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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 20 2 3
ANNUAL REPORT 2023
Rolls-Royce Holdings plc
We have set out a bold and achievable plan that will take us to
the next level: a step change in our performance that will create
a high-performing, competitive, resilient and growing business.
Our performance in 2023 gives us confidence that we can deliver
on our transformation.
Tufan Erginbilgic
Chief Executive
STRATEGIC REPORT
Group at a glance ����������������������������������������������������������������������������������������������� 2 Sustainability �������������������������������������������������������������������������������������������������������32
Chair’s statement ������������������������������������������������������������������������������������������������� 4 ����Non-financial and sustainability information statement ������������� 32
Chief Executive’s review ������������������������������������������������������������������������������� 6 ����Climate and the energy transition �������������������������������������������������������� 33
Strategy �������������������������������������������������������������������������������������������������������������10 ����Statement on TCFD ����������������������������������������������������������������������������������35
External environment �����������������������������������������������������������������������������������13 ����Responsible consumption ������������������������������������������������������������������������ 43
Business model �����������������������������������������������������������������������������������������������14 People and culture ��������������������������������������������������������������������������������������� 44
Key performance indicators ����������������������������������������������������������������������� 16 Ethics and compliance ��������������������������������������������������������������������������������49
Financial review ���������������������������������������������������������������������������������������������� 19 Principal risks �������������������������������������������������������������������������������������������������50
Our divisions ��������������������������������������������������������������������������������������������������� 24 Going concern and viability statements ������������������������������������������������ 58
����Civil Aerospace ���������������������������������������������������������������������������������������������� 24 Stakeholder engagement �������������������������������������������������������������������������� 60
����Defence �������������������������������������������������������������������������������������������������������� 26
����Power Systems ������������������������������������������������������������������������������������������� 28
����New Markets ��������������������������������������������������������������������������������������������� 30
GOVERNANCE REPORT
Compliance with the Code ������������������������������������������������������������������������65 ����Audit �����������������������������������������������������������������������������������������������������������80
Chair’s introduction �������������������������������������������������������������������������������������66 ����Remuneration ������������������������������������������������������������������������������������������������ 84
Corporate governance �������������������������������������������������������������������������������67 �������� Remuneration policy ������������������������������������������������������������������������������ 88
Board of Directors ���������������������������������������������������������������������������������������� 70 �������� 2023 remuneration report ����������������������������������������������������������������� 99
Executive Team ���������������������������������������������������������������������������������������������� 72 ����Safety, Energy Transition & Tech ��������������������������������������������������������� 111
Committee reports ��������������������������������������������������������������������������������������� 78 Responsibility statements ����������������������������������������������������������������������������� 112
����Nominations, Culture & Governance ������������������������������������������������� 78
FINANCIAL STATEMENTS
Consolidated financial statements ��������������������������������������������������������� 114 Notes to the Company financial statements �������������������������������������� 187
Notes to the consolidated financial statements ��������������������������������� 122 Subsidiaries ���������������������������������������������������������������������������������������������������190
Company financial statements ����������������������������������������������������������������� 185 Joint ventures and associates ��������������������������������������������������������������������194
OTHER INFORMATION
Independent auditors’ report ����������������������������������������������������������������� 196 Reconciliation of alternative performance measures ���������������������213
Sustainability assurance statement �����������������������������������������������������209 Directors’ report ����������������������������������������������������������������������������������������������218
Greenhouse gas emissions �������������������������������������������������������������������������� 210 Shareholder information ���������������������������������������������������������������������������������� 221
Other financial information ����������������������������������������������������������������������� 211 Glossary ��������������������������������������������������������������������������������������������������������������222
Use of underlying performance measures in the Annual Report
All figures in the narrative of the Strategic Report are underlying from continuing businesses unless otherwise stated. We believe this is the most appropriate
basis to measure our in-year performance as this reflects the substance of trading activity, including the impact of the Group’s foreign exchange forward contracts,
which lock in transactions at predetermined exchange rates. In addition, underlying results exclude the accounting impact of business acquisitions and disposals,
certain impairment charges and exceptional items. A full definition of underlying and the reconciliation to the statutory figures can be found on pages 213 to 214
and 217. All references to organic change are at constant translational currency.
Forward-looking statements
This Annual Report contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future
performance and guidance may be updated from time to time. This report is intended toprovide information toshareholders, and 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that required under English
law. Latest information will be made available on the Group’swebsite. By their nature, these statements involve risk and uncertainty and a numberoffactors could
cause material differences to the actual results or developments.
1
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
UNDERLYING PROFIT
BEFORE TAX
1, 2
£1,262m
2022: £206m
UNDERLYING EARNINGS
PER SHARE
1, 2
13.75p
2022: 1.95p
ORDER BACKLOG
1, 7
£68.5bn
2022: £60.2bn
STATUTORY PROFIT/(LOSS)
BEFORE TAX
1
£2,427m
2022: £(1,502)m
STATUTORY EARNINGS/(LOSS)
PERSHARE
1
28.85p
2022: (14.24)p
GROSS R&D EXPENDITURE
1, 2, 8
£1.4bn
2022: £1.3bn
TOTAL UNDERLYING CASH COSTS
AS A PROPORTION OF UNDERLYING
GROSS MARGIN
1, 2, 4
0.59
2022: 0.80
RETURN ON CAPITAL
1, 2, 5
11.3%
2022: 4.9%
UNDERLYING OPERATING PROFIT
1, 2
£1,590m
2022: £652m
STATUTORY OPERATING PROFIT
1
£1,944m
2022: £837m
UNDERLYING OPERATING MARGIN
10.3%
2022: 5.1%
STATUTORY OPERATING MARGIN
11.8%
2022: 6.2%
UNDERLYING REVENUE
1, 2
£15,409m
2022: £12,691m
STATUTORY REVENUE
1
£16,486m
2022: £13,520m
FREE CASH FLOW
1, 2
£1,285m
2022: £505m
STATUTORY CASH FLOWS FROM
OPERATING ACTIVITIES
3
£2,485m
2022: £1,524m
NE T DEBT
£(1,952)m
2022: £(3,251)m
COUNTRIES WITH ROLLS-ROYCE
PRESENCE
48
2022: 48
EMPLOYEES (MONTHLY AVERAGE)
41,400
2022: 41,800
1
2023 and 2022 figures represent the results of continuing operations
2
A reconciliation of alternative performance measures to their statutory equivalent is provided on pages
213 to 217
3
2022 statutory cash flows from operating activities has been represented as described on page 125
4
Total underlying cash costs as a proportion of underlying gross margin is defined on page 217 and is
abbreviated to TCC/GM
5
Adjusted return on capital is defined on page 217 and is abbreviated to return on capital
6
Liquidity is defined as cash and cash equivalents plus any undrawn facilities, as listed on page 58
7
See note 2 on page 141
8
See note 3 on page 144 for a reconciliation of gross R&D expenditure to total R&D expenditure
LIQUIDITY
6
£7.2bn
2022: £8.1bn
See note 2 on page 142 for a reconciliation between
underlying and statutory results
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2
Group at a glance
CIVIL AEROSPACE DEFENCE POWER SYSTEMS NEW MARKETS
Civil Aerospace is a major
manufacturer of aero engines
forthe large commercial aircraft,
regional jets and business aviation
markets. The business uses its
engineering expertise, in-depth
knowledge and capabilities to
provide through-life service
solutions for itscustomers.
Defence is a market leader inaero
engines for military transport and
patrol aircraft with strong positions
in combat applications. It has
significant scale in naval and
designs, supplies and supports the
nuclear propulsion plant for all
of the UK Royal Navy’s nuclear
submarines.
Power Systems, with its product
and solutions brand mtu, is a world-
leading provider of integrated
solutions for onsite power and
propulsion, developing sustainable
solutions to meet the needs of its
customers�
New Markets are early-stage
businesses. They leverage our
existing, in-depth engineering
expertise and capabilities to
develop sustainable products for
new markets, focused on the
transition tonetzero.
Underlying revenue Underlying revenue Underlying revenue * R&D expenditure
Large engines – 73%
Business aviation – 20%
Regional – 3%
V2500 – 4%
Transport – 31%
Combat – 34%
Submarines – 22%
Naval – 8%
Helicopters – 5%
Power generation – 39%
Governmental – 25%
Marine – 12%
Industrial – 24%
Rolls-Royce SMR – 46%
Rolls-Royce Electrical – 54%
UNDERLYING REVENUE UNDERLYING REVENUE UNDERLYING REVENUE UNDERLYING REVENUE
£7,348m £4,077m £3,968m £4m
2022: £5,686m 2022: £3,660m 2022: £3,347m 2022: £3m
UNDERLYING OPERATING PROFIT UNDERLYING OPERATING PROFIT UNDERLYING OPERATING PROFIT UNDERLYING OPERATING LOSS
£850m £562m £413m £(160)m
2022: £143m 2022: £432m 2022: £281m 2022: £(132)m
UNDERLYING OPERATING MARGIN UNDERLYING OPERATING MARGIN UNDERLYING OPERATING MARGIN UNDERLYING OPERATING MARGIN
11.6% 13.8% 10.4% n/a
2022: 2.5% 2022: 11.8% 2022: 8.4% 2022: n/a
See page 24 See page 26 See page 28 See page 30
OUR DIVISIONS IN 2023
* In 2023, the naval business of Power Systems was moved from marine to governmental to better reflect the products and customer mix of this business
3
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
GROUP AT A GLANCE
Change is a constant in business and the rate of change has been
dramatic in 2023. For Rolls-Royce, our annual results represent positive
change. Our record performance is testament to the hard work and
contributions of all of our people at every level. I would like to thank
everyone for the pace and rigour with which they have embraced our
transformation programme. We are creating a high-performing,
competitive, resilient and growing Rolls-Royce which will ultimately
benefit all stakeholders.
The change brought about within our business in 2023 has been driven
by the clear transformation programme which our Chief Executive,
Tufan Erginbilgic, set out in last year’s Annual Report. As part of that
process, a thorough strategic review was then carried out involving
senior leaders and experts from across the Group. The Board
experienced the sheer scale and rigour of that process first hand
during 2023. We presented the outcome at our capital markets day
(CMD) in November. Our new strategic framework (see page 8) is owned
by leadership and is now being cascaded through the
organisation as the backbone of both performance management and
people engagement. The financial targets that we have laid out for the
mid-term (see page 12) are ambitious but achievable, representing a
step-change in performance. At the same time, we are continuing to
invest in our engineering excellence and technology as well as the
safety of our products and people.
Outside of Rolls-Royce, change has been just as dramatic but by no
means as positive and underlines the importance of Rolls-Royce
becoming a more resilient business through its transformation. The
geopolitical outlook, which was already unsettled as a result of the
Russia-Ukraine conflict, worsened as 2023 progressed with the deeply
distressing events in Israel and Gaza heightening regional tensions and
threatening important trade routes. In 2024, there is likely to be further
geopolitical uncertainty as countries that account for more than half the
world’s population hold elections. The macro-economic environment,
meanwhile, has been characterised by persistent inflationary pressure,
driven in part by the global bounce back from the pandemic, coupled
with supply chain challenges and fears of recession in some markets.
Against this backdrop, it is imperative that we build a financially stronger
Rolls-Royce that will be more resistant to external shocks. It is also vital
that, as we do so, we create a Rolls-Royce which can generate
sustainable long-term growth built on great technology and engineering,
with safety and integrity at its core and which delivers outstanding results
for our customers and people.
Listening at a time of change
During a period of transformation, it is important for the Board to
monitor the impact of change on the organisation, especially its effect
on our people, and ensure that the right values and behaviours are in
evidence. In last year’s report, I said that the Board would maintain a
focus on employee sentiment and culture during 2023, recognising
their critical role in delivering a successful transformation programme.
In May 2023, we made a series of changes to the Board Committee
structure to support this (see page 67). These included a refocusing of
the Nominations & Governance Committee, now renamed as the
Nominations, Culture & Governance Committee, to assess and monitor
culture across the organisation. This was assisted by our Employee
Champions, Bev Goulet and Wendy Mars, who continued to
represent the voice of our people in the boardroom. Our Employee
Champions form an important connection between the Board and our
people at all levels of the organisation, providing feedback from their
regular interactions, including through the employee stakeholder
engagement committee. The whole Board, meanwhile, was able to hear
Dame Anita Frew
Chair
The ongoing transformation of our business, the strategy we have laid out and the
new mindset being developed throughout the organisation, will create a Rolls-Royce
that can be a stronger partner for all our stakeholders. Our progress in 2023 is a
significant step in the right direction.
4
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Chair’s statement
much of her executive career at Ford Motor Company, latterly as vice
president of global purchasing and oversaw the company’s European
joint ventures and alliances. Her non-executive appointments are across
industrial groups beyond automotive, all with a focus on sustainability
and transformation.
Stuart Bradie also joined us as a Non-Executive Director in May 2023,
bringing with him an outstanding track record in driving strategic
transformation and cultural change in international engineering
businesses. Currently CEO of KBR, the US listed engineering and
technical government services company, Stuart has over 25 years of
experience leading global, technically oriented businesses and has
strong project management credentials. Additionally, Paulo Cesar Silva
joined us as a Non-Executive Director in September. Paulo has an
outstanding track record in the global aerospace industry with over
25 years of experience at Embraer, the world’s third largest commercial
jet manufacturer. As president & CEO, he led Embraer through major
strategic change, successful innovation in product development and
programmes, significant improvement in operational efficiency and
supply chain optimisation and successful industry partnerships.
During 2023, we also saw a number of departures from the Board. Mike
Manley stepped down at the Annual General Meeting while Paul Adams
stepped down in September. I would like to thank both of them, on
behalf of the whole Board, for their hard work during their tenures. We
also said farewell to Sir Kevin Smith after serving almost eight years.
He made an outstanding contribution during his time and I would like
to thank him personally for his work as Senior Independent Director
until 2022 and for the way he led the Chair succession process. He was
instrumental in the Chief Executive transition. Finally, Panos Kakoullis
stepped down as Chief Financial Officer in August, having ensured the
successful delivery and reporting of the Group’s half-year performance.
Shareholder payments
As set out in further detail elsewhere (see page 19), our capital
framework is focused on three clear priorities: a strong balance sheet
with an investment grade profile; a commitment to reinstating and
growing shareholder returns; and a disciplined approach to investments.
Strengthening the balance sheet is a clear priority. We are positioning
Rolls-Royce to better withstand volatility and external shocks and to
give us financial flexibility for the future. When the Board is confident
that the strength of the balance sheet is assured and we are
comfortably within an investment grade profile, we are committed to
reinstating and growing shareholder distributions.
Looking forward
I have written to you before about my immense pride in being part of
Rolls-Royce and that I want to see the Group thrive and remain in
control of its own destiny. To achieve this we must become more resilient
and the plan laid out by Tufan and his leadership team, which is firmly
endorsed by the Board, will achieve this aim. Our mid-term financial
targets are ambitious but based on rigorous analysis and will result in a
resilient and profitable Rolls-Royce that will deliver outstanding
performance for our people and all our stakeholders.
The pride I feel in working for Rolls-Royce is shared by the Board and
the whole leadership team. I know for a fact that it is also felt by
everyone within the business. I know this because every time I visit one
of our facilities our people tell me. There is a special quality to
Rolls-Royce and it comes from them. The other members of the Board
and I would like to thank all our colleagues in the Group for their
incredible hard work in 2023. Together we have already delivered
significant progress and I am confident that even better is still to come.
Dame Anita Frew
Chair
first-hand accounts of how the transformation programme is coming
to life at our annual Meet the Board event which followed the 2023
Annual General Meeting (see page 60) and in our programme of site
visits where we meet regularly with our people.
When significant change is being made at pace, it is also crucial that
the focus on fundamentals is not lessened and the Board must provide
oversight. The transformation programme sees Rolls-Royce place an
increased focus on commercial outcomes. This is to be welcomed but
must be accompanied by continued vigilance on issues of ethics and
integrity. We remain committed to zero tolerance of business
misconduct and that is always non-negotiable. The Nominations, Culture
& Governance Committee now has oversight of our ethics assurance
processes, including reporting of calls into our speak up line.
Tufan has made it clear from his very first day that safety is the number
one priority of his leadership team, from the safety of our
mission-critical products through to the safety and wellbeing of our
people. In the latter half of 2023, a new engineering, technology and
safety (ET&S) capability was created within the Group, led by a new
Group Director of Engineering, Technology & Safety with a place on
the Executive Team. This new capability mirrors a change made to the
Board Committee structure earlier in the year with the formation of
the Safety, Energy Transition & Tech Committee, which is focused upon
safety as well as the energy transition agenda. The strategic framework
set out at the CMD makes clear the fundamental role of lower carbon
solutions to the long-term success of Rolls-Royce. We are committed
to becoming a net zero company by 2050 and we support our
customers to do the same. This Committee will provide oversight of our
plans (see page 67).
Board developments result in gender parity
To deliver on the strategy that Tufan and his leadership team set out in
November 2023 requires a Board with the relevant experience and
expertise, who can assist and support as necessary and provide
appropriate oversight. We already have significant bench strength in
areas vital to the success of our ongoing transformation; nevertheless,
during the year we further strengthened the Board’s strategic,
commercial and operational expertise and brought in additional
experience in forging successful international partnerships. Our new
appointments in the year also saw us exceed our ambitions to increase
the diversity of the Board as we reached gender parity for the first time
in the history of Rolls-Royce. The achievement of this milestone should
not be taken lightly. It is an historic moment. When I took up the post
of Chair, I set a target to have, as a minimum, 40% female representation
on the Board and stated that our longer-term ambition was to reach
gender parity. The fact that we have reached this target is testament
to our hard work and targeted recruitment. It is a clear signal of the
importance which the Board places on gender diversity, as well as
aligning with the wider ambition to increase representation and
opportunity for progression across the Group.
During 2023, the Nominations, Culture & Governance Committee led
the process for recruiting and appointing Helen McCabe as Chief
Financial Officer. She joined the Board in August, bringing more than
25 years of experience in senior finance and performance management
within complex, multinational engineering organisations. She has run
multi-billion dollar customer-focused businesses and has extensive
experience of delivering transformation programmes that generate
substantial returns. She has already made a significant impact on
Rolls-Royce, providing robust oversight of our process which led to
our mid-term financial targets and played a key role in the presentation
of our ambitions for the future at the CMD. She is also bringing
renewed rigour and a strong focus to the way Rolls-Royce conducts
performance management.
In May 2023, Birgit Behrendt joined as a Non-Executive Director. Birgit
brings a combination of deep experience across global procurement
and supply chain management with extensive expertise gained from
leading large, complex projects across multiple geographies. She spent
5
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
CHAIR’S STATEMENT
Rolls-Royce is a great company, with a rich heritage and so much
potential. This year, we have taken very significant steps towards
realising that potential through our transformation programme. The
pace at which we are delivering, achieved by managing the Group very
differently, enabled us to raise our full-year financial guidance in July
2023 and our transformation has delivered a record performance. At
our CMD in November 2023, we set out the scale of that potential over
the mid-term (see page 20). Our targets for the mid-term represent a
step change in financial performance: quadrupling operating profit
compared with 2022; operating margins representing an equal or
better competitive performance benchmarked against our peers;
sustainable cash flows delivering a more than 100% conversion of
improved profits; and an increase in return on capital that will create
a truly compelling investment proposition.
In addition to transforming our financial performance, we are also
transforming our business. We are creating a simpler, more efficient,
more effective and more capable organisation with the winning
mindset and performance culture we need to succeed. Our strong
progress in 2023 gives us good reason to be confident of achieving
further growth in 2024 and unlocking our potential in the mid-term.
In last year’s report, I set out my experience of partnering engineering
expertise with a granular strategy, business acumen and intense
performance management to create an organisation that thrives on
strategic progress. This transformation has four key elements. The first
is to put a mirror up to the organisation. This is not about giving an
opinion, it is about presenting the data honestly about where the
business is. During the latter half of 2022, we conducted extensive
benchmarking of our Group performance and that of our businesses
against our peers. That work showed there was significant scope for
us to deliver materially higher profit, cash flows and returns in the
mid-term, unlocking our potential and performing as well or better than
our best competitors. The conversations this sparked within the
organisation were incredibly energising because, at the same time, we
presented a vision of what a winning Rolls-Royce will look like. This was
evident when we conducted our main employee survey (see page 46)
with record turnout and our highest ever engagement score.
The second principle is to set out a clear and granular strategy with
well defined strategic initiatives cascaded down through the
organisation so that everyone knows their role in the transformation.
This is what we set out at the CMD and I will go into further detail shortly.
Thirdly, the success of transformation relies on rigorous performance
management driving year-on-year improvement. Our focus is on the
strategic progress of Rolls-Royce. We are now creating the performance
management framework which will ensure we manage closely against
our goals. Performance management also means understanding the
markets in which we operate and taking proactive action when the
external environment changes. That requires robust management
information provided in a timely manner in order to manage the future
rather than merely reporting on the past.
Fourthly, transformation must be carried out through a systematic
approach, with pace, rigour and intensity. Our performance in 2023 is
not only about what we have done, but how we did it. Our people are
energised and our strategy is being led by a strengthened Executive
Team who are managing the business very differently within a new
organisational structure that aligns with that strategy.
Our transformation must be carried out at pace, with rigour and intensity. That is
exactly what we have done in 2023 and the proof is in our performance. We now have
a clear and granular strategy that will create a high-performing, competitive, resilient
and growing Rolls-Royce with the strength to control and shape its own destiny.
Tufan Erginbilgic
Chief Executive
6
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Chief Executive’s review
in attractive markets which provide a degree of resilience to the
external environment, we have to remain very focused on increasing
our resilience to external events, whether that be mitigating
inflationary pressure and volatile commodity pricing through cost
control measures, strengthening our balance sheet to insulate ourselves
from sustained higher interest rates or robust supply chain management
in an environment of enhanced geopolitical tensions globally.
Outcome of our strategic review: a granular strategy
Early in 2023, I set out our transformation programme including a
rigorous and detailed strategic review across every division and
sub-division in the Group. At our CMD, we set out the results of this
extensive work and how we will unlock the potential of our business.
Our strategy will enable us to deliver on our proposition to our
shareholders, which is to: build a high-performing, competitive and
resilient business with profitable growth; grow sustainable free cash
flow; and build a strong balance sheet and growing shareholder returns.
This will transform Rolls-Royce into a more resilient and efficient
business with higher quality of earnings and a focus on cash expansion
and more sustainable cash flows. We will be a One Rolls-Royce team,
with different ways of working and mindset, underpinned by a
differentiated performance culture. This will be delivered through a
new organisation that delivers efficiency, simplification and improved
capabilities. Our strategic clarity ensures that the organisation will be
focused, aligned and energised in the delivery of our strategy. Many
of our leaders took part in the strategic review process. At the
beginning of 2024, we started the process of cascading it to our
people. Not only will everyone appreciate what the strategy means for
them and the area of the business in which they work but also the role
they play in delivering it. This is an alignment and engagement tool as
well as serving as a performance management tool.
Portfolio choices and partnerships
In line with our strategy, we are making choices and executing on them.
This allows us to allocate resources more effectively and drive
profitable growth. We have segmented our portfolio into three
categories: key investment areas for performance improvement and
growth; areas where partnerships can create truly winning positions;
and businesses and activities we will exit, though only at the right time
and at the right price. Our strategic choices will drive value creation.
In Civil Aerospace, our focus will be on the widebody commercial airline
market and business aviation, leveraging the value from our Trent and
Pearl engine families and investing for the future with UltraFan. In Defence,
we have opportunities to continue to improve pricing and performance
with new programmes in transport, combat and submarines. We can also
use our expertise in adjacent fields such as nuclear micro-reactors. In
Power Systems, we will focus on governmental, marine and power
generation end markets, where we see the strongest demand and an
opportunity for better returns from our power-dense and reliable
solutions.
In some cases we will grow in partnership to strengthen our market
position. This can bring new skills, build capability and scale, as well as
de-risk and reduce capital investment. In Civil Aerospace, we believe
we are well positioned to re-enter the narrowbody market by choosing
a partnership approach for the next programme. Our UltraFan
technology is a vital step towards this. At the right time, with the right
partner, we will decide the next steps. In Power Systems, our focused
strategy on power generation will make this business more efficient
and competitive and drive faster profitable growth. We are also
considering potential partnerships to further grow our market position.
Battery storage systems are a logical complement to our stationary
power generation business, as we have transferable capability. We are
already developing a good position in Europe. A partnership with access
to additional markets could strengthen our position. Finally, for small
modular reactors (SMRs), a broad set of partners will strengthen
our position to deliver the overall solution and reduce any future
capital call�
Record performance driven by every division
Our performance in 2023 was driven by the actions we took to
improve efficiency, reduce costs and enhance our pricing position and
commercial outcomes. This step-change has been achieved across all
our divisions, despite a volatile environment with geopolitical
uncertainty, supply chain challenges and inflationary pressures.
In Civil Aerospace (see page 24), we delivered improved operating
profit and a four-fold margin increase despite engine flying hours only
88% of pre-pandemic levels. This was driven by increased aftermarket
profit, in both large engines and business aviation, reflecting
commercial optimisation and cost efficiencies, as well as volume growth.
Defence (see page 26) delivered an improved operating margin of 13.8%
(2022: 11.8%), which primarily reflected improved pricing and cost
efficiencies. In Power Systems (see page 28), which reported an
operating margin of 10.4% (2022: 8.4%), pricing and cost efficiency
actions in the first half of the year resulted in a significantly improved
operating profit and margin in the second half and in the full year.
As a result of our actions and our new ways of working, Group
underlying operating profit rose by £0.9bn to £1.6bn supported by our
transformation programme and strategic initiatives, with commercial
optimisation and cost efficiency benefits across the Group. This means
that we have already delivered more than half of the increase required
to achieve the lower end of our mid-term target. Underlying operating
margin more than doubled to 10.3%. Civil Aerospace, Defence and
Power Systems all delivered materially higher margins compared to last
year. This represents a huge step towards our mid-term target of
13%-15% as we narrow the competitive gap. Free cash flow from
continuing operations grew by approximately 150% to a best on record
£1.3bn, principally due to higher operating profit. Civil Aerospace net
long term service agreement (LTSA) creditor growth, net of risk and
revenue sharing agreements (RRSAs), was £1.1bn (2022: £0.8bn).
