Print | Close

Results

Q. These are another set of good results. What are the key features for you - and are they sustainable?

A. We're delighted to have continued to grow the company organically and to have again met market expectations. The key features of the results are that we've grown sales by 14 per cent to over £7bn, underlying profit has grown by 19 per cent to £705m and we've continued the strong cash generation with an improvement in our average cash by £410m during the year. So the consequence of that is that we've increased our payment to our shareholders by 10 per cent.

Underlying all that, of course, is the fact that we continue to grow our order book strongly. We're operating in strong international markets and our order book has grown since 2000 by 10 per cent compound. It's now at a record level of £26.1bn.

Q. That cash that you talk about, that strong cash generation, what might you do with the cash?

A. We've been pretty consistent about how we've talked about our priorities for cash. The first thing was to become a cash generative business. The second thing was to make sure that we had a strong balance sheet. Given the nature of our business we make very large long-term investments and we need to be strong because we end up with very long relationships with our customers, which they expect us to be able to sustain.

Notwithstanding that, we'll be looking at our financial strategy during this year, taking into account the payments that we've already committed to our pension fund of £500m, the sort of cash generation we expect and the sorts of investment opportunities that we see.

Civil cycle

Q. Are you not worried that the cycle in civil aerospace might be turning downwards?

A. I think in answering that question the first thing I have to say is that Rolls-Royce is now a very broadly-based business. We sell our power systems into the civil market, obviously; the defence market; marine; and energy. So the overall concentration on the civil business has over time become smaller, although it's obviously still a very large part of our business.

The second thing I would say is that the cycle tends to be associated with original equipment sales. Original equipment sales to the civil industry are about 20 per cent of our business. The rest of our business is either to other sectors or driven by our services revenue. So, whilst inevitably there will be cycles, I think the business is robust enough to weather them successfully.

I think there is another point worth saying, that this is now a very, very global industry. The overall order book for civil aircraft goes out a very, very long way. So I have no immediate concerns about the civil cycle at all.

Addressing environmental issues

Q. We hear a lot about the impact of civil aviation on global warming. Are you doing enough in this arena?

A. Rolls-Royce has always been very proactive in the area of environmental issues. We published our first environmental report in 1998 and that outlined the sorts of things that we were doing both in the context of our product development, but also in the way that we managed our manufacturing facilities and it set targets for improvement. In that context, it's worth saying that we've grown our business between 1998 and 2005 by about 45 per cent whilst reducing our output of greenhouse gas emissions by 30 per cent. So I think we've got a good track record in terms of environmental responsibility and that's been recognised by people like Business in the Community where we're in their 'Premier League' in this area.

We clearly also invest a lot of money in research and development and that's focused on improving the characteristics of our products, both from a performance and an environmental perspective. But the lion's share of the technology investment goes into what you would call environmental characteristics. And we're also investing in new low carbon technology such as fuel cells.

I think it's worth saying that the environmental issues that we face are going to create both challenges and opportunities. Companies like Rolls-Royce have a rich resource in terms of our engineering and scientific skills. It's important that we help the policymakers to create good policy by giving them good facts based analysis and then we're part of the industrial solution to a problem which is going to require both industrial solutions and individual solutions.

Outlook

Q. Now your release talks of continuing headwinds. Do you think you can continue to offset these again?

A. Well, we achieved our financial results in 2006 despite some quite significant headwinds: about a 7 per cent deterioration in the dollar/sterling rate and about a 5 per cent impact on unit costs, as a result of inflation in raw material prices.

As we go forward, we're going to continue with all the actions that we already have in place: improved productivity and the increasing dollarisation of our cost base, both our own manufacturing and through the supply chain. We will continue to hedge raw material costs and the dollar so that we have a progressive approach to dealing with these issues. Clearly, we're demonstrating that the business model is very robust and our ability to grow the business is enabling us to absorb these headwinds.

Q. So how does the future look?

A. We're very fortunate, as a company, to be able to address four growing international markets. Our success in addressing those is evidenced by the fact that we continue to grow our order book. It's grown 10 per cent compound since 2000 and it's now £26.1bn. So that gives us very good visibility of our future opportunity.