	£m	£m
ASSETS
Intangible assets	8	5,266	5,665
Property, plant and equipment	9	4,494	4,672
Investments - joint ventures and associates		717	688
Investments - other		27	26
Other financial assets	10	409	610
Deferred tax assets		938	842
Post-retirement scheme surpluses	11	2,521	2,125
Non-current assets		14,372	14,628
Inventories		4,065	3,888
Trade and other receivables		6,363	6,341
Taxation recoverable		9	17
Other financial assets	10	47	36
Short-term investments		7	3
Cash and cash equivalents		4,379	2,953
Current assets		14,870	13,238
Assets held for sale	14	829	7
TOTAL ASSETS		30,071	27,873
LIABILITIES
Borrowings		(797)	(82)
Other financial liabilities	10	(768)	(601)
Trade and other payables		(10,183)	(11,653)
Current tax liabilities		(141)	(209)
Provisions for liabilities and charges 1		(843)	(495)
Current liabilities		(12,732)	(13,040)
Borrowings		(3,644)	(3,406)
Other financial liabilities	10	(2,694)	(2,458)
Trade and other payables		(7,195)	(5,433)
Deferred tax liabilities		(485)	(565)
Provisions for liabilities and charges 1		(782)	(373)
Post-retirement scheme deficits	11	(1,306)	(1,387)
Non-current liabilities		(16,106)	(13,622)
Liabilities associated with assets held for sale	14	(463)	-
TOTAL LIABILITIES		(29,301)	(26,662)
NET ASSETS		770	1,211
EQUITY
Called-up share capital		374	368
Share premium account		435	195
Capital redemption reserve		162	162
Cash flow hedging reserve		(103)	(112)
Other reserves		687	660
Retained earnings		(804)	(65)
Equity attributable to ordinary shareholders		751	1,208
Non-controlling interests		19	3
TOTAL EQUITY		770	1,211

 

* The prior period has been restated for IFRS 15 Revenue from Contracts with Customers, an interim update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 16 for more details.

¹ Explanation for the movement in provisions for liabilities and charges can be found on page 21.

 

 

Condensed consolidated cash flow statement

For the half-year ended 30 June 2018

	Notes	Half-year to 30 June 2018 £m	Restated* Half-year to 30 June 2017 £m	Restated* Year to 31 December 2017 £m
Reconciliation of cash flows from operating activities
Operating (loss)/profit		(775)	(103)	366
Loss on disposal of property, plant and equipment		(11)	6	11
Share of results of joint ventures and associates		(52)	(51)	(131)
Dividends received from joint ventures and associates		46	28	79
Amortisation and impairment of intangible assets	8	325	172	345
Depreciation and impairment of property, plant and equipment	9	239	221	450
Impairment of investments		-	-	14
Increase/(decrease) in provisions		814	(30)	77
Increase in inventories		(427)	(428)	(196)
Increase in trade and other receivables		(287)	(482)	(291)
Decrease in amounts payable for financial penalties from agreements with investigating bodies		-	(267)	(286)
Other increase in trade and other payables		997	1,374	1,893
Cash flows on other financial assets and liabilities held for operating purposes		(261)	(340)	(663)
Net defined benefit post-retirement cost recognised in profit before financing	11	118	118	240
Cash funding of defined benefit post-retirement schemes	11	(87)	(130)	(249)
Share-based payments		22	15	33
Net cash inflow from operating activities before taxation		661	103	1,692
Taxation paid		(77)	(71)	(180)
Net cash inflow from operating activities		584	32	1,512
Cash flows from investing activities
Additions of unlisted investments		(4)	-	(4)
Additions of intangible assets	8	(327)	(213)	(647)
Disposals of intangible assets		2	-	7
Purchases of property, plant and equipment	9	(343)	(389)	(801)
Government grants received		1	3	14
Disposals of property, plant and equipment		60	9	4
Acquisition of business		-	-	263
Consolidation of previously unconsolidated subsidiary		-	-	1
Reclassification of joint operations to subsidiaries		4	-	-
Disposal of business	14	584	-	-
Other investments in joint ventures and associates		-	(8)	(48)
Net cash outflow from investing activities		(23)	(598)	(1,211)
Cash flows from financing activities
Repayment of loans	10	(5)	(5)	(166)
Proceeds from increase in loans and finance leases		969	280	366
Capital element of finance lease payments		(8)	(1)	-
Net cash flow from increase in borrowings and finance leases		956	274	200
Interest received		11	3	14
Interest paid		(47)	(36)	(64)
Interest element of finance lease payments		-	-	(3)
Increase in short-term investments		(4)	-	-
Issue of ordinary shares (net of expenses)		-	20	21
Purchase of ordinary shares - other		-	(22)	(24)
Redemption of C Shares		(85)	(85)	(214)
Net cash inflow/(outflow) from financing activities		831	154	(70)
Change  in cash and cash equivalents		1,392	(412)	231
Cash and cash equivalents at 1 January		2,933	2,771	2,771
Exchange gains/(losses) on cash and cash equivalents		33	(25)	(69)
Cash and cash equivalents at period end **		4,358	2,334	2,933