Continued LTSA balance growth reflects higher engine flying hours
and the benefit of commercial optimisation, with LTSA invoiced flying
hour receipts of £4.6bn (2022: £3.6bn). Our focus on working capital
resulted in a release in the second half despite ongoing supply chain
challenges. For the full year there was a net working capital outflow of
£0.4bn (2022: £0.5bn). Inventory and debtor days both improved
year-on-year, building further confidence in the actions we are taking
to improve the quality of cash delivery. Finally, return on capital more
than doubled to 11.3% reflecting improved operating profit, disciplined
capital allocation and working capital management.
During 2023, our teams continued to build momentum for the future
with strong sales performance across all divisions. Civil Aerospace
sealed fantastic customer wins, including orders with Air India, Turkish
Airlines, Emirates, new customer EVA Air and, in early 2024, Delta
Airlines. It was our best year for large aero-engine orders since 2007.
This success is important in maintaining our momentum in the widebody
market where our in-service fleet is growing faster than the market.
While we currently power about a third of the widebody aircraft in
service, in 2023 over half of new aircraft delivered were powered by
Rolls-Royce engines, meaning we are growing share. The Defence team
achieved generational wins, confirming the engine contract for the US
Army’s Future Long-Range Assault Aircraft (FLRAA) while our nuclear
reactors are set to power submarines for the Royal Australian Navy
under the trilateral AUKUS agreement. The multi-national next
generation Global Combat Air Programme (GCAP) continued its
positive momentum with the signing of the Convention of the
Establishment of the GCAP programme by the Italian, Japanese and
UK governments. Power Systems delivered an excellent sales
performance with major wins from data centres and governmental
customers, the latter including a deal to provide more than 50 Puma
tank engines for the German Bundeswehr, ensuring that the pipeline
for 2024 is largely full.
This performance was achieved despite ongoing macro-economic and
supply chain challenges, which we continued to mitigate. The macro
outlook remains uncertain and whilst we have advantaged businesses
7
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
CHIEF EXECUTIVE’S REVIEW
In addition, we identified areas that are not strategic for Rolls-Royce.
In total, we expect to generate between £1bn and £1.5bn from gross
divestment proceeds, which would be in addition to our mid-term cash
flow target.
Advantaged businesses and strategic initiatives
Our businesses are advantaged by enjoying strong positions in
attractive markets. Across the areas in which we will focus, we have a
series of strategic initiatives which underpin the profitable growth we
see in the mid-term.
In Civil Aerospace, we have detailed plans to improve large engine
margins by targeting both reduced costs and increased
revenues. This cost and commercial discipline applies across original
equipment (OE), aftermarket, spare engines and our time and materials
activities. There are six levers we are pulling, three related to cost and
three to revenues. We are extending time-on-wing with better product
durability and greater use of digital tools; lowering shop visit costs with
better working practices; and reducing product costs through better
buying and engineering. On the revenue side, we intend to keep engines
earning for longer with contract extensions and conversions, while
implementing a new value-driven pricing strategy focused on creating
win-win solutions with our customers and addressing onerous and low
-margin contracts. Finally, we are driving rigour on contractual terms
and conditions. In business aviation, we have established a great
platform with our Pearl engines which positions us well to optimise
commercial outcomes and grow margins.
Defence was already performing well but there is still an opportunity
to improve through strong performance management, commercial
optimisation initiatives and greater efficiency. Across transport, combat
and submarines we are also seeing a benefit from volume and mix
factors as we move from legacy programmes to new funded programmes.
We have the same focus on commercial optimisation and value-pricing
behaviours as we have across the Group and we are prioritising
investment in areas that benefit from increased customer funding.
In Power Systems, our profit growth is being delivered through our power
generation, governmental and marine end markets. In power
generation, we are optimising our cost structure and focusing on key
accounts to drive margin growth. We are also expanding our microgrid
solutions and extending our services offering in battery energy storage
systems, which is moving to a profitable business in the short term. In
governmental, we are capturing near-term growth with scope
expansion and investment. Lastly, in marine, we are developing
alternative fuel solutions to strengthen our synthetic fuel-ready portfolio.
Efficiency and simplification
We are driving efficiency and simplification across the business. We
had a TCC/GM ratio of 0.80 times in 2022 and before that, 0.88 times
in 2019. That is around two times higher than the best-in-class level for
a business like ours. It is an important metric because it is a measure
of the operating leverage of our business and, therefore, of our
resilience. We plan to approximately halve our TCC/GM by the
mid-term. Across the Group, we have efficiency initiatives underway
that will deliver sustainable annualised savings of £400m to £500m,
making us more competitively advantaged and fit for the future. This
is supported by improved cost reporting capability and fundamentally
shifting mindset on efficiencies, embedding them as a sustainable and
strategic lever to underpin performance.
Lower carbon and digitally enabled businesses
Our strategic framework acknowledges the fundamental role of lower
carbon solutions and digital technologies in the success of Rolls-Royce.
We are committed to becoming a net zero company by 2050 (see page
32) and we support our customers to do the same. We are making good
progress towards making our own operations net zero (see page 33)
but there is a lot more to do to decarbonise the sectors in which we
operate. Our technological expertise has a crucial role to play.
New lower carbon fuels will be central to achieving net zero in the
medium term across many of our markets. In commercial aerospace,
for instance, sustainable aviation fuel (SAF) is the answer for large
aircraft. That is why we are very pleased to have successfully reached
our target of testing all our in-service Trent and business jet engines
with 100% SAF in 2023. We have also been working with our armed
forces customers to achieve the same for the engines they use from
our Defence division. We also believe the internal combustion engine
can be made compatible with net zero, through the use of sustainable
fuels. This is vital as many of our customers, such as data centre and
governmental clients, will continue to use combustion engines well into
the future. At the end of 2023, variants of all our major Power Systems
engine platforms can run on sustainable fuels, such as hydrotreated
vegetable oil. In marine, we are developing methanol-based solutions
and for power generation we see hydrogen as a future solution. All
these developments are based on existing engines. In some markets,
such as yachts, hybrid solutions will be key and solutions are being
developed. We are also prepared for the gradual transition to
battery-based solutions, with the required capabilities and products
in place�
We are also making increased use of new digital technologies across
four areas: enhancing the customer experience; accelerating product
design; improving manufacturing; and empowering our people. We are
well known for our skill in collecting engine data in order to improve
the performance of our engines while in service and, with digital twin
capabilities, we can forecast the time an engine stays on wing. This is
improving dispatch reliability and reducing disruption for customers.
Our future vision is raising the bar to 100% availability, where everything
is planned and predictable, further improving the service we offer
customers. Digital tools are also helping us design products more
efficiently. Powerful virtual simulations and use of artificial intelligence
(AI) can reduce the time it takes to develop and test a new engine. In
manufacturing, we are using digital tools, such as AI machine learning,
to improve our inspection regimes. We also intend to make increasing
use of AI to remove repetitive tasks, freeing our people to focus on
high-value activity.
Portfolio choices and
partnerships
The markets we have chosen
to operate in, businesses we
want to invest in and the
partnerships that will help
create truly winning
positions.
Advantaged businesses
and strategic initiatives
How we will create a
competitive business,
expand our earnings
potential and sustainably
improve our performance.
Efficiency and
simplification
The importance of a
company-wide focus to
drive synergies that will
enable us to be more
competitive and simplify
the way we operate.
Lower carbon and
digitally enabled
businesses
Our commitment to the
energy transition and
capturing the benefits of
becoming digitally enabled.
OUR STRATEGIC FRAMEWORK
8
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CHIEF EXECUTIVE’S REVIEW
leadership accountability for safety across the Group, every single
person within Rolls-Royce has a responsibility to prioritise safety above
all other considerations.
Looking forward
While we have a strong focus on delivering our short and mid-term
targets, we are also investing heavily in product improvements, new
product introductions and product cost improvement. All of these are
long-term investments. This is in addition to the significant customer
wins we have had that drive long-term growth. The result of this
combination is a group being set up for enhanced financial performance.
It means we are laying down foundations that will benefit us in the
period long after our mid-term targets.
For example, in Civil Aerospace, we are spending £1bn on time-on-wing
improvements in a multi-year programme. This will double the time-on-
wing of our Trent 1000 engine and, in non-benign environments,
double the time-on-wing of the Trent XWB-97 as well as generating a
50% improvement in benign environments. We are investing in
reducing shop visit costs, creating a more efficient and more resilient
aftermarket operation; and in decreasing product costs so we can
capture more of the value from the order book. Our win-win approach
to contracting means we are better placed to be rewarded for our
innovation, while our investment in new digital technologies will ensure
a better experience for our customers, as well as make us more efficient.
We are also expecting to invest further in UltraFan, having achieved
the very important milestone of successful full power testing during
2023. UltraFan also provides us with opportunities to introduce
technologies from the demonstrator into our existing fleet. Our Pearl
and Trent engine families will benefit from these actions as they power
the in-service fleet well into the 2040s.
In Power Systems, we see long-term potential for our competitive
portfolio of products and are investing in making those products
compatible with sustainable fuels and creating engines capable of using
new fuels such as methanol. We are also developing the first new mtu
engine for many years, an investment that will pay off beyond the
mid-term. In Defence, our recent successes in securing a place on the
US Air Force’s B-52 and US Army’s FLRAA will not start to deliver
significantly until well after the mid-term. GCAP is expected to deliver
a next generation combat aircraft in 2035, building on the progress we
have already made with our Team Tempest partners in the UK. All these
Defence programmes will result in engines and systems that will remain
in service for 30 or 40 years after they are delivered. AUKUS, meanwhile,
will see our submarines business delivering and servicing nuclear
propulsion systems well into the second half of this century. Finally, of
course, our SMR business has a compelling long-term growth story,
with power stations expected to be in service for 60 years. As a result,
2024 and even the mid-term targets are merely milestones. They are
not the final destination. Rolls-Royce will continue to grow with enhanced
margins and cash flow well into the long term as a result of our strategy
and the choices we are making today.
Building a track record of delivery
This is a pivotal moment in the history of Rolls-Royce. We have set out
a bold and achievable plan to create a high-performing, competitive,
resilient and growing business. Our strategy is granular and owned
throughout our business. The choices we have made in our strategic
review are clear. Our mid-term targets are compelling. We are building
a track record of delivery, while investing in the future. Our success will
benefit not just our shareholders but all our stakeholders, including our
customers as they meet the challenges and opportunities that define
the future. We will also create more opportunities for our people, so
everyone can be a part of an energising, rewarding and world-leading
group. I would like to thank all of our people for their effort and hard
work in 2023. Together, we are building One Rolls-Royce. A Group that
can fully realise its potential, ensuring the excellence and innovation
that has helped shape the modern world, endures long into the future.
Tufan Erginbilgic
Chief Executive
One Rolls-Royce focused on strategic delivery
The delivery of our ambitious strategy is through a new organisation
structure. We now operate as One Rolls-Royce. This is a major shift away
from the previous decentralised model and creates an aligned organisation
benefiting from the ability to dynamically deploy resources to strategic
priorities; common measures that enable us to assess our progress against
our strategic priorities; improved performance through clear decisions
and accountability; and finally, a simpler and more efficient operating
model. This leaner and lower cost model reduces siloed working and
eliminates the waste of duplicated tasks and capabilities in each division.
During 2023, we announced the new organisational design with a
simplified leadership structure and plans to reduce the number of roles
across the Group by 2,000 to 2,500 by the end of 2025 (see page 48).
It simplifies our business, reducing layers and creating a clearer system
of controls and alignment. It is not only about structural change, it is
also about changing how we run our business. For instance, across
Rolls-Royce we are taking a zero-based budgeting approach and have
set a 10% to 15% reduction in targeted areas and we are controlling
investment centrally to ensure we fund projects in line with strategy.
We have brought together key areas crucial to our success, through a
new engineering, technology and safety (ET&S) capability and an
enterprise-wide procurement and supplier management organisation.
ET&S is a significant change right at the heart of Rolls-Royce. Focused
on programme delivery, ET&S will build and strengthen our competence
and has responsibility for the delivery of some programmes, engineering
standards, processes, methods and tools. This structure provides
significant benefits to efficiency levels, capability and retention by
ensuring we can move our engineering teams to the highest priority
activities across all of our divisions, in-line with our strategy. By
benefiting from the learning, tools, resources and capabilities that are
common across projects we are better able to execute new product
introduction. There are significant synergies across the Group that we
will be able to exploit. For example, our GCAP project in Defence can
benefit from the certification, design and system engineering that our
business aviation team has built from the introduction of three new Pearl
engines. Our SMR team can benefit from the manufacturing engineering
capability that our Civil Aerospace business has built, while there are
common engineering challenges in areas such as thermal management
or controls that equally apply to Power Systems as to our Civil Aerospace
and Defence divisions. This allows for better retention of talent in key skill
areas, as work is balanced across all of the divisions, while also increasing
capability by pulling best practice and experience from the whole Group.
Our Group-wide procurement and supplier management organisation,
meanwhile, has a critical role to play in our success as we harness the
scale of Rolls-Royce. It will support the consolidation of Group spend,
leverage scale, develop consistent best-in-class standards and build
people capability. We will leverage opportunities across the organisation
to deliver approximately £1bn of gross third party cost savings in the
mid-term.
Within this new One Rolls-Royce organisation, we have added new
talent and strengthened our leadership, with almost half of the
immediate direct reports to my leadership team either new to the role
or in an expanded role. The Executive Team has also been strengthened,
bringing new experience, capabilities and energy. During the year,
Helen McCabe joined Rolls-Royce as Chief Financial Officer and Nicola
Grady-Smith as Chief Transformation Officer. In 2022, Jörg Stratmann
joined as President of Power Systems and I was closely involved in his
appointment. During 2023, Rob Watson moved to President of Civil
Aerospace, Adam Riddle became President of Defence and Chris
Cholerton became Group President, with executive responsibility for
the Group’s nuclear operations, including Rolls-Royce Submarines and
Rolls-Royce SMR. Simon Burr also took up the newly created post of
Group Director of Engineering, Technology & Safety (ET&S) in 2023.
Keeping our employees and customers safe is our number one priority.
Nothing is more important than that. Always, every time. So, we have
put product safety at the heart of this new organisation to strengthen
our approach to technical safety and assurance. While Simon has
9
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
CHIEF EXECUTIVE’S REVIEW
Rolls-Royce has been at the forefront of innovation for over a century.
We set the standard for engineering excellence, providing
mission-critical products and services to customers across the globe.
We have built a world-class product portfolio and deep customer
relationships. Our focus now is to translate our technical and market
success into strong financial returns. We have the potential to achieve
so much more�
The progress made in 2023 gives us confidence in the delivery of our
strategic plans. We are accelerating financial delivery and have set
new, ambitious yet achievable mid-term targets.
The Rolls-Royce proposition
1�
Build a high-performing, competitive and resilient business with
profitable growth.
2� Grow sustainable free cash flow.
3� Build a strong balance sheet and grow shareholder returns.
Delivering the proposition will make us a stronger partner to our
customers as they face future challenges and opportunities. We will
unlock our full potential by turning engineering excellence into strong
financial performance.
To implement our strategy, we will be disciplined, agile and systematic.
We will continue to have a tight focus on priorities, improve commercial
discipline and seek efficiency in every step, whilst never compromising
on integrity or safety. We will put the business on a stronger financial
footing by delivering a sustainable reduction in working capital, higher
operating margins and improved operational performance.
Improving profitability will give us options to grow the business and
enhance shareholder returns. This performance shift is also crucial to
creating more opportunities for our people to be part of an energising,
rewarding and world-leading team.
In 2023, we developed a clear strategy to help Rolls-Royce perform to its full potential.
We have already made good progress towards building a strong, competitive, resilient
and growing business. This success is thanks to transformation and performance
management�
OUR TRANSFORMATION
A HIGH-PERFORMING, COMPETITIVE AND
RESILIENT BUSINESS WITH PROFITABLE
GROWTH
GROWING SUSTAINABLE FREE
CASH FLOWS
STRONG BALANCE SHEET AND GROWING
SHAREHOLDER RETURNS
STRATEGIC FRAMEWORK
— Portfolio choices and partnerships
— Advantaged businesses and strategic initiatives
— Efficiency and simplification
— Lower carbon and digitally enabled businesses
DELIVER AS ONE ROLLS-ROYCE
— Embrace new ways of working and mindset
— Establish a differentiated performance culture
— Execute with strategic clarity
— Externally focused and benchmarking
— Simplified organisation and strengthened capabilities
10
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Strategy
DELIVERING SUSTAINABLE GROWTH THROUGH TRANSFORMATION
Digital technology will play an increasingly important role
throughout our value chain. We already use data from products
in service to create value for ourselves and for our customers.
Future advances in digital, particularly AI, will further enhance
operational performance and reduce costs across our industries
and markets.
We focus on four areas: enhancing the customer experience;
accelerating product design; improving manufacturing; and
empowering our people.
Capturing the benefits of becoming digitally enabled
Our strategic framework to deliver the proposition
We have launched a Group-wide focus to drive synergies, make
us more competitive and simplify the way we operate, enabling
us to deliver our priorities as One Rolls-Royce. We are
optimising our footprint and leveraging our scale to reduce third
party costs; strengthening supply chain management to reduce
inventory and working capital; and changing the way we work
through a refreshed organisational design to reduce duplication
and overheads, creating a more efficient organisation.
Efficiency and simplification
We are committed to becoming a net zero company by 2050
and we are supporting our customers to do the same. We focus
on areas where we have the greatest leverage, improving the
efficiency of our products, enabling our customers to operate
in the most efficient way and decarbonising our own operations
and our supply chain.
Commitment to the energy transition
We have launched a number of focused strategic initiatives to
drive change across the Group, delivering improved value
through top and bottom-line actions. These initiatives will
enhance competitiveness, expand our earnings potential and
sustainably improve our performance.
Strategic initiatives
We will make decisions on where to operate and where to invest
based on clear criteria:
— is the market attractive and growing?
— do we have a differentiated position?
— can we generate attractive returns?
We are making choices and executing on them. We are only
investing where the market is attractive and growing, where
we can build an advantaged position differentiated through
strong customer relationships and competitive technology and
where there are high barriers to entry. This allows us to allocate
resources more effectively and drive profitable growth.
We have segmented our portfolio into three categories:
—
areas where we will invest to drive performance improvement
and growth;
— areas where we can create truly winning positions through
partnership; and
— business activities which we intend to exit.
Portfolio choices
11
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
STRATEGY
20232022
Mid-term
target
£0.65bn
£1.6bn
£2.5bn-£2.8bn
20232022
5.1%
10.3%
Mid-term
target
13%-15%
20232022
£0.5bn
£1.3bn
Mid-term
target
£2.8bn-£3.1bn
20232022
4.9%
11.3%
Mid-term
target
16%-18%
Operating profit Free cash flow Operating margin Return on capital
CAPTURING PERFORMANCE IMPROVEMENT OPPORTUNITIES
During our strategic review in 2023, we developed a new set of targets that represent a step change in ambition and performance.
They are underpinned by our strategy and demonstrate we are creating a new Company, taking Rolls-Royce significantly beyond any
previous financial results.
We will build on our world-class engineering heritage to deliver a world-class investment proposition, significantly expanding our
earnings and cash potential.
The high, but achievable, bar that we have set is reflective of our winning mindset:
— we will quadruple operating profit from the 2022 baseline to between £2.5bn-£2.8bn;
— we will expand operating margins to between 13% and 15% to be at least as competitive as our peers;
— we will grow sustainable cash flows to between £2.8bn and £3.1bn; and
— we are targeting 16% to 18% return on capital, an improvement of more than ten percentage points over our performance in 2022.
We define the mid-term as a 2027 timeframe. Delivering these targets will mean we have created a financially and operationally
resilient Group with an expanded earnings potential. They are milestones on our journey, not the destination, and we will continue
to grow beyond them into the long term.
Group mid-term targets
12
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGY
Geopolitical tensions
The ongoing Russia-Ukraine conflict and the more recent escalation
of violence in the Middle East have destabilised international
relations. Policy makers are strengthening their focus on national
security in terms of defence, access to energy, critical commodities
and key technologies, the latter through re-shoring critical industries
and the use of sanctions and subsidies. These policies and actions
are disrupting the competitive environment and, together with recent
geopolitical risks to international trade, are contributing to price
volatility and supply chain issues.
Rolls-Royce response
We see opportunity and risk from the changing security situation.
On the opportunity side, we are extending production in our Power
Systems division to meet a strong increase in demand from our
governmental customers; this will drive longer-term benefits from
higher sales of spares and services. We also see increased potential
for Rolls-Royce SMR, as customers, particularly in Europe, seek to
reduce their dependence on imported oil and gas and Russian nuclear
technology. On the risk side, recognising the price and disruption
risk in our supply chains, we are taking steps to build resilience,
including dual sourcing where appropriate.
Economic slowdown
In 2023, we saw a further slowdown in global activity. The main
reasons were the phasing out of post-pandemic effects and high
interest rates designed to contain inflationary pressures. The
slowdown is expected to continue through 2024 with advanced
economies and China being most affected. The US economy, despite
proving resilient in 2023, is expected to feel the effects of tighter
financial conditions. Europe’s growth remains contained by energy
uncertainty and slowing external demand. China continues to
struggle with its real estate crisis. Business demand is slowing in the
manufacturing sector although supply chain problems are easing. A
tight labour market may start to open but possibly not for specialised
skills. Inflation is expected to normalise above central banks’ target
of 2% and so forecasters and financial market analysts do not expect
interest rates to return to their previous low levels in the short term.
Rolls-Royce response
Across the Group, the diversity in our product portfolio helps to
absorb short-term economic impacts and our high level of order
backlog acts as a cushion for our business. On the demand side, we
have advantaged businesses in markets that are set to grow ahead
of GDP. For example, in the widebody market, mid-term growth is
forecast to be in the region of 5% to 7% per annum driven by post
pandemic recovery and new demand from a growing middle class in
countries such as India and China. On the cost side, in addition to
the existing inflation-linked pricing clauses in our Civil Aerospace
division, we have taken measures to protect margins in our Power
Systems division by reacting to price changes in energy, materials
and wages. The steps we are taking to strengthen our financial
performance will improve the Group’s credit rating and contain the
impact of high interest rates on our financing costs.
Supply chain uncertainties
As industries recovered from the pandemic, efforts to scale up
production exposed underlying supply chain issues which had been
exacerbated by cuts in capacity made during the crisis. Skills and
experience had been lost and labour availability became a key growth
constraint, significantly impacting lead times. With every industry
increasing demand at the same time, even relative commodity
materials such as steel became difficult and expensive to source. High
interest rates also became a drag on recovery by constraining
investment in production scale up. The situation is improving but
shortages remain for some commodities, parts and components and
we expect to experience challenges for at least another 18 to 24 months.
Rolls-Royce response
We are taking steps to improve supply chain efficiency and resilience.
We are improving forecasting and planning and collaborating closely
with suppliers to drive tighter management of lead times to ensure
we have the inventory we need when we need it. Additional supply
chain resilience benefits will come from our efforts to reduce cost
and enhance commercial discipline. Operationally, we are simplifying
product designs to improve sourcing options and we are improving
manufacturing processes to reduce scrap and waste. Commercially,
we are pushing for stronger contractual protection against
inflationary impacts and supplier underperformance.
Long-term issues
Other significant long-term issues for our business include
demographic trends, climate change and the intent to move towards
a net zero economy.
According to UN data, the expected growth in global population
from eight to ten billion people by 2050 will be concentrated in urban
areas, driving higher demand for energy and mobility solutions. The
development in emerging economies of a stronger middle-class
population, especially in India and China, will support growth in
commercial aviation. Resource constraints are likely to increase
geopolitical risk and Defence budgets will continue to rise in response.
The global effort to decouple economic development from
greenhouse gas emissions presents both a challenge and a
generational business opportunity.
Rolls-Royce response
Thanks to our strong positions in Civil Aerospace and Power Systems
we will benefit directly from the growing demand for global mobility.
Our Defence division will grow within its core transport and combat
segments and our unique capabilities will open other opportunities.
Rolls-Royce SMR is seeking to enhance the economics of modular
nuclear power generation to deliver a scalable, cost-effective source
of low-carbon electricity, helping societies meet their development
and sustainability goals.
Across the Group we are working to ensure that all our products, in
the air, at sea, and on land, can be used sustainably through
ensuring compatibility with sustainable fuels and by developing
technologies to enable the next generation of high
efficiency solutions.
13
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
External environment
OUR UNIQUENESS
We partner with customers to develop a close understanding of
their needs, co-creating solutions and capabilities. We have
partnered for decades with aircraft manufacturers and airlines,
including joint MRO facilities.
We partner with our supply chain to access capability and
capacity, to maximise market cover, minimise collective investment
and share risk and reward.
NEW GENERATION
WIDEBODY
AIRCRAFT
POWERED BY
ROLLS-ROYCE
4 out of 5
OUR COMMON DRIVERS
FOR SUCCESS
WHAT WE
WILL ACHIEVE
OUR CORE DIVISIONS
CIVIL AEROSPACE
OUR ROLE
IN SOCIETY
We make it possible for people to move safely, efficiently and
affordably across the globe.
We provide social and economic value through enabling unique
experiences and in-person relationships; connecting people and
cultures, businesses and families.
Connect
PASSENGERS WHO FLEW
ON A ROLLS-ROYCE
POWERED AIRCRAFT
IN 2023
>250m
OUR BUSINESS
MODEL DRIVERS
We design, develop, manufacture and support high performance
gas turbines for commercial aviation.
We pioneered the industry’s adoption of long-term service
agreements, a model that aligns our interests with those of our
customers and rewards us for improving reliability, availability and
reducing costs.
We provide value to airlines through data driven insights and we
set the standard for customer service in business aviation.
