Part 2

Welcome to:

Building Business Acumen®

Marine

Civil Aerospace

Energy

Nuclear

Defense Aerospace

Rolls – RoyceEngine Services

OaklandRRESO

In today’s business world, no growth means lagging behind in a world that grows every day…

Investors expect it.

Employees are more energized by it.

Customers are generally attracted to it.

Executives are measured by it.

Why Grow?

Business in Rapid Decline…

• The best & brightest leave first.

• Productivity goes down.

• Morale goes down.

• Costs are cut, which limits the ability to grow, the company becomes less profitable.

Studies Show: It usually takes 4 or 5 years for the company to recover.

Business in Rapid Growth…

• Growth attracts/retains the best & brightest!

•Productivity goes up, that equals more profit, which generates more cash, which provides more ability to grow!

• Morale is higher.

• You have the ability to grow in your career!

Growth gets more time & attention than any of the 5 drivers - in a public company.

Ways we measure growth

Business growth can be measured in many ways, but the most common ways:

1) Revenues2) Award Fee percentage (Customers we

supply product to)3) Profit dollars4) Profit percentage5) EBIT dollars6) EBIT percentage

(Page 15)

Growth - Rolls-Royce

Growth Examples at RR

Recent interview with Sir John Rose:

Question: In light of the economic challenges why did Rolls-Royce do so well?

Answer: Our results were strong due to:

1) A strong order book.

2) Over 52% (2009) of revenue is from service.

3) We were early in cost reduction and efficiency improvement.

Growth- Rolls-Royce & Benchmark Companies

Growth- Rolls-Royce & Benchmark Companies

5 Business Drivers

Definition: PEOPLE

People

The External Customer, Vendor/Re-seller, or Internal Customer that has the ability to impact the success of the business.

Revenue per Employee

Profit per Employee

Customer Retention

Employee Turnover

Measures

Definition

People:

What is more important than meeting customer expectations?

Exceeding?Anticipating Customer Needs & Expectations!

“If I would have asked my customer what they wanted, they would have said a faster horse!”

~Henry Ford

Failing to Anticipate customer needs/expectations!

What companies have failed to anticipate customer expectations? What were the results?

Unprepared for recession and required government bailout money. Ford secured line of credit prior and retained full ownership.

Decided to move to digital product line. Polaroid did not and is no longer a serious competitor.

In 1943, the CEO said the customer need for their product was approximately 5 computers for the entire world.

Did not move to a digital music player and lost a significant market share to innovative companies like Apple and Motorola.

• GM/Ford

• Kodak

• IBM

• Sony

World Class Employees“In responding to the short-term challenges we are

currently facing and in developing the business for the longer term, our people are our strongest asset.

Rolls-Royce is a power and systems company, powered by the knowledge, experience and imagination of all our employees across the world.

Our advantages are dependent on the contributions they make…” AR page 9

Evidence of our leadership…

What is the Purpose of the Annual Report?

(high-level view) General Communication

Shareholders, existing/potential investors (others?) Important, numbers, decision and

strategy Where we have been and where we

are going Marketing

The what, who and how Name, image & Branding Colors

Compliance GAAP IFRS

Demystify the Annual Report(Page 21)

• Financial Hi-lights ( Inside Cover)

• Chairman Statement ( page 2)

• Chief Executive Review (page 4)

• Management Discussion & Analysis (Part II pages 19 - 35)

• Financial Statement

• Notes to the Financial Section (pages 97)

Income statement (page 92)

Balance Sheet (page 93)

Statement of Cash Flows (page 94)

Rolls-Royce’s Annual Report (Page 21)

• What is the basic equation for each statement?

• What is the purpose of the statement?

• What are the key numbers and how are they

trending?

• How can you impact each statement?