 

*     The prior period has been restated for IFRS 15 Revenue from Contracts with Customers, an interim update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 16 for more details.

**    The Group considers overdrafts (repayable on demand) to be an integral part of its cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement.

Condensed consolidated cash flow statement continued

	Half-year to 30 June 2018 £m	Restated* Half-year to 30 June 2017 £m	Restated* Year to 31 December 2017 £m
Reconciliation of movements in cash and cash equivalents to movements in net funds
Change in cash and cash equivalents	1,392	(412)	231
Cash flow from increase in borrowings and finance leases	(956)	(274)	(200)
Cash flow from increase in short-term investments	4	-	-
Change in net funds resulting from cash flows	440	(686)	31
Net funds (excluding cash and cash equivalents) on acquisition of ITP Aero	-	-	(34)
Net funds (excluding cash and cash equivalents) of previously unconsolidated subsidiary	-	--	(18)
Exchange gains/(losses) on net funds	30	(20)	(59)
Fair value adjustments	7	56	131
Movement in net funds	477	(650)	51
Net funds at 1 January excluding the fair value of swaps	(532)	(583)	(583)
Net funds at period end excluding the fair value of swaps	(55)	(1,233)	(532)
Fair value of swaps hedging fixed rate borrowings	220	302	227
Net funds at period end	165	(931)	(305)

 

The movement in net funds (defined by the Group as including the items shown below) is as follows:

	At 1 January 2018 £m	Funds flow £m	Exchange differences £m	Fair value adjustments £m	Reclass- ifications* £m	At 30 June 2018 £m
Cash at bank and in hand	838	17	4	-	4	863
Money market funds	589	641	3	-	-	1,233
Short-term deposits	1,526	731	26	-	-	2,283
Cash and cash equivalents (as per reported balance sheet)	2,953	1,389	33	-	4	4,379
Overdrafts	(20)	(1)	-	-	-	(21)
Cash and cash equivalents (per cash flow statement)	2,933	1,388	33	-	4	4,358
Short-term investments	3	4	-	-		7
Other current borrowings	(39)	5	-	8	(724)	(750)
Non-current borrowings	(3,292)	(969)	1	(1)	724	(3,537)
Finance leases	(137)	8	(4)	-	-	(133)
Financial liabilities	(3,468)	(956)	(3)	7	-	(4,420)
Net funds excluding the fair value of swaps	(532)	436	30	7	4	(55)
Fair value of swaps hedging fixed rate borrowings	227			(7)		220
Net funds	(305)	436	30	-	4	165

*  Reclassifications relate predominantly to the movement of non-current borrowings to current borrowings as maturity dates approach.