Differentiated services
Trusted partner
ONE ROLLS-ROYCE
Advantaged businesses with strong positions
in attractive and growing markets
A HIGH-PERFORMING, COMPETITIVE,
RESILIENT AND GROWING BUSINESS
CUSTOMERS ON
LONG-TERM
SE R V I CE
AGREEMENTS
2/3
1
Safety
7
Information & data
2
Compliance
8
Market & financial shock
3
Strategy
9
Political
4
Execution
10
Talent & capability
5
Business interruption
11
Technology
6
Climate change
Link to risk
Link to risk
1
3
6
9
11
Link to risk
1
3
6
7
10
11
Link to risk
1
2
3
4
5
6
7
8
9
10
11
14
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Business model
OUR UNIQUENESS
OUR COMMON DRIVERS
FOR SUCCESS
Read more about our
KPIs on pages 16 to 18
Read more about our
strategy on pages 10 to 12
Read more about our principal
risks on pages 50 to 57
WHAT WE
WILL ACHIEVE
OUR CORE DIVISIONS
DEFENCE POWER SYSTEMS
OUR ROLE
IN SOCIETY
We provide mission critical power and propulsion in
the air, at sea and on land.
We enable operational independence and strategic
and tactical advantage; helping nation states keep their
citizens safe at home and protect their interests
overseas.
Protect Power
YE A R S OF
PROVIDING
GAS TURBINE
POWER FOR
DEFENCE
CUSTOMERS
80
We provide answers to the challenges posed by
the rapidly growing societal demands for energy
and mobility.
We deliver high performance, dependable and
sustainable power, enabling economic growth
and development.
EXPECTED ANNUAL
GROWTH RATE
ACROSS OUR
POWER
GENERATION
MARKETS
5%-7%
OUR BUSINESS
MODEL DRIVERS
We design, develop, manufacture and support high
performance aero and naval gas turbines and nuclear
power and propulsion systems.
We turn technology into differentiated products that
provide customers with unique capabilities and stay
in-service for decades.
We create broader economic value for the Group by
balancing the volatility seen in commercial markets
and by enabling synergies across technology,
infrastructure, supply chain and product families.
We design develop, manufacture and support
high-performance reciprocating engines and broader
system solutions for use at sea and on land.
We invent once and use many times, developing
products and product families that can be used in
different applications across multiple markets,
delivering proven solutions for our customers and
maximising the returns on investment to us.
NUMBER OF S4000
ENGINES SOLD
ACROSS DIVERSE
MARKETS
50k
Customer-funded growth One core solution addressing multiple markets
We deliver unmatched power, reliability and ef ficiency
in return for premium value.
We are recognised as the engine provider of choice
where the mission matters: high integrity back-up power
for critical infrastructure such as hospitals, airports
and data centres; and high performance propulsion
for yachts, military vehicles and naval vessels.
MARKET SHARE
IN GOVERNMENTAL
BUSINESS
>30%
We support over 160 armed forces in over 100
countries.
We provide whole engine design, development and
manufacturing capability and operational
independence in the US, UK and Germany and we work
closely with partners in Japan, Italy, Spain, France
and Australia.
HOME NATIONS
WITH WHOLE
ENGINE
CAPABILITY
3
Global access, local presence Structural advantage
DIFFERENT
APPLICATIONS OF
THE AE ENGINE
FAMILY ACROSS
DEFENCE AND
CIVIL MARKETS
16
ONE ROLLS-ROYCE
Advantaged businesses with strong positions
in attractive and growing markets
Differentiated by deep customer relationships; market leading
products and technology; engineering and commercial excellence
DRIVEN BY COMMITTED EMPOWERED PEOPLE
OPERATING IN A PERFORMANCE CULTURE
WITH TRUST, INTEGRITY AND SAFETY
AS OUR CORE VALUES
15
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
BUSINESS MODEL
Financial performance indicators
1,2
Order backlog (£bn)
68.5
60.2
21 20 19
23
22
50.6
52.9
60.9
HOW WE DEFINE IT
Total value of firm orders placed by
customers for delivery of products
and services where there is no
right to cancel. This KPI is the same as
the statutory measure for order
backlog. See note 2 on page 141 for more
information.
WHY IT IS IMPORTANT
Order backlog provides visibility of
future business activity.
LINK TO REMUNERATION
Customer orders drive future revenue
growth which, in turn, enables profit
and cash flow growth. Profit and free
cash flow performance are key financial
metrics in the Incentive Plan.
Underlying revenue (£m)
15,409
12,691
21 20 19
23
22
10,947
11,430
15,450
HOW WE DEFINE IT
Revenue generated from operations at
the average exchange rate achieved
on effective settled derivative contracts
in the period that the cash flow occurs.
See note 2 on page 138 for more
information.
WHY IT IS IMPORTANT
Underlying revenue provides a measure
of business growth and activity.
LINK TO REMUNERATION
Underlying revenue growth enables
profit and cash flow growth, both of
which are key financial metrics in the
Incentive Plan.
Underlying operating profit/(loss) (£m)
1,590
652
21 20 19
23
22
414
(2,008)
808
HOW WE DEFINE IT
Operating profit generated from
operations at the average exchange
rate achieved on effective settled
derivative contracts in the period that
the cash flow occurs. It excludes M&A,
exceptional items and certain other
items outside of normal operating
activities. See note 2 on page 138 for
more information.
WHY IT IS IMPORTANT
Underlying operating profit indicates
how the effect of growing revenue and
control of our costs delivers value for
our shareholders.
LINK TO REMUNERATION
Profit is a key financial performance
measure for our Incentive Plan.
Underlying operating margin (%)
10.3
5.1
21 20 19
23
22
3.8
(17.6)
5.2
HOW WE DEFINE IT
Underlying operating profit (as defined
above) as a percentage of underlying
revenue (as defined above). It indicates
how much profit the business makes
for every one pound sterling of
revenue generated.
WHY IT IS IMPORTANT
Underlying operating margin indicates
how effective the business is at
converting revenue to profit. A higher
margin is an indicator of increased value
for our shareholders, as it demonstrates
a higher conversion of revenue to
profit.
LINK TO REMUNERATION
Profit is a key financial performance
measure for our Incentive Plan.
Free cash flow from continuing operations (£m)
1,285
505
21 20 19
23
22
(1,485)(4,255)
873
HOW WE DEFINE IT
Free cash flow is cash flows from
operating activities, adjusted to include
capital expenditure and movements in
investments, capital elements of lease
payments, interest paid and to exclude
amounts spent or received on business
acquisitions or disposals, financial
penalties paid and exceptional
restructuring payments. Cash flow from
operating activities is our statutory
equivalent. See note 28 on page 184.
WHY IT IS IMPORTANT
Free cash flow is a key metric used
to measure the performance of our
business and how effectively we are
creating value for our shareholders.
It enables the business to fund
growth, reduce debt and make
shareholder payments.
LINK TO REMUNERATION
Free cash flow is a key financial metric
in the Incentive Plan.
1 The adoption of IFRS 16 Leases in 2019 had no material impact on our financial KPIs
2 2023, 2022 and 2021 figures represent the results of continuing operations. 2020 figures
have been restated, where relevant, to show ITP Aero as a discontinued operation in line
with 2021 reporting. 2019 figures have not been restated
A reconciliation from the
alternative performance measure
to its statutory equivalent can be
found on pages 213 to 217
16
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Key performance indicators
3 This is a new KPI added in 2023 to provide information on gross R&D expenditure as this
provides a more meaningful view of total R&D. The previous KPI presented was
self-funded R&D as a proportion of underlying revenue
4 This is a new KPI added in 2023 to provide information on gross capital expenditure as this
provides a more meaningful view of total capital expenditure. The previous KPI presented
was capital expenditure as a proportion of underlying revenue
A reconciliation from the
alternative performance measure
to its statutory equivalent can be
found on pages 213 to 217
TCC/GM (ratio)
0.59
0.80
21 20 19
23
22
0.86
(2.84)
0.88
HOW WE DEFINE IT
TCC is defined as total underlying cash
costs during the period (represented
by underlying R&D and underlying
C&A) as a proportion of underlying
gross profit.
WHY IT IS IMPORTANT
This measure provides an indicator of
total cash costs relative to gross profit
(the percentage of the Group’s
overheads that are covered by gross
profit). A reduction in total cash costs
relative to gross profit indicates how
effective the business is at managing
and/or reducing its costs.
LINK TO REMUNERATION
Profit is a key financial performance
measure for our Incentive Plan.
Return on capital (%)
11.3
4.9
21 20 19
23
22
3.2
(16.5)
4.7
HOW WE DEFINE IT
Return on capital is defined as net
operating profit after tax (NOPAT) as a
percentage of average invested capital.
NOPAT is defined as underlying net
profit excluding net finance costs and
the tax shield on net finance costs.
Invested capital is defined as current
and non-current assets less current
liabilities. It excludes pension assets,
cash and cash equivalents and debt.
See page 217 for more detail on how we
calculate return on capital.
WHY IT IS IMPORTANT
Return on capital assesses our
efficiency in allocating capital to
profitable investments. The more
efficient we are as a business in
allocating capital to profitable
investments, the more profitable we
will be.
LINK TO REMUNERATION
Profit is a key financial performance
measure for our Incentive Plan.
Gross R&D expenditure ³ (£m)
1,390
1,287
21 20 19
23
22
1,179
1,225
1,459
HOW WE DEFINE IT
In-year gross cash expenditure on R&D
excluding the impact of contributions
and fees, amortisation and impairment
of capitalised costs and amounts
capitalised during the year.
WHY IT IS IMPORTANT
This measure demonstrates the balance
between long-term strategic
investments and delivering short-term
shareholder returns.
LINK TO REMUNERATION
Disciplined control and allocation of
R&D expenditure optimises in-year
profit and cash flow performance
without compromising long-term
growth through innovation. There is a
balance of long-term metrics which
reward strong financial performance
and also relative returns to our
shareholders through total shareholder
return (TSR) in the Incentive Plan.
Gross capital expenditure ⁴ (£m)
429
345
21 20 19
23
22
304
585
747
HOW WE DEFINE IT
In-year gross cash expenditure on
capital excluding capital expenditure
from discontinued operations.
WHY IT IS IMPORTANT
This measure demonstrates the balance
between long-term strategic
investments and delivering short-term
shareholder returns.
LINK TO REMUNERATION
Disciplined control and allocation of
capital expenditure optimises in-year
profit and cash flow performance
without compromising long-term
capital requirements. There is a balance
of long-term metrics which reward
strong financial performance and also
relative returns to our shareholders
through total shareholder return (TSR)
in the Incentive Plan.
17
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
KEY PERFORMANCE INDICATORS
Non-financial performance indicators
Safety index (%)
23 22 21
94
85
74
HOW WE DEFINE IT
In 2023, we changed our people metric
to incorporate a 50% weighting to an
internal safety index. The safety index
is the leading measure of our safety
culture, which was introduced across
the Group in 2021. The index consists
of a composite score of five leading
indicators, with each indicator
measuring a key element of our
safety culture. See page 44 for more
information.
WHY IT IS IMPORTANT
The measure is strongly aligned to our
strategy of safety being the number
one priority, with an emphasis on
proactive measures.
LINK TO REMUNERATION
This metric accounts for 5% of the
Incentive Plan.
Employee engagement (scored 1 to 5)
5
3.99
3.85
21 20 19
23
22
3.73
3.68
3.53
HOW WE DEFINE IT
Since 2019, we have been on a journey
targeting upper quartile status versus
Gallup’s manufacturing organisations
peer group. Responses to the
engagement survey are scored on a
scale of one to five. The employee
engagement score averages the
responses to all 12 questions in the
survey. Our target for 2023 was to score
a grand mean of 3.97. See page 46 for
more information.
WHY IT IS IMPORTANT
Our people are crucial to delivering
future business success. This is an
objective way to assess how engaged
our employees are with the business
and its leaders.
LINK TO REMUNERATION
Employee engagement performance
against our target accounts for up to
5% of the Incentive Plan.
Sustainability
The metrics for the Incentive Plan
combine short-term measures
which focus on in-year
performance with longer-term
strategic measures. The metric for
sustainability is a longer-term
measure with targets set at the start
of 2021.
HOW WE DEFINE IT
At the start of 2021, each division was set
sustainability targets for the
three-year performance period ended
31 December 2023. See pages 41 and 42.
WHY IT IS IMPORTANT
We are committed to becoming a net
zero company by 2050 and we support
our customers to do the same. New fuels
will be crucial to achieving net zero
in the medium term across many of
our markets.
LINK TO REMUNERATION
This metric accounts for up to 5% of
the Incentive Plan for 2023.
5 External assurance over the employee engagement score is provided by Bureau Veritas.
See page 209 for their assurance statement
18
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
KEY PERFORMANCE INDICATORS
We have ambitious, bold and achievable plans. We are driving sustainable and higher
quality growth in earnings and cash flows and improved return on capital. We have
a clear capital framework and detailed plans to deliver our financial targets.
pound spent as their own to deliver the most value for all our
stakeholders. We are already transforming the way we work with new
frameworks and higher quality training in place to build skills
and capabilities.
3. Working capital optimisation
Working capital is a key focus as we look to strengthen our balance
sheet and improve our return on capital. Our initiatives underpin a
sustainable release of working capital benefit across the mid-term,
which we define as a 2027 timeframe. The largest opportunity relates
to inventory, where we are targeting a meaningful reduction in
inventory days. Actions we will take include improving our demand
planning and supply chain management. We also see an opportunity
to improve receivables, with teams in place to drive down unbilled debt
and review customer payment terms, as well as improving our payables
performance. We have granular plans to underpin our targets. There
are a number of working capital headwinds over the mid-term but the
result of our actions offset these headwinds which result in a net
working capital release.
4. Capital framework
Our capital framework is focused on three clear priorities.
—
First, to obtain a strong balance sheet with an investment grade
profile. A strong balance sheet will position us well to withstand
volatility and external shocks and will allow us the financial flexibility
for further investment for growth.
—
Second, once the strength of our balance sheet is assured we are
committed to reinstating and growing shareholder distributions. For
further details see page 5.
I joined Rolls-Royce in August 2023, excited by the opportunity to help
shape the future of this iconic company. We have advantaged positions
in attractive and growing end markets with world-leading capabilities
and committed and motivated people. We have so much to be proud
of and so much potential. I am delighted to be part of the
Rolls-Royce team�
We are transforming Rolls-Royce into a high-performing, competitive,
resilient and growing business. We have started on a journey that will
take the Group to a place where we have the financial strength to invest
in projects that will enable us to win, where we have strengthened our
balance sheet to withstand external shocks and to enable us to reward
our shareholders. We have made good progress in 2023 but there is
still more work to do.
I have identified four key priorities which I will be focusing on.
1. Integrated performance management
Our strategic review highlighted the need for improved processes and
a stronger culture of integrated performance management. We have
already started to improve this and will strengthen it further. Strategic
plans will be linked to annual budgets which in turn will be linked to
in-year performance management. We will rigorously track performance
and make interventions proactively. Targets will be underpinned and
owned across the whole organisation.
2. Commercial and cost optimisation
We are developing sharper commercial acumen and a more
cost-conscious culture across the organisation. This is underpinned by
the philosophy that everyone must act like an owner, treating every
Helen McCabe
Chief Financial Officer
19
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
Financial review
—
Third, a disciplined approach to investments. All investments must
be aligned to the Group’s strategy. Investments are prioritised on a
Group-wide basis, focusing on those that drive the greatest
shareholder value. We have strict financial and sustainability criteria
and hurdle rates in place.
2023 financial performance
In 2023, we have made good progress against our strategic priorities
and delivered a step change in financial performance which included
some early benefits from our transformation efforts.
—
Driving growth in attractive markets: Large engine flying hours (EFH)
in Civil Aerospace recovered to 88% of 2019 levels, up from 65% in
2022. Large engine orders were the highest in more than 15 years,
with major orders from Air India and Turkish Airlines. In Defence, the
AUKUS submarine agreement was announced, which will be
supported by the expansion of our submarines site in Raynesway,
and work on our future programmes in the UK and US progressed
well. In Power Systems, we are capturing strong demand for power
generation solutions and services in the rapidly expanding data
centre market.
—
Significantly improved profit and margins: Underlying operating
profit rose by £0.9bn to £1.6bn supported by our transformation
programme and strategic initiatives, with commercial optimisation
and cost efficiency benefits across the Group. Underlying operating
margin more than doubled to 10.3%. Civil Aerospace, Defence and
Power Systems all delivered materially higher margins compared to
last year. The largest improvement was in Civil Aerospace, which
delivered an operating margin of 11.6% compared to 2.5% in the
previous year. This was driven by increased aftermarket profit, in
both the large engines and business aviation segments, reflecting
commercial optimisation and cost efficiencies, as well as volume
growth. Defence delivered an improved operating margin of 13.8%
(2022: 11.8%), which primarily reflected improved pricing and cost
efficiencies. In Power Systems, which reported an operating margin
of 10.4% (2022: 8.4%), pricing and cost efficiency actions in the first
half of the year resulted in a significantly improved operating profit
and margin in the second half and in the full year.
— Record cash generation: Free cash flow from continuing operations
grew by approximately 150% to £1.3bn, principally due to higher
operating profit. Civil net LTSA creditor growth net of risk and
revenue sharing agreements (RRSAs) was £1.1bn (2022: £0.8bn).
Continued LTSA balance growth reflects higher EFHs and the
benefit of commercial optimisation, with LTSA invoiced flying hour
receipts of £4.6bn (2022: £3.6bn). Our focus on working capital
resulted in a release in the second half despite ongoing supply chain
challenges. For the full year there was a net working capital outflow
of £0.4bn (2022: £0.5bn). Inventory and debtor days both improved
year on year building further confidence in the actions we are taking
to improve the quality of cash delivery.
—
Building financial resilience: Total underlying cash costs as a
proportion of underlying gross margin (TCC/GM) ratio improved to
0.59x in 2023 from 0.80x in 2022. Net debt improved to £2.0bn
(2022: £3.3bn). We have £4.1bn of drawn debt, of which £0.5bn matures
in 2024, £0.8bn in 2025 and £2.8bn in 2026-2028, and £1.7bn of lease
liabilities. We have £3.7bn in cash and cash equivalents and £3.5bn
undrawn facilities, totalling £7.2bn of liquidity, and expect to repay
the 2024 and 2025 bonds from cash. We cancelled a £1.0bn undrawn
UK Export Finance (UKEF) backed facility in the year, and a £1.0bn
undrawn bank loan facility reflecting our higher cash balance and
more resilient financial position.
2024 outlook
As we continue to deliver our strategy, we expect further improvements
towards all our mid-term targets. This is despite the impact of continued
supply chain challenges, which we expect to persist for 18 to 24 months,
geopolitical uncertainty and inflationary pressures. Our forecast for
2024 underlying operating profit is £1.7bn-£2.0bn and free cash flow
between £1.7bn-£1.9bn.
Mid-term outlook: growing profit and competitive margins
Our underlying operating profit and margins in 2023 represent a step
change in financial performance, but there is still more to deliver. As
detailed at our CMD, our key mid-term targets included operating profit
of £2.5bn-£2.8bn with an operating margin between 13%-15%. This is
a quadrupling of operating profit from the 2022 baseline, making
margins equal to or better than our peers on a competitive basis. These
targets are underpinned by the rigour of our extensive benchmarking,
the findings of our strategic review and by our commercial optimisation,
efficiency and simplification actions across the Group.
In Civil Aerospace, we expect the most material improvement in margins
from 2.5% in 2022 to 15%-17% by the mid-term. We are driving higher
widebody profit using the six levers of improvement: extending
time-on-wing, lowering shop visit costs, reducing product costs,
keeping engines earning for longer, implementing a new value-driven
pricing strategy and driving rigour on contractual terms and conditions.
We are also driving profitable improvement through our aftermarket
business, time and material, OE and spare engines. In the business
aviation market, we will increase profitability and market share due to
the success of the Pearl engine family.
In Defence, we are targeting a 14%-16% operating margin by the
mid-term. Our strategic focus is on growing our transport, combat and
submarines activities. Operating profit growth and margin
improvements will be driven by growth from volume and mix as we move
from legacy programmes to new funded programmes and from
prioritising investment as we focus our spend and benefit from an
increase in customer funded programmes. Margins will also benefit
from our efforts on commercial optimisation, including value-driven
pricing, and from efficiency and simplification.
In Power Systems, where we are targeting a 12%-14% margin by the
mid-term, profit growth will be delivered by strategic initiatives focused
on power generation, governmental and marine end markets. In power
generation, we are optimising our cost structure and focusing on key
accounts to drive margin growth. We are also expanding our microgrid
solutions and extending our service offering in battery energy storage
systems which will become a profitable business in the short term. In
governmental, we are capturing near-term growth with scope expansion
and focused investment and in marine we are developing alternative
fuel solutions to strengthen our synthetic-fuel-ready portfolio.
Mid-term outlook: sustainable and growing free cash flow
We expect mid-term free cash flow of £2.8bn-£3.1bn; an improvement
of £2.3bn-£2.6bn compared to 2022. This free cash flow growth will
primarily be driven by operating profit growth of between £1.8bn-£2.1bn
as we ensure that all divisions are delivering to their full potential.
In addition to our expectation of higher operating profit, our mid-term
free cash flow targets also reflect continued net growth in the Civil
Aerospace long term service agreement (LTSA) balance of between
£0.8bn-£1.2bn per annum. This is driven by: our young and growing
widebody fleet, business aviation growth, benefits from currency as
we consume our legacy hedges and the impact of strategic initiatives
such as time-on-wing. Our cash flow target also reflects our more
disciplined investment approach targeted at strategic growth and
working capital improvements.
20
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL REVIEW
Statutory and underlying Group financial performance from continuing operations
2023 2022
£ million Statutory
Impact of
hedge
book
1
Impact of
acquisition
accounting
Impact of
other
non-
underlying
items Underlying Underlying
Revenue 16,486 (1,077) – – 15,409 12,691
Gross profit 3,620 (461) 46 26 3,231 2,477
Operating profit 1,944 (475) 50 71 1,590 652
Gain arising on disposal of businesses 1 – – (1) – –
Profit before financing and taxation 1,945 (475) 50 70 1,590 652
Net financing income/(costs) 482 (915) − 105 (328) (446)
Profit before taxation 2,427 (1,390) 50 175 1,262 206
Taxation
2
(23) 285 (12) (370) (120) (48)
Profit for the year from continuing operations 2,404 (1,105) 38 (195) 1,142 158
Basic earnings per share (pence) 28.85 13.75 1�95
1 Reflecting the impact of measuring revenue and costs at the average exchange rate during the year and the valuation of assets and liabilities using the year end exchange rate rather than
the rate achieved on settled foreign exchange contracts in the year or the rate expected to be achieved by the use of the hedge book
2 Taxation includes the recognition of a deferred tax asset on UK tax losses of £328m in other non-underlying items
Revenue: Underlying revenue of £15.4bn was up 21%, with double-digit
growth in all three core divisions and particularly strong growth in Civil
Aerospace. Statutory revenue of £16.5bn was 22% higher compared
with 2022. The difference between statutory and underlying revenue
is driven by statutory revenue being measured at average prevailing
exchange rates (2023: GBP:USD 1.24; 2022: GBP:USD 1.24) and
underlying revenue being measured at the hedge book achieved rate
during the year (2023 GBP:USD 1.50; 2022: 1.50).
Operating profit: Underlying operating profit of £1,590m (10.3% margin)
versus £652m (5.1% margin) in the prior year. This was due primarily to
strong aftermarket growth in Civil Aerospace and commercial
optimisation and cost efficiencies across the Group. The largest year
on year improvement in margin was in Civil Aerospace, but Defence
and Power Systems margins also rose materially. Statutory operating
profit was £1,944m, higher than the £1,590m underlying operating
profit largely due to the £475m negative impact from currency hedges
in the underlying results. Net charges of £71m were excluded from the
underlying results as these related to non-underlying items comprising
net transformation and restructuring charges of £102m; partly offset
by net impairment reversals of £8m, the write back of exceptional Trent
1000 programme charges of £21m; and a £2m pension past service
credit.
Profit before taxation: Underlying profit before taxation of £1,262m
included £(328)m net financing costs comprising £164m interest
receivable, £(275)m interest payable and £(217)m of other financing
charges and costs of undrawn facilities. Statutory profit before tax of
£2,427m included £515m net fair value gains on derivative contracts,
£(205)m net interest payable and net foreign exchange gains of £394m.
Taxation: Underlying tax charge of £(120)m (2022: £(48)m) reflects a tax
charge on profits of £(198)m net of a tax credit arising on the
recognition of a £78m deferred tax asset on previously unrecognised
UK tax losses. The 2022 underlying tax charge relates to tax on overseas
profits of £(175)m net of a tax credit on the increase in certain UK
deferred tax assets of £127m. The statutory tax charge of £(23)m is lower
than the underlying charge due to an additional £328m recognition of
a deferred tax asset on UK tax losses. This is partially offset by a net tax
charge of £(231)m on non-underlying items.
As we pay down debt, our financing costs will reduce and the cash
costs of closing out our over-hedged position, which has been a drag
in recent years, will abate. Offsetting these cash flow benefits will be
increased tax cash payments which will naturally increase as our
profit grows.
Mid-term outlook: efficiency and simplification and total
cash cost to gross margin ratio
Across all parts of the Group we are focused on efficiency and
simplification. We are targeting to improve our TCC/GM ratio,
approximately halving it by the mid-term, taking it to a market
leading level (see page 8).
We are leveraging the power of One Rolls-Royce to simplify our
organisation and drive efficiencies that will enable us to be more
competitive and simplify the way we operate. We are right-sizing the
organisation and ensuring it is structured to support strategy
implementation, including plans to reduce 2,000 to 2,500 roles across
the Group by the end of 2025. We expect severance costs to be between
£200m-£250m, which will be taken as an exceptional charge. The
reduction in roles will create an annualised sustainable benefit of around
£200m once completed. This benefit is part of a collection of initiatives
which, across the Group, will deliver a sustainable annualised saving of
£400m-£500m. We plan to deliver around £1bn of gross third party
cost savings over the mid-term which will help offset the impact of
inflationary and product cost increases. We are also more tightly
aligning R&D spend to strategy. Finally, we have set a 10%-15%
reduction in spend in targeted areas through zero-based budgeting.
Mid-term outlook: return on capital
By the mid-term we are targeting a 16%-18% return on capital. We view
return on capital as an important metric for the Group, as it measures
both our profitability and capital efficiency.
