Rolls-Royce plc Interim Results 2002; Results in Line with Guidance

LONDON, Aug. 22 -- "We have today announced results for the first half of 2002 in line with earlier guidance. We have a balanced business portfolio, strong market positions as evidenced by our record order intake, a growing aftermarket and a lower cost base.

"The business has continued to perform as predicted. Average net debt was similar to the level of the first half last year, our liquidity position has been substantially improved and we anticipate the average net debt for the full year to be lower than that given in our earlier guidance.

"We have made excellent progress with our restructuring programme, which we accelerated as a result of the events of 11 September 2001. I thank our employees and unions for their support during this difficult task." Sir Ralph Robins, Chairman Rolls-Royce plc.

Highlights are:

* Profit and cash on course * Underlying profit before tax 104 million pounds sterling(*) * Average net debt in line with guidance * Dividend maintained

* Record order book * Record order intake of 5.2 billion pounds * Record order book of 16.7 billion pounds

* Strong aftermarket services * Aftermarket services represent 41 per cent of total revenues * Long term service agreements represent 20 per cent of the order book

(*) before exceptional and non-trading items (see note 3)

Overview

Results for the half year ended 30 June 2002 were in line with the guidance provided in October 2001 and repeated in March 2002. Underlying profit before tax was 104 million pounds, reflecting the expected reduction in civil aerospace business following the events of 11 September 2001.

Net debt at the half-year end was 770 million pounds, compared to 748 pounds million at the same point last year. Average net debt for the first half was 990 million pounds (2001 940 million pounds). The company now expects average net debt for 2002 to be modestly better than that given in its earlier guidance.

The company successfully refinanced maturing borrowing facilities in the first half, with a five-year revolving credit facility of 750 million pounds, which was oversubscribed. Total committed borrowing facilities now stand at 2.4 billion pounds.

The operational performance of our businesses has been consistent with the market outlook first published by the company in October 2001 and positions the company for profit growth in 2003 compared to 2002. However, the final outcome in 2003 will be influenced by any increase that might be required in pension fund contributions.

A robust business model

Rolls-Royce operates in four growth markets. Its robust business model is applied across all its business sectors. The company invests in technology and capability that can be exploited in each of these sectors to create a competitive range of products.

The success of these products is demonstrated by the company's rapid and substantial gains in market share over recent years. As a result, engine deliveries have grown to the point where Rolls-Royce now has an installed base of 53,000 gas turbines in service across all its businesses. The necessary investments in product, capability and infrastructure to gain this market position create high barriers to entry.

Most of the engines in service will have operational lives of 25 years or more, generating an assured aftermarket demand for the provision of spare parts and services. The company's strategy is to maximise aftermarket revenues through the development of a comprehensive services capability.

The installed base of engines, therefore, represents an annuity for the business and provides visibility as to future activity levels. Aftermarket service revenues accounted for 41 per cent of sales in the half year.

Further visibility is provided through the forward order book, which has now reached a record level of 16.7 billion pounds, having grown by 2.6 billion pounds in the first half of the year. A further 1.9 billion pounds of orders have been announced but not yet signed. Aftermarket service revenues accounted for 29 per cent of the order book, including long term service agreements, which accounted for 20 per cent.

The company continued to make good progress in reducing costs and rationalising the business. At the end of the first half, the workforce was 39,000 people, a reduction of 3,200 since the start of the year and 4,500 since the rationalisation programme was announced in October 2001. In addition nearly 1,000 contract workers have left the company. The company is on target to achieve annual cost savings of 250 million pounds.

The sale of Vickers Defence Systems to Alvis was announced in August and will be reflected in the year end results. Rolls-Royce acquired Vickers in 1999 to create a world-leading marine business. This has been achieved by the successful integration of the marine activities and the disposal of the non- core businesses.

Pensions

The next formal actuarial review of the principal Rolls-Royce pension fund is due in March 2003. This scheme was closed to new entrants in January 1999. Subject to market levels and actuarial assumptions applying at 30 June 2002 remaining unchanged, the consequent additional charge to the profit and loss account in 2003 could be around 35 million pounds in relation to this fund (see note 7).