Condensed consolidated statement of changes in equity

For the half-year ended 30 June 2018

	Attributable to ordinary shareholders
	Share capital	Share premium	Capital redemption reserve		Cash flow hedging reserve		Other reserves 2	Retained earnings 3	Total		Non-controlling interests		Total equity
	£m	£m	£m		£m		£m	£m	£m		£m		£m
At 1 January 2017 as previously reported	367	181	162		(107)		814	445	1,862		2		1,864
Impact of adopting IFRS 15 1	-	-	-		-		(19)	(4,445)	(4,464)		-		(4,464)
Other  1	-	-	-		-		-	43	43		-		43
At 1 January 2017 restated 1	367	181	162		(107)		795	(3,957)	(2,559)		2		(2,557)
Profit for the period	-	-	-		-		-	3,663	3,663		1		3,664
Foreign exchange translation differences on foreign operations	-	-	-		-		(136)	-	(136)		-		(136)
Movement on post-retirement schemes	-	-	-		-		-	735	735		-		735
Share of other comprehensive income of joint ventures and associates	-	-	-		(5)		-	(1)	(6)		-		(6)
Related tax movements	-	-	-		-		1	(307)	(306)		-		(306)
Total comprehensive income for the year	-	-	-		(5)		(135)	4,090	3,950		1		3,951
Arising on issue of ordinary shares	1	14	-		-		-	(14)	1		-		1
Issue of C Shares	-	-	(215)		-		-	1	(214)		-		(214)
Redemption of C Shares	-	-	215		-		-	(215)	-		-		-
Ordinary shares purchased	-	-	-		-		-	(24)	(24)		-		(24)
Share-based payments - direct to equity 4	-	-	-		-		-	51	51		-		51
Related tax movements	-	-	-		-		-	3	3		-		3
Other changes in equity in the year	1	14	-		-		-	(198)	(183)		-		(183)
At 31 December 2017	368	195	162		(112)		660	(65)	1,208		3		1,211
Impact of adopting IFRS 9	-	-	-		-		-	(15)	(15)		-		(15)
At 1 January 2018 including the impact of IFRS 9	368	195	162		(112)		660	(80)	1,193		3		1,196
Profit for the period	-	-	-	-		-		(962)	(962)		2		(960)
Foreign exchange translation differences on foreign operations	-	-	-	-		47		-	47		-		47
Reclassification to income statement on disposal of business	-	-	-	-		(19)		-	(19)		-		(19)
Movement on post-retirement schemes	-	-	-	-		-		451	451		-		451
Share of other comprehensive income of joint ventures and associates	-	-	-	9		(1)		-	8		-		8
Related tax movements	-	-	-	-		-		(154)	(154)		-		(154)
Total comprehensive income for the period	-	-	-	9		27		(665)	(629)		2		(627)
Arising on issues of ordinary shares 5	6	240	-	-		-		-	246		-		246
Issue of C Shares	-	-	(85)	-		-		-	(85)		-		(85)
Redemption of C Shares	-	-	85	-		-		(85)	-		-		-
Share-based payments - direct to equity 4	-	-	-	-		-		22	22		-		22
Reclassification of joint operations to subsidiaries	-	-	-	-		-		-	-		15		15
Transactions with non-controlling interest	-	-	-	-		-		-	-		(1)		(1)
Related tax movements	-	-	-	-		-		4	4		-		4
Other changes in equity in the period	6	240	-	-		-		(59)	187		14		201
At 30 June 2018	374	435	162	(103)		687		(804)	751		19		770

¹ The prior period has been restated for IFRS 15 Revenue from Contracts with Customers, an interim update to the provisional fair values of the ITP Aero acquisition and other adjustments. See note 16 for more details.

²   Other reserves include a merger reserve of £3m and a translation reserve of £684m.

³   At 30 June 2018, 6,347,623 ordinary shares with a book value of £51m were held for the purposes of share-based payment plans and included in retained earnings. During the period, 153,281 ordinary shares with a net book value of £1m vested in share-based payment plans and the Company acquired 34,801 of its ordinary shares via reinvestment of dividends received on its own shares.

⁴   Share-based payments- direct to equity is the share-based payment charge for the year less the actual cost of vesting and cash received on share-based schemes vesting.

⁵  Share premium on shares issued relate to the payment of the first three instalments for the acquisition of ITP Aero.