Helen McCabe
Chief Financial Officer
21
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
FINANCIAL REVIEW
Free cash flow in the year was £1.3bn, an improvement of £0.8bn
compared with the prior year driven by:
Operating cash flow before working capital and income tax of £3.1bn,
£0.9bn higher than the prior year. The improvement at the Group level
was principally due to our actions on commercial optimisation and cost
discipline. The movement in Civil LTSA balance was £1,331m (2022:
£792m) driven by higher EFH receipts. RRSA prepayments were £252m
(2022: £8m). The movement in provisions of £(258)m largely related to
utilisation of the Trent 1000 provision, contract loss provisions and the
settlement of a legal claim. The settlement of excess derivative contracts
of £(389)m was in line with expectations, with a further cash outflow of
£146m expected to be incurred in 2024, £148m in 2025 and £27m in
2026. Interest received was £159m, up from £36m in 2022 due to higher
cash balances and higher interest rates in the year.
Working capital £(396)m, compared to £(524)m in the prior year.
Inventory increased by £(0.2)bn in the year primarily driven by Civil
Aerospace as a result of continued supply chain disruption. There was
a net £(0.2)bn outflow from receivables, payables and contract liabilities
reflecting the net of volume growth in receivables and an increase in
advance payments from customers.
Income tax of £(172)m, net cash tax payments in 2023 were marginally
lower than the prior year of £(174)m, mainly due to the receipt of refunds
in respect of prior periods in the US and timing of payments in Germany.
The capital element of lease payments was £(270)m, £(72)m higher than
the prior year as a result of timing of lease payments.
Capital expenditure of £(695)m, mainly £(429)m property, plant and
equipment additions and £(284)m intangibles additions. The combined
additions were higher than last year as a result of investment in site
improvements across the Group.
Interest paid of £(333)m, including lease interest payments, has reduced
by £19m as a result of the settlement of the UKEF £2bn loan facility in
September 2022 slightly offset by higher interest on gross overdrafts.
Free cash flow
2023 2022
£ million Cash flow
Impact of
hedge
book
Impact of
acquisition
accounting
Impact of
other non-
underlying
items Funds flow Funds flow
Operating profit 1,944 (475) 50 71 1,590 652
Operating profit from discontinued operations – – – – – 86
Depreciation, amortisation and impairment 1,019 – (50) 9 978 953
Movement in provisions (325) 46 – 21 (258) (23)
Movement in Civil LTSA balance 1,708 (377) – – 1,331 792
Movement in prepayments to RRSAs for LTSA parts (315) 63 – – (252) (8)
Settlement of excess derivatives
1
(389) – – – (389) (326)
Interest received 159 – – – 159 36
Other operating cash flows
2
(63) (8) – 3 (68) 5
Operating cash flow before working capital and income tax 3,738 (751) – 104 3,091 2,167
Working capital (excluding Civil LTSA balance and prepayment
to RRSAs)
3
(236) (123) – (37) (396) (524)
Cash flows on other financial assets and liabilities held for
operating purposes (845) 853 – – 8 77
Income tax (172) – – – (172) (174)
Cash from operating activities 2,485 (21) – 67 2,531 1,546
Capital element of lease payments (291) 21 – – (270) (198)
Capital expenditure (699) – – 4 (695) (504)
Investment 69 – – – 69 28
Interest paid (333) – – – (333) (352)
Other 54 – – (71) (17) (29)
Free cash flow 1,285 – – – 1,285 491
– of which is continuing operations 1,285 1,285 505
1 The funds flow to 31 December 2022 has been represented to disclose cash flows on settlement of excess derivative contracts as cash flows from operating activities. As a result, operating
cash flows before working capital and income tax during the year to 31 December 2022 have reduced by £(326)m to £2,167m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash flow. There is no impact to free cash flow
2 Other operating cash flows includes profit/(loss) on disposal, share of results and dividends received from joint ventures and associates, flows relating to our defined benefit post-retirement
schemes, and share based payments
3 Working capital includes inventory, trade and other receivables and payables, and contract assets and liabilities (excluding Civil LTSA balances and prepayment to RRSAs). Working
capital was previously defined as inventory, trade and other receivables and payables, and contract assets and liabilities, excluding Civil LTSA
22
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL REVIEW
Key drivers of balance sheet movements were:
Civil LTSA: The £(1.7)bn movement in the net liability balance was mainly
driven by an increase in invoiced LTSA receipts exceeding revenue
recognised in the year, this is especially prevalent on new contracts
where shop visits are not immediately scheduled.
RRSA prepayments for LTSA parts: The £0.3bn increase corresponds
to the increase seen in the civil LTSA balance above. RRSA prepayments
typically move in line with the civil LTSA as the RRSA prepayment
represents amounts that we have paid to Risk and Revenue Share
Partners for the parts that they will ultimately provide in support of our
contracts.
Working capital: The £(1.4)bn net working capital position decreased
by £0.6bn compared to the prior year. The movement comprised £0.1bn
increase in inventory, mainly in Civil Aerospace due to supply chain
disruption, £0.9bn increase in receivables due to higher trading volumes
and prepayments from customers, £0.5bn reduction in payables due
to changes in operational volumes and timing of supplier payments,
partly offset by an increase in contract liabilities of £(0.9)bn driven by
advanced payments received across the divisions.
Provisions: The £0.3bn net reduction was primarily driven by the
settlement of a legal claim, utilisation of the Trent 1000 provision, and
a net £0.1bn reduction in contract loss provisions due to provision
utilisation, renegotiations and extensions of some major contracts
resulting in improved margins, partly offset by increased cost estimates
from supply chain issues.
Net debt: Decreased from £(3.3)bn to £(2.0)bn driven by free cash inflow
of £1.3bn. Our liquidity position is strong with £7.2bn of liquidity
including cash and cash equivalents of £3.7bn and undrawn facilities
of £3.5bn. Two undrawn facilities, totalling £2.0bn, were cancelled in
2023 reflecting our higher cash balance and more resilient financial
position. Net debt included £(1.7)bn of lease liabilities (2022:
£(1.8)bn).
Net financial assets and liabilities: A £1.6bn reduction in the net
financial liabilities driven by contracts maturing in the year and a change
in fair value of derivative contracts largely due to the impact of the
movement in GBP:USD exchange rates.
Taxation: The net tax asset has increased by £137m. This includes an
overall increase in the deferred tax asset of £267m, due to increases in
the deferred tax asset recognised on UK tax losses of £422m and other
deferred tax assets of £101m, partly offset by a reduction of £256m on
the deferred tax on foreign exchange derivative contracts. Other tax
balance movements include increases in the deferred tax liability of
£44m and net current tax liabilities of £86m.
Balance sheet
£ million 2023 2022 Change
Intangible assets 4,009 4,098 (89)
Property, plant and equipment 3,728 3,936 (208)
Right of use assets 905 1,061 (156)
Joint ventures and associates 479 422 57
Civil LTSA
1
(9,080) (7,372) (1,708)
RRSA prepayments for LTSA parts
1
1,320 1,005 315
Working capital
1
(1,386) (2,017) 631
Provisions (2,029) (2,333) 304
Net debt
2
(1,952) (3,251) 1,299
Net financial assets and liabilities
2
(2,060) (3,649) 1,589
Net post-retirement scheme deficits (253) (420) 167
Taxation 2,605 2,468 137
Held for sale
3
54 – 54
Other net assets and liabilities 31 36 (5)
Net liabilities (3,629) (6,016) 2,387
Other items
US$ hedge book (US$bn) 15 19
1 The total of these lines represents inventory, trade receivables and payables, contract assets and liabilities and other assets and liabilities in the statutory balance sheet
2 Net debt includes £23m (2022: £86m) of the fair value of derivatives included in fair value hedges and the element of fair value relating to exchange differences on the underlying principal
of derivatives in cash flow hedges
3 Held for sale assets relate to the sale of the off-highway engines business in the lower power range based in Power Systems
23
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
FINANCIAL REVIEW
CIVIL AEROSPACE
UNDERLYING OPERATING PROFIT
£850m
2022: £143m
UNDERLYING OPERATING MARGIN
11.6%
2022: 2.5%
Market overview
Our Civil Aerospace division comprises four categories: large engines,
business aviation, regional and V2500.
Our large installed product base of more than 4,860 engines powers
4 out of 5 of the new generation widebody aircraft. We have a 33%
market share of the large engines in service globally and 41% of the
engines on order. Large engine deliveries increased in 2023 to 262
(2022: 190) as we grow our market share.
We have a high-quality order book with 1,632 large engines (2022:
1,282). We have seen substantial new orders in 2023, including orders
with Air India, Turkish Airlines, Emirates, EVA Air and in early 2024, Delta
Airlines. 2023 was our best year for large engine orders since 2007.
We are also seeing growth in the new Airbus A350 freighter market
where there is clear demand for our products and services. During
2023, we took new orders of 678 large engines (2022: 150). Of the 262
large engine deliveries in 2023, 53 were spare engines (2022: 44). Spare
engines are important to our customers as they support fleet health
and aircraft availability.
In 2023, business aviation engine deliveries increased to 196 (2022:
165). There are currently over 6,500 in-service Rolls-Royce business
aviation engines across our Tay, BR710 and AE 3007 platforms which
provide power to a range of aircraft, including Gulfstream and
Bombardier aircraft. There are over 1,200 BR725 and Pearl 15 engines
in service which power the Gulfstream 650/G650ER and Bombardier
5500/6500. The Pearl 700, which is going through in-flight testing
and already has a strong order book, will power the Gulfstream G700/
G800. The Pearl 10X, which is in development and has had a positive
reaction from the market, will power the Dassault Falcon 10X. This will
be the first time a Rolls-Royce engine powers a Dassault aircraft. Within
the market, we have won the last three major campaigns, with the Pearl
engine firmly established as the engine of choice.
The civil aerospace market further recovered from the effects of the
pandemic in 2023. Large engine flying hours were 88% of 2019 levels
(2022: 65%). The easing of global pandemic management measures,
specifically in China, paired with fleet expansion are the main
contributors to engine flying hour improvement. Industry forecasts
predict a return to 2019 large engine flying levels in 2024 and we expect
this to grow to 120%-130% by 2027. Business aviation engine flying
hours continue to be above 2019 levels, as they were in 2022, having
recovered more quickly from post-pandemic measures.
Total shop visits in 2023 were 1,227 (2022: 1,044) carried out to
maintain and repair the engines in our fleet. Of these, 368 were large
engine major shop visits (2022: 248). The increase was driven by higher
utilisation levels and growth in the fleet.
Supply chain pressures remain a hurdle across the industry. We are
proactively managing the risks, including consolidating spend with our
high performing supplier group for cost, quality and reliability,
improving our sourcing, renegotiating contracts and supporting our
most important suppliers. We expect supply chain challenges to persist
for the next 18 to 24 months. We are not experiencing any ongoing impact
from the two supplier fires which we reported in our 2022 Annual Report.
Financial performance
Underlying revenue of £7.3bn increased 29% year on year, driven
by higher shop visits and OE engine deliveries and commercial
optimisation. Underlying OE revenues grew by 36% in the year to £2.7bn
and services revenues grew by 25% to £4.6bn. LTSA revenue catch-ups
were £(104)m (2022: £360m).
Underlying operating profit was £850m (11.6% margin) versus £143m in
2022 (2.5% margin). The year on year improvement was driven by higher
large engine LTSA shop visit volumes and profitability, increased time
and materials profits from life limited parts sales for large engines, and
higher business aviation profits, again driven by aftermarket profit
growth. In each case, our commercial optimisation actions helped drive
margin improvements. This was complemented by cost efficiencies,
with lower indirect costs net of inflation.
Civil Aerospace is a major manufacturer of aero engines for the large commercial aircraft, regional
jets and business aviation markets. The business uses its engineering expertise, in-depth knowledge
and capabilities to provide through-life service solutions for its customers.
UNDERLYING REVENUE
£7,348m
2022: £5,686m
ORDER BACKLOG
£55.2bn
2022: £47.7bn
Underlying revenue mix Underlying revenue mix by sector
OE – 37%
Services – 63%
Large engines – 73%
Business aviation – 20%
Regional – 3%
V2500 – 4%
Our divisions
24
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Contract catch-ups were £(29)m (2022: £319m). The prior year
benefitted from material positive contract catch-ups mostly associated
with inflation assumption changes in 2022. Net onerous provisions/
releases were £(25)m (2022: £51m). We made good progress on onerous
contracts in the year, releasing £385m of provisions taken in prior
periods. However, this was more than offset by £410m new provisions
taken in 2023 mostly related to industry wide supply chain constraints.
Trading cash flow was £626m versus £226m in 2022. Improved cash
flows were driven by higher operating profit, continued strong growth
in the LTSA balance, partly offset by net working capital movements
and increased investments in the year including improving time on wing
for our Trent engines, investment in the Pearl business aviation engines
and the UltraFan demonstrator engine test. LTSA invoiced flying hour
receipts increased to £4.6bn (2022: £3.6bn).
Operational and strategic progress
As we outlined at our CMD, we are focused on the following six key
levers to unlock value in the Civil Aerospace aftermarket business:
extend time-on-wing; lower shop visit costs; reduce product costs; keep
engines earning for longer; implement value-based pricing; and drive
contractual rigour. We are making excellent progress against these
initiatives. In addition, the same commercial and cost disciplines are
being applied to other areas of our business too, where we are
targeting profitable improvements in time and material, original
equipment and spare engines.
We are improving engine performance whilst maintaining excellent
safety and operational availability. For example, extending time-on-wing
means our engines stay in service for longer periods between shop
visits, reducing the lifetime maintenance cost. We aim to improve the
average time-on-wing for modern Trent engines by at least 40% over
the medium term. This means that relative to today’s engine standard
we will extend time to overhaul by almost two years. We are spending
£1bn on time-on-wing improvements as part of a multi-year programme.
This will double the time-on-wing of our Trent 1000 engine and in
non-benign environments double the time-on-wing on the
Trent XWB-97 as well as generating a 50% improvement in benign
environments.
At the right time we believe we are well positioned to re-enter the
narrowbody market by choosing a partnership approach for the next
engine programme. Our UltraFan technology is a vital step towards
this. The UltraFan demonstrator, our next generation of engine
architecture and suite of technologies, achieved a significant milestone
by running to maximum power in tests. These tests also showed the
power gearbox handled accelerations and decelerations 20 times faster
than we have previously achieved. We expect to continue to invest in
the UltraFan following these significant milestones. UltraFan
technologies can also be fitted to our existing Trent engines to increase
time-on-wing, reduce cost and increase efficiency.
We remain focused on the transition to lower carbon and in reducing
emissions in our markets. Our actions start with maximising the efficiency
of our current fleet, as many of these engines will remain in service for
decades to come. We have already demonstrated that all our
production engines are 100% SAF compatible, and this year our Trent
1000 engines powered the world’s first commercial transatlantic 100%
SAF flight on a Virgin Atlantic Boeing 787 Dreamliner.
Outlook
Executing on our strategic initiatives, which include the six key levers
previously mentioned, will mean that we are less exposed to fluctuations
in engine flying hours. Industry forecasts do predict a continued
recovery in international travel and in 2024 we expect large engine
flying hours to be in the range of 100%-110% of 2019 levels. Business
and regional markets are expected to continue to perform above 2019
levels with growth year-on-year.
We expect operating profit to improve to 15%-17% in the mid-term as
a result of the actions we are taking.
Financial overview
£ million 2023
Organic
change
1
FX 2022 Change
Organic
change
1
Underlying revenue 7,348 1,645 17 5,686 1,662 29%
Underlying OE revenue 2,703 706 15 1,982 721 36%
Underlying services revenue 4,645 939 2 3,704 941 25%
Underlying gross profit 1,394 540 1 853 541 63%
Gross margin % 19.0% 15.0% +4�0pt +4�0pt
Commercial and administrative costs (354) 18 (1) (371) 17 (5)%
Research and development costs (343) 112 (3) (452) 109 (25)%
Joint ventures and associates 153 40 – 113 40 35%
Underlying operating profit 850 710 (3) 143 707 nm
Underlying operating margin % 11.6% 2.5% +9�1pt +9�1pt
2023 2022 Change
Trading cash flow 626 226 400
Key operational metrics
2023 2022 Change
Large engine deliveries 262 190 72
Business aviation engine deliveries 196 165 31
Total engine deliveries 458 355 103
Large engine LTSA flying hours (million) 13.5 10�0 3�5
Large engine LTSA major refurbs 368 248 120
Large engine LTSA check & repair 471 455 16
Total large engine LTSA shop visits 839 703 136
1 Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. All underlying income statement commentary is provided on an
organic basis unless otherwise stated
25
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
OUR DIVISIONS
DEFENCE
Market overview
Our Defence business supports five distinct end markets: transport,
where we are the market leader; combat, where we have full engine
capability; submarines, where we have unique nuclear propulsion
capability; naval, where our high power density engines bring real
advantage; and helicopters, where we have accumulated huge
experience in military and civil programmes. Our order book is strong
at £9.2bn (2022: £8.5bn) and our order coverage is 90% (2022: 86%).
We maintained our customer and shareholder commitments
throughout the pandemic. Since then, the global security situation has
led to governments increasing their commitment to defence. We
continue to be selected as long-term partners in the development,
manufacture and maintenance of defence power for critical military
missions to deter threats, preserve life and maintain order. Rolls-Royce
does not provide or manufacture weapons for our customers.
We are a trusted and key supplier to many countries across the globe
for the provision of defence power for the protection of society,
preservation of peace and economic stability. We are chosen for our
unrivalled engineering and technological capabilities as we push the
boundaries of what is possible and provide our customers with
cutting-edge solutions.
Recent substantial wins underpin our long-term growth as we have
been chosen to participate on the FLRAA programme, B-52
re-engining, Tempest and the GCAP. In 2023, it was also announced
that Rolls-Royce will provide reactors for Australia’s nuclear-powered
submarines under the AUKUS trilateral agreement. These contracts
come along once in a generation and will provide substantial economic
benefit.
The Defence market has demonstrated its resilience in recent years
and our customers continue to invest in capability in our core markets.
£45bn of new programmes will come online by 2050 within the transport
and patrol market, creating a substantial opportunity for us, and we
are very well positioned to capture a significant portion of these
emerging opportunities. We continue to see strong momentum in this
market demonstrated by the US Army selecting us for the FLRAA
programme. Partnered with Bell and the US Army, we are excited to
power FLRAA with our AE 1107F engine, providing a low risk, ready-now
propulsion solution with best-in-class capabilities. The FLRAA platform
will provide twice the range and speed for the US Army when compared
with the existing Black Hawk helicopter capabilities.
Financial performance
Revenues increased by 12% in 2023 to £4.1bn, with year-on-year growth
in all major end markets, notably double-digit revenue growth in
combat and submarines. Combat growth was driven by the GCAP
programme in the UK and the ramp-up of the F130 programme for the
B-52 in the US. Total OE revenues grew by 8% in the year to £1.8bn and
services revenues grew by 14% to £2.3bn.
Operating profit was £562m (13.8% margin) versus £432m (11.8% margin)
in the prior year, reflecting commercial optimisation, cost efficiencies,
and growth in submarines. A lower R&D charge reflected increased
customer funding and our strategic focus on the most attractive future
programmes�
Trading cash flow of £511m improved versus £426m last year, driven by
higher underlying operating profit and our working capital initiatives
which resulted in inventory reductions, and increased customer
deposits.
Operational and strategic progress
One outcome of the Group strategic review in 2023 is to concentrate
on areas where we leverage our differentiation. In Defence, we are
focusing on growing sectors where we are strategically advantaged.
These are combat, transport and submarines. There are opportunities
to improve our position in the defence market through strong
performance management, commercial optimisation and efficiency
savings.
Defence is a market leader in aero engines for military transport and patrol aircraft with strong positions
in combat applications. It has significant scale in naval and designs, supplies and supports the nuclear
propulsion plant for all of the UK Royal Navy’s nuclear submarines.
UNDERLYING REVENUE
£4,077m
2022: £3,660m
UNDERLYING OPERATING PROFIT
£562m
2022: £432m
ORDER BACKLOG
£9.2bn
2022: £8.5bn
Underlying revenue mix Underlying revenue mix by sector
OE – 43%
Services – 57%
Transport – 31%
Combat – 34%
Submarines – 22%
Naval – 8%
Helicopters – 5%
OUR DIVISIONS
UNDERLYING OPERATING MARGIN
13.8%
2022: 11.8%
26
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
We have been designing and producing combat jet engines for 80
years and we currently support customers in 22 countries. In 2023, we
produced 39 new engines, up from 20 to 30 per year in the 2018 to
2020 period. This increase was driven by the maturity of the F-35
programme which has moved to full-rate production. This drove an
increased demand for our LiftSystem as well as increased demand for
Typhoon and EJ200 in Germany, Spain and Qatar.
In 2021, we secured the contract to re-engine the B-52 for the US Air
Force. With the ramp-up of B-52, we expect to increase production of
our combat portfolio to 100 engines per year before the end of the
decade and peak at over 130 engines per year by the early 2030s. In
2023, we completed the initial F130 engine testing for the B-52 aircraft.
Continued testing at NASA Stennis Space Center in Mississippi
accomplished our testing goals and allowed for the gathering of large
amounts of data early in the programme. This will de-risk the integration
of the F130 engine onto the B-52.
Rolls-Royce powered submarines have played a critical role in the UK’s
naval defence for over 60 years. This is a growing market with a recent
increase in demand from the UK Ministry of Defence which includes
providing all of the new reactor plants for the UK and Australia as part
of the AUKUS trilateral agreement. This will ensure we are supporting
naval propulsion with our nuclear expertise for another 60 years and
beyond. To meet the enhanced demands from both the UK Royal Navy
and AUKUS we are already on the journey to double the size of our site
at Raynesway in the UK, developing cutting-edge manufacturing
facilities and inspiring the nuclear experts of tomorrow to maintain our
talent pool. AUKUS has given us enhanced surety of work that will take
us well into the second half of this century.
At our CMD, we demonstrated how we are capturing performance
improvement opportunities to grow our business. We outlined the
key drivers for operating profit improvement as volume and mix,
commercial optimisation, investment prioritisation and cost
management�
Under volume and mix, the overall transport fleet is growing,
generating higher flying hours and more shop visits. In combat, changes
to the product mix yield higher profits due to the scale of newer
programmes with similar themes in submarines which will see an increase
in volume, funded development and infrastructure.
Under commercial optimisation, in the mid-term, all our major contracts
will be renewed, providing us the opportunity to work with our
customers to find win-win solutions that capture the fair value of our
products and services.
Under investment priorities, the strategic review enabled us to take a
more focused view on where and how to invest. We remain aligned with
the Group investment priorities framework which will result in capital
being allocated to the best projects. Our major customers strongly
support our core differentiated strengths in transport, combat and
submarines and, as a result, our customer-funded R&D is due to increase
by 150% over the medium term.
Our financial results demonstrate that we are making progress on cost
management as we embrace the Group-wide transformation activities
and strive for a sustainably reduced cost base in the medium term and
beyond.
We are committed to becoming a net zero company by 2050 and we
support our customers to do the same. The best solution for the defence
markets which we operate in to decarbonise is via synthetic fuels, which
can deliver a reduction in lifecycle carbon emissions compared to
fossil fuels. Our micro-reactors can also play a big part in helping energy
security and resilience as part of the energy transition.
Outlook
As we outlined at our CMD, we expect the defence market to grow. We
expect our margins to improve to between 14%-16% in the mid-term,
which we define as 2027, as long-term contracts underpin security for
our Defence business for decades to come.
Current geopolitical uncertainties do not immediately benefit our
financial performance, however, they provide the backdrop which will
support growth in defence budgets in the years to come.
Financial overview
£ million 2023
Organic
change
1
FX
2022 Change
Organic
change
1
Underlying revenue 4,077 428 (11) 3,660 417 12%
Underlying OE revenue 1,766 136 (4) 1,634 132 8%
Underlying services revenue 2,311 292 (7) 2,026 285 14%
Underlying gross profit/(loss) 804 78 – 726 78 11%
Gross margin % 19.7% 19.8% (0.1)pt (0.1)pt
Commercial and administrative costs (173) 2 (1) (174) 1 (1)%
Research and development costs (72) 49 1 (122) 50 (40)%
Joint ventures and associates 3 1 – 2 1 50%
Underlying operating profit 562 130 – 432 130 30%
Underlying operating margin % 13.8% 11.8% +2�0pt +1�9pt
2023 2022 Change
Trading cash flow 511 426 85
1 Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. All underlying income statement commentary is provided on an
organic basis unless otherwise stated
27
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
OUR DIVISIONS
POWER SYSTEMS
Market overview
Our Power Systems business serves four distinct end markets where
we are a leading player with double-digit market shares. The outlook
for our markets is positive with annual growth rates often greater than
GDP growth. Our broad positioning in different industries further makes
us resilient to market volatility in individual sectors. Based on this,
we have created a highly resilient business model which will drive
profitable growth.
In power generation, we have a market share of 15%-20% and our key
markets are data centres, industrial manufacturing and utilities. We
offer dependable diesel and gas power solutions as well as battery
energy storage systems for mission-critical to everyday backup and
continuous power needs.
In governmental, we have a market share of greater than 30% and our
two key markets are land defence and naval. We provide
peak-performance diesel engines and propulsion systems with
outstanding power density and power-to-weight ratios.
In marine, we have a market share of 15%-20% and our two key markets
are commercial marine and yacht. We deliver integrated diesel, gas
and hybrid propulsion systems, including automation and control
systems, which are renowned for reliability and performance.
In industrial, we have a market share of 10%-15% and our key markets
are rail, construction, agriculture and mining. We offer a broad range
of highly reliable industrial diesel and hybrid solutions for a diverse
range of requirements.
The short cycle nature of these markets and global supply chain
disruptions over the last three years led to increased industry-wide
inventory build. The supply chain stabilised in 2023 and as a result we
were able to unwind some of the inventory build we were holding.
Financial performance
Underlying revenue was £4.0bn, an increase of 16% year on year with
34% growth in the power generation end market driven by data centre
growth, where we have a leading position. Underlying OE revenues
grew by 19% to £2.7bn. Underlying Services revenues grew by 10% to
£1.3bn.