Financial Statements

Income Statement Balance Sheet Statement of Cash

Flows

P&LStatement of OperationsEarning Statement

Top Line

Bottom Line

Equation: Revenue – Expenses = Profit (or loss)

Gross Margin$11,085 - $8,885 = $2,200$2,200 ÷ $11,0854 = 19.85%

Profit Margin$543 ÷$11,085 = 4.9%

Bottom Line

Underlying Profit Before Taxation$955 ÷$11,085 = 8.62%

2009 to 2010

Variance7.01%

-3.24%

6.44%

Gross Profits 4.22%

-3.75%

4.37%

FX Hedging Mainly a UK and Civil issue

Civil receive their UK income in USD

Costs largely in £,

Treasury transact with banks to convert the USD into £

We agree to do this well in advance

Could be up to 5 years ahead so that we know what £ we will receive

Securing this certainty is referred to as Hedging

“An investment made in order to reduce the risk of adverse price movements in a security or

denomination.”

Indicates Financial Strength

Equation:Assets = Liabilities + Equity

Least Liquid

Most Liquid

Due First

Due Last

Due in a year or less

Becomes cash in a year or less

Equity Position 24.51%

Total current assets

Total current liabilities

2009 to 2010 Variance

Equity is up by 5.23%

Assets are up by 5.21%

Liabilities are up by 5.28%

Strong Balance Sheet?

1) Enough Cash. Also have additional

“head room”, or borrowing capacity of

1.7 B. (see page 61)

2) Current ratio = 1.1 (2008) to 0.96

(2009)

3) Equity position at 24.52%

2,962

859

10,414

20.3

915

8.8

24.19

24.52

14.7

4.0

3.64

58,000

10,4142,111

10,414915

3,782915

15,4223,782

9,08210,414

880915

10,414379

(Page 2)

1 ½

0

SCORING:

Right answer = 1 pointSomewhat close = ½ pointMissed it by a ways = 0 point

~Human Histogram~

Competitor Reports

Caterpillar

GE

United Technologies

Keep your friends close, and your enemies Keep your friends close, and your enemies closer.closer.

--Lao Tzu--Lao Tzu

Raise Revenue by

100

+100

+20

-80

Manage Costs by

100

-4.0

+16

-100

+100

-25

+75

Work Team Impact on the 5 Drivers

Which is better, increasing revenue by £100 or cutting costs by £100?

Increasing revenue increases profit before tax by £14

Cutting costs increases profit before tax by £75

What are the other considerations of increasing revenue vs. cutting costs?

External Factors (page 40)

How does the situation affect:

CashCash

ProfitProfit

AssetsAssets

PeoplePeople

GrowthGrowth

Heads Up!Heads Up!

The Role of the Stock Market

1) What role does the stock market play?

2) Who cares about a company’s stock price and why?a. Investorsb. Analysts

Analyst Recommendations

The Role of the Stock Market

1) What role does the stock market play?

2) Who cares about a company’s stock price and why?a. Investorsb. Analystsc. The CEOd. Employees

3) What are the benefits of a higher stock price?

6 Benefits of a Higher Stock Price:

(Page 17)1) Treasury stock is worth more.2) Secondary offering brings more

cash.3) Better credit ratings = more

access to cash at a cheaper rate.

4) More acquisition power.5) Can attract talented people.6) More expensive in a buy-out.

Rolls-Royce, One-Year Stock Chart

Total Shareholder Return

Rolls-Royce & FTSE One-Year Chart

Rolls-Royce, GE, GD & LMT, One-Year Chart

CEO Urgency Continuum

(Page 49)

URGENT NEAR TERM LONG TERM

CASH PROFIT

ASSETS

GROWTH

PEOPLE

Apply business acumen to better understand my

internal customers business—

Thus becoming a more trusted business partner.

Not just doing things right but… doing the right things! Jimmy Feeny

95%95%Sets a future specific Sets a future specific appointment with the appointment with the

person they committed to...person they committed to...

60%60%Commits to another…Commits to another…

50%50%Plans how to do it…Plans how to do it…

40%40%When they’ll do it...When they’ll do it...

25%25%Commits, “ I’ll do it!”...Commits, “ I’ll do it!”...

10%10%““That’s a good idea”...That’s a good idea”...

Chances of the idea being Chances of the idea being incorporated into their life is...incorporated into their life is...When a Person Says When a Person Says ……

Changing Behavior**Based on a 1993 Brigham Young University Study*Based on a 1993 Brigham Young University Study

People will work hard for a paycheck,

harder for a person,hardest for a reason.