Operating profit was £413m, a 44% year on year increase. This was
driven by commercial optimisation and cost efficiencies. In power
generation, profitability tripled in 2023 as we took steps to ensure we
are appropriately remunerated for our products and services through
value-based pricing. The year on year improvement in operating
margin to 10.4% in 2023 versus 8.4% in 2022 was achieved despite a
slight product mix headwind in the year.
Trading cash flow was £461m with a conversion ratio of 112% versus
£158m and 56% last year. The increase in trading cash flow was due to
increased operating profit and working capital initiatives including a
benefit from increased customer advance payments and reduced
inventories in the year.
Operational and strategic progress
Based on the findings of our recent strategic review, which we presented
at our CMD, we are confident that we will deliver strong profitable
growth through focusing on the power generation, including battery
energy storage systems, governmental and marine markets. In all these
markets we are targeting to strengthen the highly attractive service
business through additional offerings such as upgrade and retrofit kits
or digital services. We are also developing the first new mtu Series
4000 engine for many years, an investment that will pay off beyond
the mid-term. In addition, we will drive efficiency and simplification
measures across the business, including streamlining our organisation
and creating additional synergies across the Group.
UNDERLYING REVENUE
£3,968m
2022: £3,347m
UNDERLYING OPERATING PROFIT
£413m
2022: £281m
ORDER BACKLOG
£4.1bn
2022: £4.0bn
Underlying revenue mix Underlying revenue mix by sector *
OE – 67%
Services – 33%
Power generation – 39%
Governmental – 25%
Marine – 12%
Industrial – 24%
OUR DIVISIONS
UNDERLYING OPERATING MARGIN
10.4%
2022: 8.4%
Power Systems, with its product and solutions brand mtu, is a world-leading provider of integrated
solutions for onsite power and propulsion, developing sustainable solutions to meet the needs of
its customers�
* In 2023, the naval business of Power
Systems was moved from marine to
governmental to bet ter reflect the
products and customer mix of this
business
28
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
In power generation, we are focusing on optimising our cost structure
and further scaling the business. We are targeting a benefit from our
strong position in mission-critical applications such as data centres and
capturing significant growth as the market is growing rapidly, driven
by global trends for data processing and AI. Battery energy storage
systems (BESS) are a logical complement to our power generation
business and expand our markets towards new applications such as
utility-scale storage. Here we can leverage existing system capabilities
and market access to create a profitable BESS business in the
medium term.
In governmental, we have a leading position today and are well positioned
to capture the strong market growth and even outgrow the market as
our propulsion systems are well placed for the current investment cycle
into military vehicles and naval vessels. Furthermore, we will drive
additional growth by expanding our offering towards more integrated
solutions such as ship automation products. Through disciplined
investments in technologies, we are also strengthening our longer-term
opportunities and underpinning our leading market position.
In marine, we have a market leading position in the highly profitable
yacht market and a strong position in commercial marine. Our target
is to strengthen our leading position in yachts and further improve our
position in commercial marine through various strategic measures. Part
of this is our bridge-to-propeller strategy which creates profitable
upsell potential and differentiation by providing our customers with
fully integrated solutions from bridge automation to the propulsion
system. Furthermore, we are securing our leading portfolio position
by offering alternative-fuel ready engines to support our customers’
transition towards sustainability.
As a result of our strategy to focus on power generation,
governmental and marine end-markets and a detailed product
portfolio analysis, we will be concentrating largely on higher-powered
systems in the off-highway engines sector primarily from our in-house
production. We have therefore decided to transfer our successful
lower-power-range engines business, using Daimler technology and
focused on the industrial construction and agriculture markets, to a
partner. We have reached an agreement-in-principle with an industrial
buyer to take over the lower-power-range engines business.
In all the above-mentioned markets, we have already made significant
progress towards offering lower carbon solutions. However, the speed
of transition and customer demand strongly varies between our market
segments. Combustion engines will remain highly relevant for many
years, increasingly powered by sustainable fuels. The use of sustainable
diesel substitute hydrotreated vegetable oil (HVO) can reduce full
lifecycle emissions by up to 90%. Nearly all our major engine platforms
are already able to run on HVO and some of our customers are using
this fuel to cut their emissions.
In marine, we are developing methanol-based solutions and for power
generation we see hydrogen-based engines as a future solution. These
developments are based on existing engines and given the progress
already made we are well-positioned to deliver this transition. In
addition, we are investing into electrification by offering hybrid
solutions, for example, for the yacht or rail market and transitioning
our power generation business gradually to complement battery-based
solutions. By taking these steps we are participating in the energy
transition and support our customers in various industries to achieve
their growth and sustainability goals at the same time.
Outlook
We have a resilient business model with strong market positions and
opportunities in growing markets to unlock the full potential of our
business. Based on a clear focus on profitable growth markets as well
as efficiency and simplification measures, we target to achieve an
operating margin of 12%-14% in the mid-term.
Financial overview
£ million 2023
Organic
change
1
FX 2022 Change
Organic
change
1
Underlying revenue 3,968 539 82 3,347 621 16%
Underlying OE revenue 2,661 419 55 2,187 474 19%
Underlying services revenue 1,307 120 27 1,160 147 10%
Underlying gross profit 1,050 111 21 918 132 12%
Gross margin % 26.5% 27.4% (0.9)pt (0.9)pt
Commercial and administrative costs (456) (7) (8) (441) (15) 2%
Research and development costs (187) 21 (4) (204) 17 (10)%
Joint ventures and associates 6 (2) – 8 (2) (25)%
Underlying operating profit 413 123 9 281 132 44%
Underlying operating margin % 10.4% 8.4% +2�0pt +2�0pt
2023 2022 Change
Trading cash flow 461 158 303
1 Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. All underlying income statement commentary is provided on an
organic basis unless otherwise stated
29
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
OUR DIVISIONS
NEW MARKETS
Market overview
The market for small modular reactors (SMRs) is very attractive with
real momentum behind the nuclear power ambitions in many countries,
driven by energy security and decarbonisation targets. The role of
SMRs is of particularly high interest and we see a large export
opportunity in addition to the UK fleet potential.
We took the decision in 2023 to exit our Rolls-Royce Electrical business.
We are looking at options to exit our advanced air mobility activities
in the short term or reduce our position to a minority share with the
intention to exit fully in the mid-term.
Financial performance
Planned cost increases in both Electrical and SMR to meet development
milestones resulted in an increased operating loss of £(160)m a 20%
increase from £(132)m in the prior year.
Trading cash flow was an outflow of £(63)m compared to £(57)m in the
prior year, with SMR costs covered by third party funding.
Rolls-Royce SMR is backed by world-class investors, including an
international nuclear operator, and has received grants from the UK
Government. Our current shareholding in the SMR business is more
than 70% and in 2024 we will continue to explore partnerships that will
strengthen our position to deliver the overall solution. Where
agreements are reached, equity from these partnerships will likely be
received in late 2024 or early 2025. Rolls-Royce has contributed
approximately 10% of the total cash costs.
Operational and strategic progress
Rolls-Royce SMR is the UK’s first domestic nuclear offering in more
than 20 years. Our SMRs are designed to produce stable, affordable
and emission-free electricity to power a million homes for at least
60years.
The modular build approach is the fastest and cheapest way to get
nuclear on-grid solutions to help meet global net zero ambitions. We
are controlling the integrated design of the powerplant and enabling
a very high level of modularisation. This moves work from onsite
construction into a standardised, controlled, factory build with modules
then assembled on site. This reduces cost, risk and time to construct
and results in a highly competitive cost of electricity.
Rolls-Royce SMR has been successfully shortlisted in the first stage of
the Great British nuclear SMR technology selection process, marking
a significant step towards the first plants being built in the UK. We
welcome our shortlisting and are eager to build on this progress as we
move quickly towards the next stage where we can work to agree a
contract for fleet deployment. This should be as soon as possible, as
the earlier this is achieved the more likely it is that our SMR fleet will
be able to help the UK Government reach its ambition to deliver up to
24GW of nuclear power by 2050.
Rolls-Royce SMR is making very good progress through the generic
design assessment (GDA) by the UK nuclear industry’s independent
regulators. We entered the UK regulatory process in April 2022 and
continue to successfully move through the steps to secure design
certification, putting us around two years ahead of rival technologies
in Europe.
In Rolls-Royce Electrical we have made significant strides in
developing electric and hybrid-electric power and propulsion
technology. In 2023, we continued to further develop and test the
products and power generation solutions we have been working on.
Our electrical capabilities continued to provide electrical solutions to
our core businesses and this includes leading on the EU-funded HE-ART
programme that is focusing on demonstrating enabling technologies
for regional aircraft hybridisation. Our engineers are also developing
the embedded electrical technology for the global combat
air programme�
New Markets are early-stage businesses. They leverage our existing, in-depth engineering expertise and
capabilities to develop sustainable products for new markets, focused on the transition to net zero.
Value R&D spend £(137)m
Rolls-Royce SMR – 46%
Rolls-Royce Electrical – 54%
OUR DIVISIONS
UNDERLYING REVENUE
£4m
2022: £3m
UNDERLYING OPERATING LOSS
£(160)m
2022: £(132)m
UNDERLYING OPERATING MARGIN
n/a
2022: n/a
30
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Outlook
In Rolls-Royce SMR regulatory activities such as the GDA, factory
development and siting plans will continue simultaneously as the work
to secure firm domestic and export commitments continues.
In addition to the UK, we are deeply engaged with governments,
developers and potential industrial customers in the Czech Republic,
Finland, Sweden, USA, Poland, the Netherlands and more. Selection
processes in several countries are in progress.
We will need a broad set of partners to deliver our overall solution. Our
partnership approach de-risks our profitable growth and reduces the
future capital call on Rolls-Royce. It also brings additional expertise to
help reduce delivery risk. Risk will also be mitigated by our commercial
constructs, for example funding mechanisms such as the regulated
asset base model in the UK. There is a credible path to be under contract
for multiple units domestically and overseas by 2030, creating
significant value.
In Rolls-Royce Electrical we will exit the advanced air mobility part of
the business while retaining key electrical capabilities in the Group to
support activities in Civil Aerospace, Defence and Power Systems.
Financial overview
£ million 2023
Organic
change
1
FX 2022 Change
Organic
change
1
Underlying revenue 4 1 – 3 1 33%
Underlying OE revenue 2 1 – 1 1 100%
Underlying services revenue 2 – – 2 – –
Underlying gross profit/(loss) 1 2 – (1) 2 nm
Gross margin % 25.0% (33.3)% +58�3pt +58�3pt
Commercial and administrative costs (24) (1) – (23) (1) 4%
Research and development costs (137) (27) (2) (108) (29) 25%
Joint ventures and associates – – – – – –
Underlying operating loss (160) (26) (2) (132) (28) 20%
2023 2022 Change
Trading cash flow (63) (57) (6)
1 Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. All underlying income statement commentary is provided on an
organic basis unless otherwise stated
31
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
OUR DIVISIONS
Our sustainability approach
We look to operate and act in an ethically, environmentally
and socially responsible manner by:
Managing and
minimising
environmental
impacts across our
value chain
Creating a positive
social impact for
our people, our
partners and
communities
Maintaining the
highest standards
of ethics and
compliance
See pages 33 to 43 See pages 44 to 48 See page 49
Underpinned by our values and behaviours
2023 HIGHLIGHTS
Achieved our 2023 target to test all in-production and
in-development Civil Aerospace engines on 100%
unblended SAF
Retained our second place position in the Dow Jones
Sustainability Index for the Aerospace & Defence industry
Enhanced and updated governance of sustainability at
Board and Executive-level committees
Our sustainability approach aims to ensure we are a responsible and resilient business
through identifying, assessing and managing our environmental and social impacts.
We seek to operate and act in an ethically, environmentally and socially
responsible manner that creates shared value for us and our key
stakeholders on a long-term basis. We are a technology company that
operates in markets that face great technical challenges to abate
carbon emissions. We know that the biggest contribution we can make
to a sustainable future for the climate is by actively collaborating with
partners, customers and suppliers to help enable the energy transition.
We firmly believe in the role of technology in helping to meet global
energy demands whilst mitigating the impacts of climate change. Our
products and services will have a critical role to play in enabling the
global energy transition to a low carbon economy through the provision
of power, transport and energy that can be compatible with net zero
carbon emissions.
To be successful it is critical that we appropriately understand and
manage our impact on society and the environment and that we continue
to maintain the highest standards of ethics and compliance. We use
the UN Sustainable Development Goals to refine our areas of focus on
Responsible Consumption and Production, Climate Action, Decent
Work and Economic Growth and Peace Justice and Strong Institutions.
We routinely benchmark our performance in ESG assessments such as
the Dow Jones Sustainability Index and the CDP.
Our sustainability and ESG strategy is embedded within our global
governance framework, enterprise risk management approach and
operating model. We deploy our approach through our global policies,
including Our Code and related policies, such as our health and safety,
anti-bribery and corruption and human rights policies.
During 2023, we continued to focus on two primary areas of our
sustainability approach, in particular by strengthening our strategic
resilience to climate change and the energy transition (see pages 33 to
43) and continuing to embed our Group-wide human rights programme
(see page 49). In 2023, we completed a granular strategic review of the
business resulting in us setting our strategic framework for the future.
In 2024, using this framework we will be reviewing and refreshing our
sustainability and ESG objectives including updating our Group
climate-related targets. This work will enable us to further progress and
create a more granular transition plan to support the energy transition.
NON-FINANCIAL AND SUSTAINABILITY INFORMATION STATEMENT
The following summarises where you can find further information on each of the key areas of disclosure required by sections 414CA and 414CB of the
Companies Act. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 amend these sections of the Companies Act
2006, placing requirements on the Group to incorporate climate disclosures in the annual report. We believe these have been addressed within this year’s
climate-related disclosures on page 41 and as such we have referenced the location of these within our statement on TCFD on page 35.
RELATED GROUP POLICIES & GUIDANCE RELEVANT PRINCIPAL RISKS PAGE
Environmental matters
—
Health, safety & environment
—
Safety
—
Climate change
52 and 55
Employees
—
Our Code
—
Security
—
People
—
Speak up
—
Our life-saving rules
—
Safety
—
Talent & capability
52 and 57
Social matters
—
Charitable contributions and social sponsorships
—
Political
56
Human rights
—
People
—
Diversity & inclusion
—
Human rights
—
Data privacy
—
Modern slavery statement
—
Compliance
53
Anti-bribery and
corruption
—
Anti-bribery and corruption
—
Compliance
53
For a description of our business model, see pages 14 and 15; Non-financial key performance indicators, see page 18; Full details of the Group’s principal risks, see
pages 50 to 57; Further information on Group policies can be found on www.rolls-royce.com
32
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Sustainability
OUR PROGRESS IN 2023
UltraFan technology demonstrator engine ran for the first
time using 100% SAF and world’s first commercial
transatlantic 100% SAF flight
Released 80% of our Power Systems portfolio for use on
sustainable fuels
Rolls-Royce SMR design shortlisted within the Great
British Nuclear selection process by UK Government
We have continued to make progress in decarbonising our global
operations, as well as in reducing our overall energy consumption by
approximately 10% in 2023. Both these activities will help ensure our
facilities and internal supply chains are more resilient. To continue our
progress we are: deploying energy efficiency and low-cost
electrification; maximising on-site renewable energy generation and
storage, utilising Rolls-Royce technologies where appropriate;
procuring certified green energy via Power Purchase Agreement (PPA),
Virtual Power Purchase Agreement (VPPA), or Renewable Energy
Guarantees of Origin (REGO); and procuring high quality removals to
mitigate residual emissions.
In 2023, we entered into an agreement to install more than 2,300 solar
panels on the roofs of our Tukang, Singapore facility, as part of a PPA
with a total capacity of 1,425 kWh. Once fully operational, the
installation will meet approximately a third of the site’s total energy
needs. This project builds upon our experience of existing solar
facilities at our manufacturing sites in Germany, UK, US and
elsewhere in Singapore.
We also opened our new mtu Series 2000 engine production building
in Kluftern near Friedrichshafen, Germany which has been equipped
with a 1.2 MW-peak photovoltaic system which provides green
electricity to power the site, e-charging columns and an intelligent
building control system to enable energy-efficient operation.
Emissions from product testing activities, a critical part of our product
safety assurance and engine certification programmes, contributed
42% of our Scope 1 + 2 emissions during the year. We use a blend of
10% sustainable aviation fuel (SAF) across our Civil Aerospace and
Defence UK testing activities to help mitigate some of these emissions.
Operations and facility emissions (excluding product
testing activities) (ktCO
2
e)
1,2
180 180
148
21 19 20
23
22
199
247
1 External assurance over Scope 1 + 2 GHG data is provided by Bureau Veritas. See page 209
for their sustainability assurance statement
2 Data has been reported in accordance with our basis of reporting, available at
www.rolls-royce.com/sustainability
Enabling our customers
The biggest contribution that we can make to global energy transition
is to ensure the sectors we operate in, transport, energy and power
generation, are compatible with net zero carbon emissions. Scope 3,
category 11 emissions, those associated with the use of our sold
products by our customers, dominate our emissions footprint. We will
further advance the efficiency and environmental performance of our
engine and technology portfolio and ensuring compatibility with
sustainable fuels.
During 2023, we completed the build stage of our UltraFan technology
demonstrator programme, a large Civil Aerospace engine programme
that brings together a suite of new technologies, such as a powered
gearbox and lean burn combustion system, to deliver an anticipated
10% efficiency improvement over the Trent XWB, which is already the
The following pages outline the progress we have made in advancing
our climate strategy and progress against our short-term targets in
2023. It also outlines our approach to assessing strategic resilience in
the face of climate change through alignment with our Task Force on
Climate-related Financial Disclosures (TCFD) reporting. See page 35
for our explanation.
Our role in the energy transition
We have an important role to play in the global energy transition. We
firmly believe in the role of technology in helping to meet increasing
global energy demands whilst mitigating the impacts of climate change.
Our products and services will have a critical role to play in supporting
the global energy transition to a low carbon economy through the
provision of power, transport and energy that can be compatible with
net zero carbon emissions.
We are committed to reaching net zero carbon emissions from our
operations and facilities and that our products are compatible with net
zero operations by 2050, in line with the consensus of the global
scientific community. Our climate strategy is designed to ensure that
we play an active role in the energy transition and that we are
strategically resilient in the face of climate change. In line with our
strategic review we are still committed to short and medium-term
targets. The specifics of these are to be confirmed as part of our 2024
strategic review of sustainability.
Our climate strategy has four key pillars starting with our own
operations, extending to the support we can provide our customers
and ultimately focusing on the contribution we can make to the global
energy transition, whilst recognising the enabling landscape that must
be in place for this to be realised:
— decarbonising our operations, facilities and business activities;
— enabling our customers to operate their products in a way that is
compatible with low or net zero carbon emissions;
—
delivering new products and solutions that can accelerate the global
energy transition; and
—
creating the necessary enabling environment, with public and
policy support, to achieve our collective climate goals.
The majority of our impact occurs in the use phase of our product
lifecycle (Scope 3, category 11, use of sold products emissions).
Decarbonising our operations
Our total annual Scope 1 + 2 emissions, those associated with our
operations, facilities, business activities (excluding product testing
activities), comprised 148 ktCO
2
e in 2023, a 18% decrease compared
to 2022 (see page 41 for further detail).
CLIMATE AND THE ENERGY TRANSITION
33
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
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SUSTAINABILITY
world’s most efficient large aero engine in service. The first run of the
UltraFan demonstrator was completed on our test beds in Derby, UK
on 100% SAF.
Sustainable fuels, such as SAF in aviation, will play a critical role in
energy transition. To accelerate their scale up we have been carrying
out a series of ground and in-flight tests to demonstrate there is no
technology barrier to their increased usage. In November 2023, we
announced the successful achievement of our target to test all
in-production Civil Aerospace engines on 100% unblended SAF.
Our Trent 1000 engines powered the world’s first commercial
transatlantic flight carried out on 100% SAF aircraft in November 2023,
a UK Government funded project in partnership with our customer
Virgin Atlantic. This builds on our experience working with the UK Royal
Air Force (RAF) to power the Voyager aircraft on 100% SAF in 2022
and successful in-flight refuelling SAF test carried out with the Voyager
and Typhoon and Hercules aircraft in April 2023.
In Power Systems, we have continued to release our engine portfolio
for use on sustainable fuels. In September 2023, we announced the
release of the mtu series 2000 and 4000 engines for use with bio and
synthetic based diesel fuels and have completed the successful
testing of an mtu 4000 gas engine for power generation on 100%
hydrogen fuel.
At the end of 2023, 80% of our portfolio in Power Systems had been
released for use on sustainable fuels. This enables our customers to
utilise synthetic diesel type fuels; these are e-fuels that are created
from captured CO₂ using renewable or zero carbon electricity.
Delivering new products and solutions
Beyond mitigating emissions associated with our existing products and
the markets we serve, our technologies can play a role in accelerating
the energy transition in new markets and sectors for Rolls-Royce.
Through the provision of low carbon and net zero technologies, we
can abate emissions outside of our current emissions footprint in
support of national and international climate policy goals.
A key part of our strategy is the development and deployment of SMRs,
that can play a vital role in decarbonising the global energy mix and in
meeting increasing demand for clean electricity. During 2023, the
Rolls-Royce SMR design was shortlisted in the first stage of the Great
British Nuclear SMR technology selection process and we successfully
progressed to the second stage of the design assessment process.
SMRs also have a potential role to play in the production of sustainable
fuels as a clean power source. During 2023, we entered research
agreements on the use of Rolls-Royce SMR to support production of
low-carbon hydrogen.
In Power Systems, we see battery energy storage solutions as a
potential growth area which complements our existing expertise in
stationary power generation. Energy storage will play a critical role in
stabilising intermittent renewables as part of the global energy
transition.
At the end of 2023, we successfully installed our mtu EnergyPack QG
battery systems for SemperPower in the Netherlands. With a power
rating of 30.7 MW and a 62.6 MWh of energy storage capacity, this
project is one of the largest battery projects in the EU.
Creating the necessary enabling environment
Our ability to deliver our decarbonisation approach, in addition to
supporting our customers and government partners to meet their own
climate goals, is highly dependent upon a supportive external
environment. We continue to actively engage policy makers, regulators
and others to advocate for the necessary policy and economic support
we have identified.
During 2023, this included:
— active participation at COP28 in Dubai, UAE;
— founding signatory of the Defence Aviation Net Zero Charter with
the UK RAF;
— engagement at the UN ICAO CAAF/3 meeting on creating a global
framework for sustainable aviation fuels;
— senior representation on the UK’s Jet Zero Council;
—
taking over the VP role of decarbonisation on the CIMAC
(International Council on Combustion Engines) board; and
— active participation on the BDI Climate & Energy Policy board.
34
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUSTAINABILITY
We continue to progress in building our understanding of climate-
related risks and opportunities to ensure we are strategically prepared
for a climate-impacted future and able to seize commercial
opportunities that arise from the energy transition. These activities in
turn help to support our TCFD reporting.
In our 2022 Annual Report, we confirmed a position of consistency with
nine of the 11 recommendations under the TCFD framework. The areas
of non-consistency, against Strategy B and C requirements, were in
recognition of the announcement of the strategic review of our business
model, strategy and financial plans.
The strategic review was undertaken and completed in 2023. We can
therefore confirm our consistency with Strategy B requirements. To
achieve this, we have considered a number a climate-related scenarios
and the potential impacts against on our operating profit (see climate
risk summary on page 40).
As the strategic review concluded in 2023, we will need to further assess
the impact of the review conclusions against our longer-term
sustainability and climate strategy and update our associated targets
during 2024. This review will also consider the Group’s target for net
zero for Scope 1 + 2 excluding product testing by 2030.
As a result, we can confirm full consistency to nine of the 11
recommendations of the TCFD framework. We can confirm we are only
partially consistent with Strategy C and Metrics & Targets C
requirements. Our partial consistency results from us having not fully
reviewed and confirmed our medium-term decarbonisation targets to
align with the 2023 strategic review, and further work is required to
confirm our resilience on our long-term financial planning.
A comprehensive review of our sustainability and climate-related
strategy and targets will be completed in 2024.
Through our climate programme we have made considerable progress
across the spectrum of TCFD recommendations this year. This progress
includes strengthening Board and executive-level governance;
reviewing and refining our climate scenarios; and assessing the impact
of changes in our strategy and portfolio on climate-related targets. We
have concentrated on ensuring we have robust foundations in place,
such as the further integration of climate considerations into existing
strategy and financial planning processes, to ensure this is a routine
factor in our business planning activities.
Strategy C – resilience of the organisation’s strategy
As we carried out our strategic review, our business planning processes
have necessarily focused on the short and medium term. Our financial
planning has looked out five years to 2028 and our strategic planning
ten years to 2033. Our assessment of climate risks and opportunities
and the exploration of the potential impacts of climate scenarios has
been completed on the same timescales. Whilst there has been some
consideration of longer-term impacts carried out within the divisions
this has not yet been robustly tested and reviewed at Group level.
We know from previous assessments that the majority of our identified
climate-related risks and opportunities manifest themselves over the
medium to longer term, largely beyond 2035. For that reason we have
previously completed our impact assessments on timescales out as far
as 2050. Based on previous analysis, we do not believe that any of the
changes resulting from the strategy review will have a negative impact
on our long-term financial resilience. However, until we complete our
testing, as part of our comprehensive review of our sustainability and
climate-related strategy, we have considered that our approach is not
yet fully consistent with the expectations of Strategy C.
STATEMENT ON TCFD
TCFD recommendations
RECOMMENDATION CONSISTENCY PAGE CA 414CB *
Governance
A
Board oversight of climate-related risks and opportunities
36 CA s414CB(a)
B
Management’s role in assessing and managing climate-related risks
and opportunities
36 CA s414CB(a)
Strategy
A
The organisation’s identification of climate risks and opportunities
it faces over the short, medium and long term
37 CA s414CB(d)
B
Consideration of the impact of climate risks and opportunities
on the organisation’s business, strategy and financial planning
38 CA s414CB(e)
C
Resilience of the organisation’s strategy, taking into consideration
different climate-related scenarios
40 CA s414CB(f)
Risk
management
A
Presence of the organisation’s processes for identifying
and assessing climate-related risks
37 CA s414CB(b)
B
Processes for managing climate-related risks including
prioritisation methods
37 CA s414CB(b)
C
Processes for identifying, assessing and managing climate-related
risks are integrated into overall risk management
37 CA s414CB(c)
Metrics and
targets
A
Disclosure of metrics used to assess climate risks and opportunities
in line with strategy and risk management processes
41 CA s414CB(h)
B
Disclosure of material greenhouse gas emissions and the
associated risks
41 –
C
Presence of targets used to manage climate-related risks
and opportunities and performance against such targets
41 CA s414CB(g)
Key:
✖ Not consistent Partially consistent Consistent
* Companies Act 2006, s414CB(2a)-(2h)
35
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
SUSTAINABILITY
CLIMATE-RELATED GOVERNANCE STRUCTURE
ROLLS-ROYCE HOLDINGS PLC
EXECUTIVE TEAM
CLIMATE STEERING COMMITTEE
Nominations, Culture &
Governance Committee
Audit Committee
Energy transition &
technology committee
Executive audit committee Investment committee
Climate programme
Board
oversight
Executive
responsibility
Independent
environmental
advisory
committee
Remuneration
Committee
Safety, Energy Transition
& Tech Committee
Metrics & Targets C – presence of targets used to manage
climate-related risks
We concluded our strategic review in November 2023, announcing
changes to our business strategy, technology portfolio and financial
targets that have an impact on our previously stated decarbonisation
strategy and related targets. We had previously disclosed proposed
Group-level targets for Scope 1 + 2 and Scope 3, category 11 emissions
that had been submitted to the Science-Based Targets Initiative (SBTi)
for validation; we paused this validation process in April 2023 whilst we
completed the strategic review and have since withdrawn those
proposed targets in line with the SBTi policy on validation completion
timescales. As a result, we do not currently have Group-level targets
in place for our material emissions sources, namely Scope 3, category
11, and therefore recognise that we are only partially consistent with
Metrics & Targets C, presence of climate related targets.
Governance
Sustainability and climate are embedded within our Group governance
framework, risk management system and operating model. The Board
has oversight of climate-related risks and opportunities impacting the
Group and all Board Committees have an aspect of climate within their
remit. The Executive Team is responsible for the delivery of our climate
strategy, including associated targets and transition plan and for
ensuring the assessment and appropriate response to climate-related
risks and opportunities throughout our business model and activities.
In 2023, we revised our governance structure at both Board and
Executive level to reflect the changes in our business model and wider
strategy (see corporate governance on page 67). These changes have
strengthened the focus on technologies and solutions that can play an
active role in the energy transition.
After each Committee meeting, the chair reports back to the Board
formally on topics discussed. During 2023, the Board discussed specific
aspects relating to climate, including the consideration of climate and
energy transition within our strategic review and the impact upon our
climate-related disclosures. The strategic review and later consideration
of the annual and five-year plan included consideration of climate issues
in relation to capital expenditure and potential strategic partnerships
and disposals. Climate is also embedded in the approach to risk
management�
The Safety, Energy Transition & Tech Committee oversees the Group’s
sustainability strategy, priorities and progress and has delegated
responsibility to review the principal risk relating to climate change.
It monitors our sustainability and climate-related performance
and progress against our associated strategy and targets. It receives
reports from the head of sustainability and the Committee is updated
on the discussions of the Executive-level energy transition &
technology committee.
The Audit Committee is responsible for reviewing and approving the
content of our TCFD recommendations and noted progress as
preparations were being made for the disclosures in this report.
The Committee also ensures that, where material, the impact of
climate change is reflected in the financial statements and disclosed
appropriately.
The Remuneration Committee determines our remuneration policy,
which includes sustainability metrics.
The Nominations, Culture & Governance Committee reviews the Board’s
skills and oversees membership of each of the Board’s committees and
terms of reference, ensuring, as part of its overall remit, that the Board’s
governance and oversight of ESG matters, including climate, is
appropriate.
The Executive Team is responsible for managing climate-related
risks and opportunities on a day-to-day basis and for delivering the
programmes and plans to achieve our sustainability and
decarbonisation goals.
The energy transition & technology committee, which meets four times
a year, is a sub-committee of the Executive Team that is responsible for
formulating and overseeing the Group’s response to climate change
and the energy transition and its technology portfolio. The committee
also reviews investment decisions and projects with the value between
£0.5m and £25m where they relate to the energy transition or have an
36
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUSTAINABILITY
impact on mitigating Scope 1 + 2 or Scope 3 emissions. The committee
is chaired by the Chief Executive and all members of the Executive
Team are invited to participate. The committee receives regular updates
from our climate steering committee and itself reports regularly to the
Safety, Energy Transition & Tech Committee.
This committee is supported by a climate steering committee to
specifically oversee progress against our climate programme. It
comprises core functional and business representatives, including the
head of strategy, head of sustainability, head of risk and group financial
controller. The committee meets on a monthly basis. This provides
regular oversight of progress made against our decarbonisation goals.
Internal expertise is complemented by an independent environmental
advisory committee which comprises external experts and academics
who are leaders in relevant fields, including climate science, materials
science and environmental policy. One member is a lead author of the
Intergovernmental Panel on Climate Change (IPCC). The committee
provides input and independent challenge of our sustainability and
environment policy and strategy and is commissioned to undertake or
review scientific research on behalf of the Group. During 2023, the
committee oversaw research into the non-CO
2
impacts of aviation.
Assessing strategic resilience
We seek to assess our resilience over three time horizons: short
term (less than five years), medium term (five to ten years) and
longer term (ten years plus). This year we have focused on short and
medium-term assessments.
We use climate scenarios to test our strategic planning. We test against
our business planning baseline to assess potential risks to our financial
performance and to identify ways to mitigate our exposure to these
risks. The outputs of these assessments help inform our wider business
planning and decision making, including our technology portfolio and
investment decisions, as well as our related engagement activities.
A baseline and three scenarios have been considered, (see page 39),
based on independent external climate scenarios that present plausible
levels of global temperature rise and associated policy responses. These
scenarios are not predictions or forecasts but future possibilities which
enable us to explore the physical and transition risks and opportunities
associated with climate change that may manifest over short, medium
and longer-term horizons.
Our scenarios analysis asks to what extent do the climate scenarios
manifest as risks to the Group. This included assessment of potential
impacts on market dynamics and demand, cost exposure, for instance
carbon pricing, and physical impact of climate change on operations,
including site based impacts.
From this primary question, focal questions assessed under each
scenario include:
— how does the scenario impact the life or risk exposure of assets (e.g.
product competitiveness, facilities)?
—
how does the scenario impact future revenue projections (e.g. demand
for products and services)?
—
how does the scenario impact future profitability projections (e.g.
operational disruption, supply chain)?
—
what additional costs may occur under each scenario (R&D,
commodity pricing, cost of capital)?
The outputs of this exercise inform our climate-related risk
management process�
In 2023, we have followed a three-step process:
1� review and confirm key risks and opportunities;
2� confirm key scenarios and assumptions, including the addition of
a third scenario based on a delayed disruptive transition; and
3� model the potential impact of each risk.
Our analysis, explained below, has not identified any material risks to
the Group.
Climate-related risks and opportunities
The identification, assessment and management of climate-related risks
and opportunities is undertaken as part of our enterprise risk
management framework, in line with the TCFD Technical Supplement
(see page 50). The TCFD Technical Supplement helped us understand
our risk exposure and to consider steps we could take to mitigate it.
One of the ways climate-related risks and opportunities are identified
is through the emerging risk process where one of the categories is
environmental risk (see page 51).
Once a risk is identified, the framework includes a requirement for risk
owners to decide on and document their response to an identified risk.
Although there are some examples where the risk can be transferred,
in most cases risks are accepted and require mitigation, such as
effective controls and/or a plan of action. These are monitored through
our risk management effectiveness reviews, as described on page 50,
with a focus on control effectiveness. The determination of risk
materiality is based on gross and current (i.e. net) risk assessments,
using Group-wide scoring criteria for impact and likelihood. These
criteria are used for divisional and functional key risks as well as
principal risks, with the expectation that the basis of the estimate is
clear, consistent and with key assumptions documented.
37
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
SUSTAINABILITY
Aligning with our overarching framework and using common assessment
criteria for all risk categories ensures that risks can be compared across
the Group, supporting prioritisation and providing a mechanism for
monitoring how effectively we are managing these risks.
We have identified seven key climate-related risks and opportunities
that are relevant to our business. Of these, four are transition risks and
opportunities resulting from the shift towards a low-carbon future and
three are physical risks relating to the physical impact of climatic events.
We have a climate change principal risk that specifically refers to the
potential impacts on future revenues as a result of a potential failure
to transition to an inherently lower carbon product portfolio. Following
a principal risk refresh carried out in 2023, this risk has been
re-classified as a principal risk driver (see page 51), recognising the fact
that the consequences of this risk materialising are then causes of other
principal risks. For example, extreme weather events can disrupt our
supply chain (resilience to shocks) or carbon taxes could enhance or
reduce the competitiveness of our products (competitive environment).
There are a number of climate-related opportunities that have been
explored. These include the demand for high base load, low carbon
energy sources provided by products like SMR. These also include
high demand for sustainable fuel compatible products across
our sectors to reduce the carbon emissions and potential emission
penalties.
These key climate-related risks and opportunities have been explored
in our scenarios assessments. As part of our climate-related risk
assessment process we consider the potential physical impact of climate
change on our operating locations. During 2022, we conducted a
physical risk impact assessment of 50 Rolls-Royce sites and selected
key suppliers and joint ventures. In 2023, we continued to build on this
work with further detailed analysis at eight key sites considered most
at risk. This work quantified the potential impact and likelihood of eight
key climate perils that may impact each site, including flooding, water
stress, extreme heat and wildfire, with ongoing analysis of extreme wind
events such as cyclones. The results have fed into our wider climate
scenarios assessments and are now being communicated to divisions
and locations, for inclusion in business continuity and property risk
assessments. These discussions will inform future sustainability strategy
decisions and decisions on further analysis required in 2024.
Climate scenarios assessment
We use scenario planning to help assess our strategic resilience to
climate change. These scenarios are intended to act not as predications
or projections but as explorations of potential plausible futures. In 2021
and 2022, we used two scenarios that acted as bookends of our assumed
base case. These scenarios are reviewed annually to ensure they remain
viable, plausible and appropriately challenging; as part of this review
we decided to introduce a third scenario for our 2023 assessments.
This additional scenario explores a delayed and disruptive transition;
our original scenario scoping activity in 2021 had identified that a
delayed transition may present additional challenges for aspects of our
business model, particularly in relation to the long-term nature of
ourbusiness.
The scenarios we use are based on independent external climate
scenarios (see page 39) and representative concentration pathways
(RCPs). We utilise additional supplementary data for third party sources,
such as carbon pricing and GDP, to support our modelling and financial
impact assessments�
Modelling the potential impact
Cross-functional teams within each division, including representatives
from strategy, finance and risk, collectively assess the potential impact
of each key risk on the business under each of these three scenarios.
This includes calculating a revenue, cost or profit impact for each
scenario across the timescales defined. As part of our 2023 activity, we
have quantified short and medium-term risks, consistent with our wider
financial and strategic planning. In addition, each business has
considered, but not quantified, the potential implications of each
scenario on a longer-term outlook to 2050. At this time we have not
identified any impact on demand, cost or competitive position that we
would not be able to detect and respond to.
Key climate-related risks and opportunities
Transition
risks and
opportunities
Changing customer demand Financial impact from changes to revenue and/or cost due to
customers responding to changing market conditions, e.g. customer
sentiment or cost increases affecting passenger demand in Civil
Aerospace, opportunity for zero emissions solutions in our Power
Systems markets, customer priorities in Defence
Changes in costs due to carbon pricing Changes to our costs due to the assumed application of carbon
pricing measures on our Scope 1 + 2 activities and the application
ofcarbon pricing to the activities of our suppliers that are passed
through to us in the form of higher part costs
Changes in costs due to commodity
price changes
Changes to our costs due to variation in market supply and demand
and/or cost passed through from suppliers
Change in investment requirement Changes to investment required (R&D, capital expenditure etc.) due
to a need to respond to changing customer demand
Physical
risks
Facility disruption
(acute risk)
Financial exposure resulting from a temporary (up to 12 months)
disruption to a Rolls-Royce facility due to a climate-related event
(e.g. flood or fire)
Supply chain disruption
(acute risk)
Financial exposure resulting from a temporary (up to 12 months)
disruption to supply chain due to climate-related event
(e.g. flood or fire)
Impact on product performance
(chronic risk)
Financial exposure resulting in a deviation in expected product
performance (e.g. power, efficiency and/or life etc.) due to changes
in environmental conditions
38
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUSTAINABILITY
Climate scenarios: summary and key assumptions
DESCRIPTION KEY DATA POINTS * 2030 KEY DATA POINTS * 2050
Baseline
The world follows a path in which social, economic and
technological trends do not shift markedly from historical
patterns. Global and national institutions work toward
achieving sustainability goals but make slow progress.
Environmental systems experience further degradation, despite
gradual improvement in energy and resource intensity. Global
population growth is moderate and levels off in the second
half of this century. Economic development proceeds unevenly.
Income inequality persists or improves only slowly and
challenges to reducing vulnerability to societal and
environmental changes remain.
CO
2
price ($/tonne)
— advanced economies
$60/t
— developing economies
$30/t
GDP growth rate (global
five-year average) 2.7%
Global emissions rise
36Gt CO
2
Global temperature rise
1�5°C
CO
2
price ($/tonne)
— advanced economies
$100/t
— developing economies
$30/t
GDP growth rate (global
five-year average) 1.7%
Global emissions rise
32Gt CO
2
Global temperature rise
2�0°C
Accelerated
transition
scenario
(< 1.5°C
by 2100)
The world shifts gradually, but pervasively, toward a more
sustainable path, emphasising more inclusive development
that respects perceived environmental boundaries. Resulting
global temperature rise plateaus at 1.5°C. Educational and
health investments accelerate the demographic transition and
the emphasis on economic growth shifts toward a broader
emphasis on human wellbeing. Driven by an increasing
commitment to achieving development goals, inequality is
reduced both across and within countries. Consumption is
oriented towards low material growth and lower resource and
energy intensity�
CO
2
price ($/tonne)
— advanced economies
$140/t
— developing economies
$90/t
GDP growth rate (global
five-year average) 2.4%
Global emissions rise
23Gt CO
2
Global temperature rise
1�5°C
CO
2
price ($/tonne)
— advanced economies
$250/t
— developing economies
$200/t
GDP growth rate (global
five-year average) 1.9%
Global emissions rise
none
Global temperature rise
1�5°C
Accelerated
physical
scenario
(3.5°C
by 2100)
Expanding fossil fuel demand and government failure to meet
stated commitments leads to higher emissions. The expected
expansion towards renewables is cut short causing global
emissions to rise significantly. Global warming rises to 2.1°C
by 2050, on track to hit 3.5°C of global temperature rise by
2100. This causes significant physical disruption and damage
that accelerates as the scenario progresses. Fossil fuel supply
is slower to adjust than demand as existing resources are
strained and further exploration is needed. This causes spot
prices to rise contributing to inflationary pressure in both
energy and consumer sectors.
CO
2
price ($/tonne)
— advanced economies
$24/t
— developing economies
$12/t
GDP growth rate (global
five-year average) 2.6%
Global emissions rise
46Gt CO
2
Global temperature rise
1�5°C
CO
2
price ($/tonne)
— advanced economies
$31/t
— developing economies
$17/t
GDP growth rate (global
five-year average) 1.3%
Global emissions rise
54Gt CO
2
Global temperature rise
2�1°C
Delayed
disruption
scenario
(1.7°C
by 2100)
Increasing fossil fuel demand and delay of climate policies
until 2030 leads to higher emissions. Stronger policy actions
are necessary to compensate for time lost. Global warming
can be contained to 1.7°C but the sudden shift in the energy
mix causes more economic and environmental damage than
in the baseline. Aggressive and uncertain carbon taxation
policies cause substantial inflationary pressures, stranded
assets and financial instability. Frictions in the shift towards
renewables and more limited carbon capture availability than
in the accelerated transition scenario require vast gains in
energy efficiency to bring down emissions and therefore
global warming by 2050.
CO
2
price ($/tonne)
— advanced economies
$24/t
— developing economies
$12/t
GDP growth rate (global
five-year average) 2.7%
Global emissions rise
41Gt CO
2
Global temperature rise
1�5°C
CO
2
price ($/tonne)
— advanced economies
$379/t
— developing economies
$209/t
GDP growth rate (global
five-year average) 1.7%
Global emissions rise
2Gt CO
2
Global temperature rise
1�7°C
* Key data points are taken from external sources, including Oxford Economics, Global Climate Service and Databank (data extract May 2023) and the International Energy Agency, Net Zero
by 2050 – A Roadmap for the Global Energy Sector, May 2021 and World Energy Outlook 2022, October 2022. These data points are then used to model Group specific assumptions such
as demand for aviation and maritime transport
39
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
SUSTAINABILITY
CLIMATE RISK SUMMARY
The following table summarises the potential impact assessments post mitigations of each of our identified climate-related risks under the three scenarios
(see page 39). These are presented as potential ranges that depict an estimated financial impact and timeframe. We have concluded that these risks have
no impact in 2023 and no material financial impact in the short term, as reflected in our financial accounting, see note 1 of the Financial
Statements on pages 122 to 124�
We do anticipate that the majority of the identified risks will materialise over the medium to longer-term horizon. As described on page 35, our strategic
and financial planning for 2023 has largely focused on the short to medium term, out to 2033, and we have more work to do to fully reconcile and quantify
potential financial impacts beyond this time horizon.
PERCENTAGE IMPACT ON OPERATING PROFIT BY SCENARIO AFTER MITIGATION (CUMULATIVE 2024 TO 2033)
TIMING OF
HIGHEST
EXPOSURE
NET ZERO <1.5° C HIGH TEMP 3.5°C DISRUPTIVE1.7°C
CA D PS NM CA D PS NM CA D PS NM
Changing customer
demand
(1.2) (0.4) 0.4 4.0 (0.3) 0.9 (0.1) 0 (0.1) 0 0.4 4.0
10yrs+
Change in costs due
to carbon pricing
(2.7) 0.4 (2.8) 0 (0.8) (0.3) 1.2 0 (0.7) (0.1) 0.8 0
5-10yrs
Change in costs due
to commodity pricing
0.9 0 0.1 0 (4.8) 0.2 (1.9) (0.2) 2.0 (0.1) 0.4 0
5-10yrs
Changing investment
requirement
0 0 (0.3) 0 0 0 0.3 0 0 0 (0.3) 0
5-10yrs
Facility
disruption
(0.4) (0.4) (0.4) 0 (0.4) (0.4) (0.4) 0 (0.4) (0.4) (0.4) 0
10yrs+
Supply chain
disruption
(1.4) (0.3) (0.3) 0 (1.4) (0.3) (0.3) 0 (1.4) (0.3) (0.3) 0
10yrs+
Impact on product
performance
0 0 0 0 (0.5) 0 0 0 (0.5) 0 0 0
10yrs+
Total (4.8) (0.7) (3.3) 4.0 (8.2) 0.1 (1.2) (0.2) (1.1) (0.9) 0.6 4.0
EXPLANATION/MITIGATION
Changing customer
demand
In the markets we serve, overall demand is expected to be robust in each scenario although product mix may change with
customer requirements, particularly in Power Systems where we would see a stronger market for zero emissions solutions.
We expect demand in Civil Aerospace to be strong, driven by clear demographic trends; enabled by a continued focus
on efficiency and the introduction of sustainable fuels.
We would expect climate stress to create opportunities in Defence; both in security and humanitarian response.
We see significant opportunity to accelerate the growth of SMR in the medium term in the <1.5°C and 1.7°C cases.
Change in costs due
to carbon pricing
We are taking steps to reduce our exposure to carbon pricing by decarbonising our own operations and encouraging
our suppliers to do the same.
Moves to improve energy efficiency and switch to low-carbon sources improve resilience and have short payback times.
Change in costs due
to commodity pricing
Our markets can sustain the commodity price changes assumed in each scenario.
There is medium-term risk in the 3.5°C scenario in Civil Aerospace and Power Systems where existing contracts may limit
our ability to pass through higher then expected costs, negatively impacting profits.
Future contracts with both suppliers and customers need to minimise and mitigate our potential exposure.
Changing investment
requirement
In both Civil and Defence aerospace markets, new products are expected in the mid-2030’s.
High carbon pricing could increase the level of technology required but would also delay new programme launch,
allowing resources to be reallocated and presenting an upside opportunity for current products lines.
In Power Systems the <1.5°C and 1.7°C scenarios would require an acceleration of investment in new technologies.
Facility
disruption
Quantification of potential impact is based on site assessment work carried out by Marsh Advisory and business
continuity analysis performed by each division.
Future site strategy, investment in existing facilities and development of new footprint options, needs to consider
climate risk.
Supply chain
disruption
Quantification of potential impact is based on site assessment work carried out by Marsh Advisory and business
continuity analysis performed by each division.
Future supply chain decisions, including the potential need for dual sourcing, need to consider climate risk.
Impact on product
performance
Over the next decade the temperature differences to the baseline in all scenarios are relatively limited. The risk is
highest in Civil Aerospace where we see a potential modest increase in shop visit frequency and cost in the 3. 5°C scenario.
Key: Opportunity Risk CA = Civil Aerospace D = Defence PS = Power Systems NM = New Markets
40
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUSTAINABILITY
SCOPE 3, CATEGORY 11 EMISSIONS 2022 ² 2023
Use of sold products on a fossil fuel based pathway (with weight based adjustment)
85.7 MtCO
2
e
97.3 MtCO
2
e
Use of sold products on a fossil fuel based pathway (without weight based adjustment)
247.4 MtCO
2
e
315.5 MtCO
2
e
Use of sold products of a sustainable fuel based pathway (with weight based adjustment)
70.0 MtCO
2
e
77.0 MtCO
2
e
Use of sold products of a sustainable fuel based pathway (without weight based adjustment)
185.1 MtCO
2
e
229.1 MtCO
2
e
2 Defence emission adjustments have been updated for partnerships to align to the approach taken in Civil Aerospace. Historical data has been restated to reflect this
Scope 3, category 11 emissions
Emissions associated with use of sold products by our customers, or
end-use customers, comprise the majority of our emissions footprint.
We completed an emissions inventory exercise in 2019 that demonstrated
these represent >90% of our total footprint and it is on this basis that
we do not disclose the other 14 categories. We do not anticipate there
has been any material change in this composition since then.
We calculate emissions associated with the use of sold products in
accordance with the GHG Protocol. Scope 3, category 11 emissions is
a complex calculation that requires us to take a forward-looking
projection of lifetime emissions of products sold within the reporting
year. This requires us to make a number of assumptions about the
operation of the product throughout its lifetime, including assumptions
on hours of operation, anticipated length of service and fuel choice
which may be up to 30 years plus for some of our portfolio. As a result,
we have opted to report four emissions metrics representing two
differing fuels scenarios; one is based on an assumed pathway of 100%
fossil fuel based operation out to 2050 and the other assumes a 100%
sustainable fuel uptake by 2050, both with and without a weight-based
adjustment applied. For further detail on these assumptions, and other
judgements taken, see our basis of reporting document available at
www.rolls-royce.com/sustainability/performance/reporting-approach
The majority of our portfolio is recognised by the GHG Protocol as an
intermediate product which requires us to take an allocation of
emissions based on a proportion of the total emissions of the final
platform. We do so as a weight-based adjustment, as advised within the
GHG Protocol. At present this adjustment is only applied to the relevant
Civil Aerospace and Defence portfolio; our Power Systems portfolio is
inherently more complex and varied and for this business we do not
yet have the same level of visibility of the emissions performance of
Scope 1 + 2 emissions
EMISSION SOURCE ¹ 2020 2021 2022 2023
Scope 1 + 2: emissions from office,
manufacturing and production facilities
199 ktCO
2
e
180 ktCO
2
e 180 ktCO
2
e 148 ktCO
2
e
Scope 1 + 2: emissions from product
testing activities
126 ktCO
2
e
133 ktCO
2
e 136 ktCO
2
e 109 ktCO
2
e
Total Scope 1 + 2 emissions
326 ktCO
2
e
313 ktCO
2
e 316 ktCO
2
e 257 ktCO
2
e
Total Scope 1 + 2 emissions normalised
by revenue (ktCO
2
e/£m)
0.0283 ktCO
2
e/
£m revenue
0.0279 ktCO
2
e/
£m revenue
0.0234 ktCO
2
e/
£m revenue
0.0156 ktCO
2
e/
£m revenue
1 Statutory GHG emissions disclosures are detailed in our SECR statement on page 210
Metrics and targets
Emissions are calculated in accordance with the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard and Corporate Value
Chain (Scope 3) Accounting and Reporting Standard (GHG Protocol). See our basis of reporting at www.rolls-royce.com for further detail.
We calculate and disclose our Scope 1 + 2 and our Scope 3, category 11 emissions.
For further detail on our calculation methodologies, and the assumptions and judgements applied, see our basis of reporting document at
www.rolls-royce.com
our products in the final product application, nor would a weight-based
adjustment be appropriate for parts of the portfolio, such as stationary
power generation. We will seek to progress visibility of this data in 2024.
There have been increases in our Scope 3, category 11 emissions. This
has been driven mostly out of Civil Aerospace due to ~100 extra engines
being delivered. Power Systems has had increased sales volumes as
well as a change in product mix with more products with higher
operational hours. Defence have seen a slight reduction in emissions
driven by lower OE sales in 2023 compared with 2022.
Climate-related targets
We are committed to reaching net zero carbon emissions by 2050. As
part of the commitments we made under the UN Race to Zero campaign
in 2021, we announced short-term targets to help accelerate progress
against this goal within our core business activities. These targets
formed part of our remuneration policy (see page 100). We have met
significant targets demonstrating product compatibility with
sustainable fuels across all our divisions, as well advancing the use of
these fuels in our own testing activities. For the new remuneration
policy to be considered by shareholders at the AGM in May 2024, see
page 88�
We recognise the role of interim emissions reduction targets in helping
us and our stakeholders monitor progress against our long-term goal.
In our 2022 Annual Report, we disclosed draft Group targets for Scope
1 + 2 and Scope 3, category 11 emissions that had been submitted to the
SBTi for validation. As a result of the strategic review in 2023 (see page
10), we have since withdrawn these targets from the validation process.
As a result, we do not currently have Group-level targets in place to
address our material emissions sources.
41
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
SUSTAINABILITY
SHORT TERM MEDIUM TERM LONG TERM
2024 2025 2026 2027 2028 2029 2030 2031–35 2036–40 2041–45 2046–50
Group
Sustainability strategic review See page 35 Targeting net zero carbon emissions from
our operations and facilities and that our
products are compatible with net zero operations
by 2050
Civil
Aerospace
and Defence
Power
Systems
New
Markets
In 2024, it is our intent to complete a comprehensive review of our sustainability and climate-related strategy and approach to align and integrate
with the outcomes of the strategic review. This will include redefining Group climate-related and emissions reduction targets.
2023 TARGETS PERFORMANCE
Utilise a 10% blend of SAF across our product
testing activities for Civil Aerospace operations
Target met
We utilise a contribution of over 10% SAF in our Civil Aerospace engine testing, primarily at our
largest test sites in the UK and Germany. Of the 18.6m litres of fuel consumed by our global testing
activities in 2023, 1.9m litres of this was SAF.
Prove all in-production commercial Civil
Aerospace engine types are compatible with
100% SAFs
Target met
We completed a successful series of one-off ground and in-flight tests across our Civil Aerospace
portfolio on 100% SAFs. Engines tested during 2023 include the Trent 7000, BR710, Pearl 10X
and the first run of our UltraFan demonstrator. We are the only aerospace original engine
manufacturer to test our entire portfolio on 100% SAFs.
Prove compatibility of major Defence engines
in production for 100% SAF
Target met
We successfully tested the AE, Trent 700, Model 250 and Advance 1 on 100% SAF in 2023.
Release 80% of our Power Systems portfolio
for use on sustainable fuels
Target met
The mtu Series 2000 and 4000 engines, the most popular reciprocating engines which make
up 80% of our Power Systems portfolio, have been successfully tested and released for use on
100% unblended synthetic diesels.
Transition plan
We recognise the increasing expectation for companies to develop and disclose a detailed transition plan outlining the steps they are taking to
align with a low and net zero global economy. Throughout 2023, we were actively participating in the development of the Transition Plan Taskforce
guidelines as one of a small number of companies involved.
For 2023, we are disclosing a high level transition plan. We continue to work towards our target of net zero carbon emissions by 2050 and, in
2024, we will conduct a full strategic review of sustainability, delivering a more granular transition plan with defined metrics and targets that will
allow us to measure progress and deliver net zero goals.
SMR
first
orders
Continuous product efficiency improvements
Product compatibility with SAFs
Develop third generation technologies such as hydrogen
Explore novel nuclear solutions such as microreactors
Engine compatibility with sustainable fuels
Continuous product efficiency improvements
Develop low/zero carbon solutions such as battery storage systems and hydrogen combustion engines
SMR ramp up volumesSMR design manufacture and build first units
42
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUSTAINABILITY
OUR PROGRESS IN 2023
Achieved 2025 normalised energy reduction target two
years early
Completed Group-wide Scope 1 + 2 net zero carbon
roadmaps
100% of active suppliers in tier 1 supply chain completed
first stage of sustainability due diligence
We are committed to behaving in a way that minimises impact on the
environment. This means taking personal and collective responsibility
with our business partners to prevent or minimise any adverse
environmental impact from our activities, products and services. As set
out in our health, safety and environment policy, we do this by striving
for resource efficiency and supporting the sustainable handling,
collection, storage, use and disposal of resources. Increasing our
operational resilience in this way is fundamental to the success of our
business and is an integral part of how we work every day.
We focus on our material impacts by optimising energy use; reducing
GHG emissions; reducing waste and optimising material efficiency. For
each of these focus areas we implement measures to mitigate, prevent
or minimise impacts and drive progress against our environmental
targets. Our Group-wide targets are supported by individual business-
level targets as well as specific local targets to respond to particular
risks or opportunities. For example, our recycling and recovery target
is broken down into different sub-targets for our individual divisions
depending on the types of wastes they generate and the opportunity
to recycle them whilst remaining compliant with relevant local legislation.
During 2023, we completed Scope 1 + 2 net zero carbon roadmaps for
each of our major sites; delivered a detailed physical climate risk site
assessment (see page 38); and continued to grow our understanding of
our impact on biodiversity and nature. This year, we achieved our
normalised energy consumption target two years early, having reduced
absolute energy consumption by 429,697 MWh (31.2%) since the
baseline in 2014�
The incentive for circularity is deeply embedded in our business model
given the significant aftermarket and maintenance requirements of our
products. We focus on the remanufacturing and reuse of components
and pay particular attention to the responsible use of chemicals, waste
and water. At our Magdeburg site in Germany, we have improved the
remanufacturing process for railway PowerPacks, including for their
complex drive motors. We provide the users of our products with a
comprehensive programme for spare parts and service solutions to
maximise the performance and value of our products in use.
Our supply chain plays an important role in our ability to reduce
environmental impacts, build operational resilience and improve
performance against our targets. In 2023, all active suppliers were
screened and risk rated using recognised commodity and country risk
indices to understand the inherent sustainability risks in our supply
chain. Prioritised suppliers are requested to complete comprehensive
environmental performance assessments and, where appropriate, offered
support and resources to instigate improvement plans. These
assessments will also provide greater visibility of Scope 3, category 1
purchased goods and services emissions and broader climate impacts
on our supply chain�
Energy consumption (MWh/£m) Total solid and liquid waste (t/£m) Recycling and recovery rate (%)
87
78
58 59
21 2019 14
23 25
22
96
76
117
BASELINE
TARGET
4.00
3.58
3.56
3.31
21 2019 14
23 25
22
4.46
4.74
4.02
BASELINE
TARGET
63.7
60.0
68.0
21 20 19
23 25
22
62.4
56.8
62.7
BASELINE
TARGET
Target
Reduce total energy consumption, normalised by
revenue, by 50% by 2025
1, 2, 3
Reducing our energy demand is integral to our
success in delivering our decarbonisation goals and
reducing our exposure to energy-related risk. Our
normalised energy consumption in 2023 was 58
MWh/£m. This represents a reduction of 429,697
MWh (31.2%) since 2014. The total amount of energy
consumed in the year was 947,955 MWh, of which
34% came from renewable energy sources,
including 1.5% generated from our own on-site clean
energy installations.
Target
Reduce total solid and liquid waste production,
normalised by revenue, by 25% by 2025
1, 2, 3, 4
By focusing on the waste hierarchy and introducing
new technology, we continually improve our
management and reduction of waste. In 2023, our
total normalised solid and liquid waste was 3.56
kilotonnes/£m, an 11% reduction since 2014. The
total amount of solid and liquid waste generated in
operations was 58.8 kilotonnes, compared to 48.3
in 2022. This includes 21 kilotonnes of hazardous,
primarily chemical, waste. The overall increase in
the volume of waste produced has been driven by
an increase in liquid wastewater that would normally
be treated on site. We continue to pursue
opportunities to prevent or reduce waste.
Target
Increase the recycling and recovery rate to 68% by
2025
1, 2, 4
Our recycling and recovery rate for 2023 was 60.0% .
This represents a 2.7% reduction against the 2019
baseline, driven by an increase in production
resulting in more non-recycled foundry sand and
chemical process waste. Our Power Systems business
has a recycling and recovery rate above 80%.
During the year, 6.1 kilotonnes of waste were sent
to landfill, a 24% increase since 2014, primarily due
to the increase in waste foundry sand. We continue
to work to identify appropriate alternatives to
landfill disposal for complex waste streams, such as
foundry sand.
1 External assurance over selected sustainability data, detailed on page 209, is provided by Bureau Veritas. See page 209 for their sustainability assurance statement
2 Data has been calculated in accordance with our basis of reporting. This and further data is available at www.rolls-royce.com
3 Energy and waste data are normalised by Group revenue (£m)
4 Historical data has been updated with actual rather than predicted data
Understanding and minimising our environmental impacts across our operations and
value chain helps ensure we are a responsible and resilient business. We particularly
focus on minimising energy consumption and waste generation and on maximising
resource efficiency and recycling.
43
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
Responsible consumption
OUR PROGRESS IN 2023
Implemented a new differentiated performance
management framework to enable high performance
Exceeded our 2023 engagement target with a grand mean
score of 3.99 and our greatest ever participation rate
Took significant steps to embed our enterprise approach
to skills and capabilities to drive synergies and simplify
the way we operate
Our 2023 people priorities focused on the areas required to step change our culture
and performance, enabling our transformation.
Enabling colleagues to thrive, grow and co-create our future is critical
to building a high-performing, competitive, resilient and growing
company. Our colleagues dedication to engineering excellence, safety
and integrity has enabled our rich heritage and history of innovation.
We continue to be a Company that makes a difference with our people
at the heart of everything we do. Our 2023 people priorities focused
on the areas required to make a step change in our culture and
performance, enabling our transformation. These were all underpinned
by our values of trust, integrity and a rigorous focus on safety in
everything we do.
Our 2023 people priorities were:
— safety, health and wellbeing;
— performance management: enabling high performance; rewarding
and recognising our people;
—
leading with purpose – driving a growth agenda: empowering our
leaders; learning, skills and capabilities;
—
culture and behaviours: inclusion, equity, diversity and belonging;
engagement and listening; and
— colleague experience: wellbeing; community investment and STEM
outreach; change and transformation.
Safety, health and wellbeing
The safety of our people and our customers is a core value and our top
priority. We consider all incidents to be preventable and focus on
proactive safety behaviour as the foundation of our safety culture and
journey to zero harm. We believe that safety is everyone’s
responsibility and continue to embed it into everything we do. Visible,
engaged leadership is critical to driving this culture. Through our
habitual safety moments focus is given to safety at the start of
leadership meetings. We raise awareness of important topics, safety
roles and responsibilities and incorporate real life examples in these
moments to ground relevant messages.
Safety risks are actively monitored to minimise risk, identify
improvement opportunities and continue to create a safe and healthy
working environment that is free from harm. Our safety index, introduced
in 2021, is the core measure of our safety culture. It consists of five
leading indicators that measure a key element of our safety culture:
senior leadership safety walks; safety case improvement activity; HSE
alert response; close-out of HSE non-conformances; and accountable
person engagement. These measurements, alongside more traditional
measures such as injury rates, enable an evaluation of our safety culture
and we use this information to drive action and enhance proactive
safety behaviours and interventions.
In 2023, we achieved a target safety index score of 94% representing
an improvement of 9% percentage points on the previous year (2022:
85%). We achieved this through a stronger focus on safety leadership
and the management of our high consequence hazards. This included
significant improvements in the number of safety leadership walks at
97% in 2023 (2022: 83%) and accountable person engagement at 94%
(2022: 72%).
We work to identify and control preventable incidents and we believe
that motivating colleagues to lead healthy lifestyles and maintain good
wellbeing is critical in creating safe and healthy working environments.
Our industry-leading LiveWell programme encourages colleagues to
take personal responsibility for their health and wellbeing and support
others to do the same. Our wellbeing site provides tools and resources
including practical guides and learning materials to support people
with their mental, physical and financial wellbeing.
LiveWell is a global, evidence-based accreditation scheme through
which sites, facilities and teams assess their workplace on supporting
three key areas: healthy bodies, healthy minds and healthy workplaces.
It empowers teams and individuals to set data-based goals and focused
actions on removing barriers to health and wellbeing. Our LiveWell
programme is current in 21 countries and covers 84 workplaces globally.
In addition to LiveWell, we continue to engage colleagues and raise
awareness of the importance of workplace safety. Forty-five health and
wellbeing events took place across the enterprise in 2023,
representing a total of 75,530 engagements. In April and May, we held
global world safety day events in all three divisions, re-emphasising the
importance of health and safety as our top priority. We also introduced
new safety toolkits on monthly risk themes aimed at reducing incidents
and empowering teams to reflect, think and plan how they can work
more safely.
Our total reportable injuries (TRI) rate has continued to fall this year
through our continued efforts to prevent harm and injuries. In 2023,
our TRI rate was 0.32 per 100 employees representing a 20% reduction
41,400 employees total (monthly average)
*
Civil Aerospace – 18,300
Defence – 12,000
Power Systems – 9,800
New Markets – 1,200
Corporate – 100
* Segments are defined in note 2 on page 137
Employees in 48 countries (monthly average)
*
UK – 20,900
Germany – 10,000
US & Canada – 6,000
Italy – 900
Singapore – 700
India – 600
Rest of world – 2,300
* Employee headcount data represents permanent employees and excludes contractors
Corporate
44
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
People and culture
(2022: 0.41). There was a total of 139 TRIs with 17 incidents resulting in
major injuries (including six contractors). There were no fatalities. In
2023, we exceeded our target TRI rate, which was set in 2019, and plan
to review this in 2024 on our journey to zero harm. When incidents do
occur, we have systems in place to share learning across the Group
and improve our controls to prevent similar incidents occurring in the
future. Sharing knowledge to learn, grow and minimise risk is a key
element of our transformation programme and continued focus on
safety as our number one priority.
TRI rate (per 100 employees)
*
0.32
0.33
22 21 20
25
23
0.41
0.43
0.35
BASELINE
TARGET
* Our TRI rate shows the Group TRI performance (absolute and rate). External assurance
over the TRI data is provided by Bureau Veritas (see page 209)
Performance management
Enabling high performance
We believe a differentiated performance culture, where performance
expectations are clearly defined and results tightly monitored, will drive
the step change necessary to become a high-performing, competitive,
resilient and growing company. In 2023, we launched a new Group-wide
performance management framework to embed this approach.
Our reward and recognition programmes were also adjusted to support
greater differentiation of individual outcomes. Our core programme
for leaders and colleagues includes regular on-going check-ins, annual
performance reviews and disciplined calibration. Our approach
encourages an agile mindset that is outcome focused and acknowledges
that high performance is a relative concept.
We provide accessible support through digital tools to enable our
people to grow and achieve their full potential. In 2023, we launched
new interactive learning resources for leaders to support the
performance of their teams. The new resources focus on ensuring that
high quality performance conversations take place and help leaders
take account of how people achieve their results as well as measure
the impact of what was achieved. As we continue to build our high
performance culture and enable transformation, our leaders are
critical to this shift and we are already seeing a step change in their
approach, which is evidenced in our financial results. Our 2023 employee
engagement survey results (see page 46) also highlight positive change
in leadership, with a significant increase on the continuous feedback
to improve question which shows that our leaders are
providing actionable feedback to their people to drive improvement
and enhance performance.
Rewarding and recognising our people
Our pay philosophy is directly connected to our performance
management framework and we take a Group approach for all people
leaders globally. Where possible, we align individual goals to strategic
priorities and connect reward and recognition to business success with
differentiated outcomes recognising performance that delivers the
greatest impact�
Our global incentive arrangements are aligned to the delivery of our
business strategy through direct cascade from Executive Director
incentive metrics (see page 18). Cascade of goals aligned to
transformation has been a key priority for us in 2023. From 2024, all
senior leaders have new clear performance contracts setting out
their priorities.
Steps are being taken to enable all colleagues to understand how their
accountabilities and deliverables support business strategy and their
role within it. We believe this will drive performance and enhance
colleagues pay and benefit opportunities. As an example, during 2023,
we implemented a new compensation system in Germany that enables
performance differentiation and simplification of base pay arrangements
for the vast majority of our people covered by tariff arrangements.
In 2024, we aim to enable more colleagues to share in our success
through enhanced affordable share ownership options. We currently
offer tax approved ShareSave and SharePurchase plans in the UK and
non-tax qualified cash settled phantom ShareSave plan for colleagues
outside of the UK. We also plan to expand our work on global living
wage standards in line with our continued focus on pay and benefits.
We are committed to fair and appropriate levels of pay and conform
to all national pay laws globally. In the UK, we pay all colleagues above
the standards outlined by the Living Wage Foundation and we require
all our suppliers to meet minimum/fair wage standards by signing up
to our global supplier code of conduct.
Leading with purpose – driving a growth agenda
Empowering our leaders
Our leaders play a critical role in transformation and in 2023 have been
challenged to think and act differently. We have encouraged leaders
to ruthlessly prioritise what they do to enable a tighter focus on
priorities and to work smarter and achieve better outcomes together.
We are making good progress and have already accelerated our
financial delivery (see page 20) which gives us confidence in the
ability of our leaders to make the step change in performance required
to deliver our strategic priorities.
We have undertaken different ways of engaging leaders as part of this
approach through new learning methods and tools. In 2023, we
developed resources on change, performance management and
communication as well as introducing experiential peer-to-peer
leadership learning workshops. Many of our leaders took part in our
new winning together performance management learning series,
including showing care through consistency, embracing the relativity
of performance and psychological safety. We received great feedback
and the events are now available digitally for all leaders to use. We have
continued to expand our formal leadership learning programmes and
leadership fundamentals that provide critical leadership skills for first
and second-line leaders, and in 2023 we launched a new strategic
development programme for senior leaders. Alongside our formal
leadership development programmes, we also continue to update our
digital leadership toolkit with new resources and communication guides
focused on engaging teams during times of change. In 2023, utilisation
of this award-winning resource was just over 166,000 learning
engagements, (2022: 138,500).
Learning, skills and capabilities
In 2023, we have taken significant steps to embed a Group-wide approach
to skills and capabilities to drive synergies that will enable us to be more
competitive and simplify the way we operate. Capabilities and skill
development are a core element of our learning agenda. They also
enable us to share expertise, specialist capability and resources more
effectively to align with our strategic priorities. Our business
capabilities are engineering, technology, safety, procurement and
manufacturing operations.
We have significant engineering expertise, and in 2023 we brought
together ET&S as a key element in our new organisation design, right
at the heart of our Group (see page 9). We believe this will enable
enhanced mobility and growth for our engineers and create better
efficiency and agility. This is supported by our #alwayslearning culture,
self-led, continuous learning and supporting tools and resources. Our
continued investment in digital tools provides enhanced experiential
learning opportunities and fosters a digital, agile learning culture to
keep up with the pace of change and to support future growth.
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We continually refresh and update our learning resources in line with
our strategic priorities and track development on critical skills and
capabilities at Group level. Leatro Collections, our curated learning,
provides learning on capabilities required to deliver our transformation.
As a key priority, safety is one of our core offerings and we built on this
in 2023 to include business acumen and commerciality, health and
wellbeing, engagement and change as well as inclusion, equity diversity
and belonging. Learning week, held in September, showcased our
learning resources with internal and external leaders including our
Chief Executive and three senior leaders talking through their personal
approach to learning and experience and adapting through change.
Aligned with Our Code and our Group policy framework, we also deliver
an annual Group-wide mandatory learning programme centred on our
values and behaviours and our safety, security and legal obligations.
In 2023, 96% of colleagues completed all mandatory learning (2022:
94%). Our continued investment in learning and development in 2023
was £20.8m (2022: £17.8m), delivering 757,629 hours of formal learning
(2022: 581,505 hours).
Enhancing development using skills and gigs
In 2023, we continued our work on skills development using gigs
to both enhance learning and embed new agile ways of working.
Introduced in 2022, gigs use digital systems and artificial
intelligence to create an internal marketplace of bite-sized tasks
to enable colleagues to drive their own learning and skill
development creating their own career experiences as a result.
Our early pilots were successful and experiences reported by
participants were positive. Colleagues involved in gigs are 1.5
times more likely to respond highly to our engagement survey
questions on learning and growth. We expanded gigs to the full
enterprise in October 2023 and around 11,000 people had signed
up by the end of the year.
It is driving growth in discretionary effort and productivity as well
as motivating colleagues to seek new opportunities to learn and
grow in skills areas anticipated to be required and valued in the
future. This is supporting our self-led learning culture, putting
people at the heart of their own development. It provides rich,
cross-enterprise experience, both increasing people’s breadth
and enabling agility within the organisation and enhancing
delivery of key projects through increased access to resources
and diversity of thought.
Culture and behaviours
Engagement and listening
Engagement is an outcome of our employee experience with a focus
driven through our people leadership practices, purpose and
performance culture. We believe that highly engaged colleagues fuel
improved business outcomes. Engagement is one of our Group KPIs
with continued links to leadership incentive plans (see page 18).
Listening, understanding and acting on colleagues questions and
concerns is a critical aspect of our transformation journey. In 2023, our
engagement grand mean was 3.99. We surpassed our Group target of
3.97, set in 2019 with our partner Gallup, and achieved a meaningful,
consecutive increase of 0.14 since 2022 (0.47 since 2019). We also
secured our highest participation rate of 80% with 32,544 colleagues
completing the survey.
We take a people first approach to listening, engagement and
communication and believe our leaders play a vital role given the direct
impact of their behaviour and actions on the people they lead. We
provide data and insights to leaders through Gallup to enable them to
work together with their teams on action plans and improvements. In
2023, we introduced new governance to monitor engagement across
the Group. It enables better sharing of best practice where teams have
made significant improvement as well as the ability to provide targeted
learning to support the teams that need it most.
In addition to our survey, we provide a variety of channels for colleague
engagement and listening, including interactive learning sessions,
newsletters and team briefings as well as digital communication
channels such as Viva Engage. Through our transformation programme
we are introducing new ways to engage with colleagues and amplify
employee voice. In 2023, we have held regular live town halls with Q&As
hosted by our Chief Executive and Executive Team. Our global inclusion
networks (see page 47) also play a key role in engagement and
listening. Members of our networks have been invited to various
leadership sessions this year and our Employee Champions have
attended some of the network sessions to listen to what colleagues
think about key topics (see page 60). In May 2023, we held another
Meet the Board event continuing to foster engagement with our Board
members as well as encourage all colleagues to contribute and help
co-create our transformation (see page 60). Engaging colleagues to
shape our future helps us to build a better and stronger business that
everyone is proud of. We made CMD accessible for all colleagues to
attend virtually and we held multiple local sessions to flow down key
messages as well as creating new digital tools and resources to ensure
that everyone had access to information on our new strategy and
business plan�
Culture underpins everything we do, and in 2023, through our culture
and purpose transformation workstream (see page 66), we started work
to evolve our culture and behaviours to align with our strategic
priorities and foster a new winning mindset. We invited all colleagues
to help shape our new purpose and culture ambition through 16 global
focus groups and an all-employee crowdsourcing opportunity. We are
working to better understand our current culture and establish new
ways of monitoring and measuring culture to track progress against
our future ambitions. In 2023, we introduced a new Group-wide horizon
scanning capability using organisational uncertainty metrics. This
enables us to identify and mitigate people risk across the organisation
quarterly and is reviewed at our people committee (see page 69). This
committee and the Nominations, Culture & Governance Committee will
oversee our continued work on culture and purpose.
Inclusion is everyone’s business
Our ambition is for all colleagues to feel psychologically safe and able
to be at their best, thereby driving not only our colleague experience
but also individual and business performance. We believe that being
inclusive will enhance our ability to attract, retain and grow the critical
diverse talent we need to succeed now and in the future. Whilst we
continue to report against our established diversity and inclusion
(D&I) 2025 targets, we have matured our approach to focus more on
building a culture of inclusion and belonging. Throughout 2023, the
global inclusion team have focused on embedding inclusion
throughout the Group.
Our inclusion goals (see above) provide the framework to enable our
ambition. Our 2023 mandatory learning on behaviours focused on
psychological safety. It consisted of interactive learning on
Our inclusion goals
We drive inclusion to unleash the power of our people
Lead
We drive inclusive
leadership behaviours and
capabilities to create high
performing teams
Attract
We promote our inclusive
values to enable us to hire
the best talent
Engage
We create an inclusive
culture in which everyone is
actively engaged, belongs
and can be at their best
Develop
We support the growth
of our learning culture to
empower everyone to reach
their full potential
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
PEOPLE AND CULTURE
microaggressions, exclusion and health and safety and included real-life
case studies to bring the subject to life. Ninety-five percent of all
colleagues completed this training in 2023. Mandatory learning is a key
element in our approach to embed dignity and respect throughout
the Group.
Our global inclusion networks also play a critical role in driving our
strategy and allowing the voices of all our people to be heard. They
are groups of colleagues, organised primarily around a specific
characteristic or life experience, who provide personal and professional
support to each other, run events and help everyone to focus on
inclusion. In 2023, our D&I councils were refreshed as business inclusion
forums operating under the umbrella global inclusion forum. In 2023,
the forum met quarterly with the global inclusion network chairs to
ensure two-way communication at all levels.
In September, we launched our Rolls-Royce inclusion week, led by the
global inclusion team and supported by a group of volunteers. The week
included enterprise-wide sessions covering a range of topics such as
inclusive language, allyship and neurodiversity led by external and
internal speakers. During the week, 2,976 colleagues attended at least
one of the virtual sessions.
Accelerating diversity and attracting future talent
As outlined above, we believe that to enhance diversity our primary
focus should be on creating a safe, inclusive and equitable working
environment where everyone feels valued and belongs. We also continue
to focus action on improving our diversity. Increased awareness and an
intentional focus on diversity in hiring and succession planning has
resulted in an increase in the representation of women at all leadership
levels in 2023 (see diversity metrics opposite). We focus action on
diversity in succession planning and support diverse colleagues to thrive
and grow through targeted learning programmes and support initiatives.
Following a successful implementation in 2022, we further embedded
our Thrive programme during 2023. The programme focuses on enabling
women and includes internal mentoring, coaching and skill development
workshops. Eighty-nine women across the Group participated in Thrive
this year with 88% of participants sharing feedback that they would
recommend the programme. Forty-six percent of participants were
promoted, moved role or had their responsibilities expanded. We will
also continue to accelerate diverse talent through transformation where
inclusion and diversity principles have been built into our
restructuring approach and Group-wide people system.
In 2023, we significantly reduced external recruitment as part of our
effort to mitigate job losses that could result from the transformation
programme but we continued to recruit into critical roles and skill gaps
and sustained our focus on future pipeline through early career
programmes. Across our recruitment programmes, we continued to
enhance the inclusivity of our processes. This included introducing
additional support through the process for any candidate declaring a
disability at application stage and continuing our recruitment bias
learning for all assessors and interviewers. We give full and fair
consideration to all employment applications from people with
disabilities. If an employee becomes disabled whilst working for us we
take steps to support their continued working including, wherever
possible, making adjustments to ways of working.
Within early careers and education outreach we continue to focus on
diversity and inclusion (see page 48). Our aim is to engage and inspire
more females and ethnically-diverse talent into STEM, supporting our
future talent pool, as well as more broadly within the communities in
which we operate and our supply chain. In 2023, through targeted
campaigns to attract more ethnically diverse candidates, we hired 34%
ethnically diverse graduates (2022: 17%) and 19% ethnically diverse
apprentices (2022: 31%).
Twenty-two percent of our apprentice hires were female in 2023 (2022:
22%). Our female graduate hire rate was lower in 2023 at 32% (2022:
40%).
We continue to expand our partnership approach and have introduced
new initiatives in 2023. These include working with UpReach a
partnership aimed at undergraduates from less-advantaged backgrounds
supporting access to top graduate employers, the National Coding
Challenge and sponsoring the wellbeing student roadshow. Through
Undergraduate of The Year (UGOTY), we sponsored three
undergraduate awards and converted 30% of the finalists into
internship offers across our female, social mobility and neurodiversity
categories (100% female conversion and 54% ethnicity conversion).
Our i-Accelerator insights programme supports 30 ethnically diverse
students across both STEM and business programmes.
We still have much work to do and our focus remains on inclusion,
equity and belonging. Moving forward, we plan to adopt a more
holistic approach to driving systemic change. We are determined to
increase the diversity of our workforce and work together to create a
company where every person can belong. We have been recognised
in our efforts and placed 42nd in the top 50 Inclusive Companies Award
2023 and we progressed from 336 to 47 in the Financial Times Diversity
Leaders 2024 ranking.
Our diversity metrics at 31 December 2023
1
Female diversity percentage tracking and 2025 targets
2022 2023
2025
target
The Board
2
33% 50% 50%
Executive Team 18% 30% 33%
ELG 22% 23% 35%
Senior leaders
3
22% 24% 30%
All employees 18% 18% 25%
Ethnic diversity percentage tracking and 2025 targets for UK
and US
4
2022 2023
2025
target
UK ethnicity 11% 11% 14%
US ethnicity 16% 17% 20%
Gender diversity
Female Male Total Female (%)
The Board 6 6 12 50%
Executive Team (ET) 3 7 10 30%
ET, Chief Governance Officer
and direct reports 23 49 72 32%
ELG 17 56 73 23%
Senior leaders
3
20 63 83 24%
All employees 7,662 34,148 41,810 18%
1 The data for diversity information is showing permanent employee year-end actuals
2 The Board diversity policy aims for gender parity
3 Senior leaders are defined in the Companies Act 2006 (those who have responsibility for
planning and directing or controlling the activities of the entity or a strategically significant
part of it). We do not include all subsidiary directors in the definition of senior leaders as
this would not accurately reflect the leadership pipeline. We have a large number of small
and dormant subsidiaries and the composition of these Boards reflects their level of
activity. Accordingly, senior leaders refers to the Executive Team and the ELG
4 For ethnicity information we are only able to monitor and track this in the UK and US and
therefore this only includes businesses in these locations. The population is only those who
have chosen to disclose this information
In October, we launched our global self-identification project, ‘count
me in’ which aims to increase diversity data disclosure from our global
workforce. Through this project, colleagues can self-disclose their
nationality, gender identity, armed forces service, social mobility,
carers and parents status, sexual orientation, neurodiversity, religion,
and disability (where not restricted legally). We have made good
progress with the project in the first three months since launch with
46% of our people self-disclosing. We plan to review our 2025
ambitions, including D&I targets, once we have greater participations
because we believe this will enable a review of our ambitions in a more
meaningful way. In 2023, we submitted diversity data to the FTSE Women
Leaders and Parker Review and explained our decision not to set new
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
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targets this year. As a multinational organisation we operate consistently
across the Group and vary our approach accordingly to local legislative
frameworks and D&I requirements. We plan to take a One Rolls-Royce
approach to diversity metrics and tracking progress and this will be
part of a broader, more holistic review of our equity, inclusion, diversity
and belonging ambitions moving forwards.
Colleague experience
Supporting wellbeing
We recognise the uncertainty and challenge associated with
transformation. We believe in creating a working environment where
all colleagues can be at their best and, in 2023, we increased the
support provided. We developed a new virtual wellbeing site
containing tools and resources to help support our colleague’s
wellbeing. Our new wellbeing resources form a key element in our
LiveWell programme (see page 44). We have received 22,570 visits to
our new LiveWell microsite since its launch in February 2023.
We have continued to embed existing wellbeing tools and resources,
developing over 100 new resources for people leaders to engage their
teams on mental health and wellbeing topics. An example, in 2023 there
was a new leadership workshop titled ‘resilience during times of change’.
Our programme on mental health included promotion on World
Mental Health Day with a focus on managing anxiety through uncertainty
and change and included interactive workshops by internal and
external leaders. The day was a great success, with 21,352 colleagues
attending our events and significant engagement on our internal media
and communication channels. We continue to engage in national events
to highlight important topics and focus conversations and we work
hard to ensure that mental health and wellbeing remain talking points
all year round.
Our global mental health champion network, a group of volunteers
trained to guide colleagues and provide support, has increased 33%
in 2023 to over 728 champions globally in 13 countries. We have worked
to expand the network and enhanced learning through the sharing of
best practice and new toolkits for our champions and leaders to use,
to connect and signpost colleagues to our support sites, tools and
resources�
During 2023, we also maintained our focus on menopause, and our
monthly cafe community now has over 300 members who meet regularly
to share information and host discussions on important relevant issues.
We launched a new training programme in the UK for leaders supporting
team members going through the menopause and our aim is to launch
this globally in 2024.
Community and STEM outreach
Our ambition is to contribute to a more equitable and inclusive society
by enabling our people to make a positive social impact and investing
in education and skills. Our priority is to support young people,
particularly those underrepresented in our industry, to achieve their
aspirations and overcome barriers to success.
We understand the interdependencies between business and society
and invest in our communities to address social needs in a way that
makes sense for our business. We engage with local partners to help
focus our action on activities that provide the greatest positive impact
for all of our stakeholders.
We deliver high quality STEM learning experiences that encourage
children from an early age to explore and be inspired by the role of
science, technology, engineering and maths in finding solutions to the
challenges facing society and our planet. During 2023, our STEM
ambassadors supported programmes and partnerships across the globe
to raise aspirations and encourage young people to continue STEM
studies to achieve the qualifications needed to pursue a career in STEM.
We reached 1.01 million people through our STEM programmes in 2023
and are now 41% towards our target to inspire 25 million of tomorrow’s
pioneers by 2030�
Inspiring future generations with STEM
Encouraging young people to explore how things work and find
ways to do things better is fundamental to our STEM outreach
programmes. We work with Girlguiding and the Scouts in the UK
to sponsor STEM badges and provide practical STEM activity
resources for 7 to 18 year olds, estimated to have engaged
approximately 137,000 young people during 2023.
Addressing inequalities in STEM
Our programmes help to enable future success in communities
challenged by barriers to participation. We have partnered with
Glyph in Singapore to design highly-participative STEM workshops
for children from less-privileged backgrounds and engaged 688
students in 2023. The sessions took place both in the community
and on our Seletar site, supported by our STEM ambassador team.
Enabling excellence and innovation in STEM teaching
Our UK schools prize for science and technology provided
£200,000 in bursaries through the National STEM Learning
Centre to support continuous professional development for STEM
teachers, estimated to enhance the learning of approximately
42,500 students during 2023. We invested an additional £60,000
during 2023 in awards to schools to develop innovative teaching
projects and will be announcing the winners in 2024.
Our people remain at the heart of all our programmes and contributed
37,680 hours (2022: 48,347) to community investment and education
outreach programmes in 2023. In addition, at least 106 teams across
the Group completed practical projects in their local communities
ranging from improving community facilities to maintaining natural
environments. We embed community investment and education outreach
opportunities into our strategic learning programmes, including early
career training, skills development gigs, as well as being a fundamental
element of our wellbeing strategy and LiveWell accreditation programme
(see page 44).
Our global charitable contributions and community investment for 2023
is valued at £4.3m (2022: £5.1m) with £3.0m in cash donations which
included £520,000 of funds received as a result of a share forfeiture
programme carried out in earlier years. £250,000 was provided to
support communities impacted by the earthquake in Turkey and Syria
in February.
Change and transformation
We have made good progress in our transformation in 2023 (see page
6) but there remains a lot more to do. We have confidence in our
ability to be a better and stronger business than we are today. To do
so, one of our transformation building blocks is to create a simpler and
more efficient organisation, a truly customer-centric business where
multi-disciplinary working enables us to unlock our potential and move
at pace, as one team, One Rolls-Royce.
Bringing together ET&S (see page 9) is a significant change right at
the heart of our Group. They will also have responsibility for our
engineering standards process, methods and tools and operate with a
flexible resourcing model to deliver the programmes in the divisions.
The same approach was taken to strengthen our procurement
capability and organisation. This will see us capitalise on economies of
scale for our key commodities and provide a stronger service to
our customers�
Group-wide synergies have been identified to enable us to manage our
costs more tightly. This work has allowed us to minimise the resulting
headcount reduction announced in October 2023 of between 2,000
to 2,500 roles worldwide by the end of 2025. In 2024, we will continue
to embed our transformation principles, including redeployment and
other levers available whilst maintaining continuous dialogue with our
people and their employee representatives.
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We are committed to upholding high ethical standards underpinned
by our values and behaviours to create a working environment where
everyone at Rolls-Royce and those we work with can be at their best.
Our code of conduct (Our Code) and associated Group policies guide
our actions and decisions to ensure we can be proud of the way we
behave and the way we do business.
In 2023, a global ‘win right’ campaign was deployed across the Group
to engage our employees on the important role they play in
maintaining our high standards of ethics and compliance. In addition,
as part of our 2023 annual mandatory learning programme, our core
compliance learnings included handling confidential information, data
privacy and complying with export control requirements. We ask all
our employees to annually certify their understanding of Our Code,
which is mandatory for our leaders.
We strive to create an environment where everyone feels valued and
actively encouraged to speak up about questions or concerns without
fear of negative consequences. This is a vital part of enhancing our
culture of inclusion and belonging. Everyone can use our speak up
channels, whether or not they are an employee. We provide multiple
ways to raise a concern, including the Rolls-Royce speak up line which
enables concerns to be raised anonymously and confidentially in
multiple languages. A speak up report highlighting key statistics is
made available to employees at regular intervals to remind them of the
importance of speaking up and our annual speak up report video is
published on our website.
We have a zero tolerance approach to misconduct of any kind and will
take disciplinary action, where appropriate, up to and including dismissal
in the event of a breach of Our Code. In 2023, 132 employees (2022:
76) left the business for reasons related to breaches of Our Code. The
increase in numbers of dismissals is due to a range of factors, including
enhanced consistency of tools across the Group which record and
classify dismissals and our commitment to continuous improvement.
Supply chain sustainability
Our global supplier code of conduct sets out the ethical principles we
expect from our suppliers. All suppliers are required contractually to
adhere to this or a mutually agreed alternative. We work closely with
our partners to continually improve the environmental and ethical
performance of our supply chain. Partnering with a leading third-party
provider, we conduct sustainability screening and assessments to
understand the inherent sustainability risks within our supply chain and
take appropriate mitigating actions where required.
In 2023, all active suppliers were screened and risk rated using
recognised commodity and country risk indices across environmental,
ethics, labour and human rights topics. Prioritised suppliers are
requested to complete a comprehensive assessment of their
sustainability risk management. Where risks are identified, suppliers
are asked to put in place improvement plans and offered support and
resources to help with this via our third party partner. To enhance the
effectiveness of our due diligence controls, we also updated our
partner contracts with specific sustainability clauses.
Anti-bribery and corruption
We do not tolerate bribery and corruption in any form, as set out in
Our Code and associated anti-bribery and corruption policy. We
routinely check and test the effectiveness of our anti-bribery and
corruption programme to manage proactively the associated risks (see
page 53). In 2023, we continued to monitor our controls through
compliance specific assurance activities through site visits and reviews
of financial and operational data. These activities are overseen by the
Nominations, Culture & Governance Committee (see page 78).
In October 2021, we entered into a leniency agreement with the
Brazilian offices of the comptroller general and attorney general in
relation to historic bribery allegations. As part of this, we agreed to
implement improvements to our integrity programme in Brazil and to
provide three reports to the Brazilian comptroller general setting out
all steps taken. The first report was submitted in August 2022, the
second in February 2023 and the final report in November 2023. In
the final report, we confirmed all required enhancements had been
successfully completed. The official response from the office of the
comptroller general will be received in 2024.
Human rights and anti-slavery
We are committed to protecting and preserving all internationally-
recognised human rights of everyone who may be impacted by our
business activities along our value chain. This includes upholding the
principles set out in our global policies and processes to fulfil our legal
obligations and avoid any potential complicity in human
rights violations.
In 2023, we have enhanced our human rights risk management
framework to ensure that we take appropriate action to prevent,
minimise, mitigate and, where necessary, remedy human rights related
risks. Our framework includes processes, methods and tools to regularly
conduct a risk analysis of our own operations and our suppliers using
an expert external platform provider and using established and accepted
indices on human rights globally. The risk analysis includes continuous
external screening services, internal checks on contracts, certifications
of the subsidiary or supplier, and specific examinations based on
questionnaires for prioritised risks. Results of these assessments are
considered in the human rights governance structure and compliance
framework, where further tailored preventative, corrective or remedial
measures may be assigned as appropriate in a systematic and
proportionate manner. These activities are overseen by the human
rights steering group and the Nominations, Culture & Governance
Committee (see page 78).
In 2023, we have focused on implementing a consistent approach across
the Group through the development of a human rights reporting tool,
deploying targeted human rights training, and identifying human rights
committees in each division chaired by the newly-appointed human
rights officers.
Find more information on our anti-slavery and human trafficking statement,
see the Group policies and global supply chain page at www.rolls-royce.com
For more information on our ethics approach see the Nominations, Culture &
Governance Committee report on page 78 or view ‘Sustaining our culture of
integrity’ document available at www.rolls-royce.com
We are committed to conducting business with integrity and creating a working
environment where everyone can be at their best.
OUR PROGRESS IN 2023
Delivered a global engagement campaign on ethics
and compliance
Developed a Group human rights reporting tool
Appointed division-level human rights committees
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Ethics and compliance
The Rolls-Royce risk management and internal control system
Effective risk management helps Rolls-Royce to identify anything that
could hinder or support the effective implementation of its strategy
and business model. In order to achieve this, we have an established
risk management and internal controls system, with the Board
overseeing its effectiveness (see pages 65 to 75).
As well as including procedures to monitor the nature and extent of
the principal risks the Group is willing to take in order to optimise its
commercial opportunities and achieve its long-term strategic
objectives, it also covers the monitoring of emerging risks.
At least once a year, the Board, supported by the Audit Committee,
assesses how effectively we manage principal risks and, where we are
not, reviews plans in place to address these. In 2023, there was an
additional internal review on risk maturity which was incorporated into
the effectiveness review.
For key principal risks, particularly compliance and safety, we have
mandatory training and policies in place, linked to performance
management and remuneration, which all our people are required to
complete and comply with (see pages 46 and 49 for details).
The Audit Committee also reviews the Group’s internal financial controls
with financial reporting controls being subject to periodic review by
the Group’s internal controls team.
The Board confirms that it has monitored the effectiveness
of risk management and internal controls throughout the
year, in accordance with the 2018 UK Corporate
Governance Code.
Risk management
Risks facing the business are identified and assessed
on a regular basis�
Internal control
Internal controls are designed and deployed to mitigate
these risks to an accepted level.
Assurance
Assurance activities assess whether the controls are
effective and risks are mitigated to an acceptable level
in practice.
How Rolls-Royce manages risk
We use a framework which aligns with international standards for managing risk. This sets out requirements across the organisation for all
categories of risk, including climate, finance, legal and operations, as well as providing guidance and tools. Everyone at Rolls-Royce has a role
to play in identifying and managing risks, but the Board (aided by its Committees) is ultimately accountable. An independent, central enterprise
risk management team supports the divisions and functions in their effective management of risk.
Define
Risks are identified by individuals across all divisions and functions and at
different layers of the organisation by considering what could stop us
achieving our strategic, operational or compliance objectives or impact
the sustainability of our business model (described on pages 14 and 15).
Continuous improvement
We regularly benchmark the risk
framework through active participation
in industry groups and against best
practice risk standards. Progress made
in 2023 includes further embedding
risk considerations in the investment
committee decision-making process
and five-year planning process.
We also made improvements to how
we define, document and operate
controls (e.g. for the safety and
compliance principal risks). This is a
key part of how we mitigate risk and
keep within appetite, alongside
assurance so we know the mitigation
is effective. A risk and its mitigation is
continually evaluated in response to
external or internal factors changing
the nature of the risk and how we
manage it�
Quantify
Risk owners assess the likelihood of a risk materialising and the impact
if it does, taking into account current mitigating control activities.
Control and
assure
Risk owners consider the effectiveness of current mitigating control
activities, supported by different assurance providers (detailed in the
principal risk tables from pages 52 to 57).
Respond
Risk owners identify where additional activities may be needed to bring
the risk within appetite. A judgement is made by assessing the Group’s
ability to reduce the impact of risks that do materialise and ensure the costs
of operating particular controls are proportionate to the benefit provided.
Monitor, review
and report
Risk owners report their assessment of the current risk status and action
plans to divisions, functions and other review forums (including the
Executive Team, Board and Board Committee meetings) as needed
depending on the nature of the risk, for support, challenge and oversight.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Principal risks
Principal risk interdependencies – pillars and drivers
Principal risk drivers
Emerging risks
In a fast-changing world, it is getting harder to predict the future in
time to make decisions and act early enough to deal with unexpected,
disruptive events. Rolls-Royce has processes in place to identify
emerging risks, including:
— divisional risk identification;
—
regulatory and compliance horizon scanning, including requirements
relating to climate change;
— geopolitical horizon scanning and risk identification;
— new technologies horizon scanning;
— analysis of external emerging risk information; and
— strategic risk identification.
Outputs are assessed to identify any potential new impacts on
Rolls-Royce. Where we do identify items, these are captured by either
recording a new risk or amending an existing risk and managing this in
accordance with the framework described on page 50, or added to an
emerging risk watch list to monitor and/or investigate further.
The Board consider an annual summary of emerging risks and
management’s response. In 2023, we concluded that known significant
risk trends are deteriorating simultaneously; in particular the effects
of climate change, geopolitical conflict and tensions, the pace of
technological advancements, and global economic constraints and
their knock-on effect on society. This evolution has been reflected in
the revised approach to principal risk interdependencies, shown in the
diagram below.
We added two risks to the emerging risk watch list this year arising from
external geopolitical tensions: the possibility of national power outages
and an attack on physical infrastructure. Technology risk has also now
been split out from the previously reported competitive environment
risk, expanding it into a separate opportunity risk driver (see the table
on page 57 for details). 
Principal risks
The Board confirms that it has assessed and monitored the Group’s
principal risks throughout the year, in accordance with the 2018 UK
Corporate Governance Code.
Changes to the principal risks profile in 2023
We continue to review our principal risks, their evolving nature and
how well they are managed. In November 2023, the principal risk
profile was refreshed to ensure it reflects where risks could impact the
organisation in light of the strategic review. This resulted in a number
of changes to our principal risks.
—
Transformation has been replaced with a strategy risk, which
incorporates the old transformation risk as well as elements of the
previous competitive environment risk.
—
Execution replaces elements of the previous competitive
environment risk .
—
Technology is now a separate principal risk, whereas previously
it was captured under the competitive environment risk.
—
Information & data risk includes the previous cyber risk but has been
expanded to include physical as well as digital data.
— Business continuity risk is now called business interruption.
As part of this, we also looked at risk interdependencies, categorising
principal risks as either a ‘pillar’ or a ‘driver’, with drivers being those
risks that could cause one or more risk pillars to happen and/or make
them worse if they do. The diagram below shows how the risks
interconnect, with the crosses showing the interdependencies which
will be a focus as part of our risk management and oversight in 2024.
More information on each of the risks can be found in the tables
starting on page 52.
Principal risks are owned by one or more members of the Executive
Team and subject to a review at an Executive Team meeting at least
once each year, before a review by the Board or a Board Committee.
Risks are managed against risk appetite (i.e. how much risk we are
prepared to accept or be exposed to) as a mechanism for making
decisions for how risks are managed and the actions needed to
mitigate them.
Principal risk pillars
Strategy Execution Business
interruption
Read more about our strategy
on pages 10 to 12
Climate change
Political
Talent & capability
Technology
Market shock
Financial shock
✖
✖
✖
✖
✖
✖
✖
✖
✖
✖
✖
✖
✖
Safety
Product &
people
Compliance
With law &
regulations
Information & data
✖ ✖✖✖
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STRATEGIC REPORT
PRINCIPAL RISKS
Changes in overall risk levels
The overall risk profile has remained broadly stable. Where we have developed our strategy (as described on pages 10 to 12) and associated short
to medium-term plans, the related risks have reduced accordingly. Successfully managing these risks will help us to achieve our goal of being a
high-performing, competitive, resilient and growing business.
The following tables detail the current principal risk pillars and drivers, together with how we manage them, how we assure them (in addition to
internal audit), the oversight provided by the Board and/or its Committees and how the risk levels have changed over the course of the year.
PRINCIPAL RISKS – PILLARS
Change in risk level:
Increased
Static
Decreased
Safety
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Product: Failure to provide safe products
People: Failure to create a place to work which minimises
the risk of harm to our people, those who work with us,
and the environment, would adversely affect our
reputation and long-term sustainability
Product:
—
Our product safety management system includes controls designed to reduce
our safety risks as far as is reasonably practicable and to meet or exceed relevant
company, legal, regulatory and industry requirements
— We verify and approve product design
— We test adherence to quality standards during manufacturing
— We validate conformance to specification for our own products and those of our
suppliers
— We mandate safety awareness training
— We use engine health monitoring to provide early warning of product issues
— We take out relevant and appropriate insurance
People:
—
Our HSE management system includes activities and controls designed to reduce
our safety risks as far as is reasonably practicable and to meet or exceed relevant
company, legal, regulatory and industry requirements
— We reinforce our journey to zero harm
— We use our crisis management framework
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
Product
— Product safety assurance team
— Product safety board
— Technical product lifecycle audits
People
— Safety case interventions
— HSE audit team
—
Safety, Energy Transition & Tech Committee
— Our role in society
— Our business model drivers
— Our uniqueness
WHAT HAS CHANGED IN 2023?
No overall change in risk status.
As part of transformation, we are bringing together engineering technology and safety into one organisation, ET&S, with product safety
at its heart (see page 9).
People safety related metrics can be found on pages 44 to 45.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
PRINCIPAL RISKS
PRINCIPAL RISKS – PILLARS CONTINUED Change in risk level:
Increased
Static
Decreased
Compliance
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Non-compliance by the Group with legislation or other
regulatory requirements in the heavily regulated
environment in which we operate (e.g. export controls;
data privacy; use of controlled chemicals and substances;
anti-bribery and corruption; human rights; and tax and
customs legislation). This could affect our ability to conduct
business in certain jurisdictions and would potentially
expose us to: reputational damage; financial penalties;
debarment from government contracts for a period of
time; and suspension of export privileges (including export
credit financing), each of which could have a material
adverse effect.
— We continuously develop and communicate a comprehensive suite of mandatory
policies and processes and controls throughout the Group
— We undertake third-party due diligence
— We encourage, facilitate and investigate speak up cases
— We investigate potential regulatory matters
—
Our financial control framework activities are designed to reduce financial
reporting and fraud risks
— We classify data to meet internal and external requirements and standards
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Compliance teams
— Financial controls team
— Board
— Nominations, Culture &
Governance Committee
— Audit Committee
— Our business model drivers
WHAT HAS CHANGED IN 2023?
No overall change in risk status. Read more about ethics and compliance on page 49.
Strategy
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to develop an optimal strategy and continuously
evolve it, investing in key areas for performance
improvement and growth (taking into account risk reward),
making difficult decisions for competitive advantage and
the right portfolio and partnership choices, could result
in us underperforming against our competitors and
significantly reduce our ability to build a high-performing,
competitive, resilient and growing company.
— We run a rigorous strategic review process
—
We benchmark our capabilities and performance against our competitors,
the market and other external metrics
— We align our R&D spend to our strategy, with a smaller, more focused portfolio
—
We make investment choices to improve the quality, delivery and durability of our
existing products and services
—
We scan the horizon for competitive threats and opportunities, including
patent searches
— We invest in R&D opportunities to support the development of new products or
services to protect and sustain our future market
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Group strategy team
— Challenge from external advisers
— Board — Our business model drivers
WHAT HAS CHANGED IN 2023?
This risk replaces transformation as well as part of the previous competitive environment risk and covers the development of the Group’s
strategy. It has reduced following completion of our strategic review which included a robust assessment of the competitive environment,
agreement on priorities and changing how the organisation operates to enable execution.
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STRATEGIC REPORT
PRINCIPAL RISKS
PRINCIPAL RISKS – PILLARS CONTINUED Change in risk level:
Increased
Static
Decreased
Execution
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to deliver as One Rolls-Royce on short to medium-
term financial plans, including efficient and effective
delivery of quality products, services and programmes,
or falling significantly short of customer expectations,
would reduce our resilience and have potentially
significant adverse financial and reputational
consequences, including the risk of impairment of the
carrying value of the Group’s intangible assets and the
impact of potential litigation.
—
We robustly performance manage our operational execution and monitor
performance against plans
— We keep control of costs with rigorous budgeting
— We review product lifecycles
— We protect our intellectual property (e.g. through patents)
— We include inflation clauses in our contracts to manage cost increases
— We work closely with our suppliers, driving tighter management of lead times
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Executive Team monitoring of execution — Board
— Investment committee
— Our business model drivers
WHAT HAS CHANGED IN 2023?
This risk replaces part of the previous competitive environment risks and covers delivery of strategic initiatives, including existing product
delivery and improving performance, together with the associated financial plans.
Although progress has been made (as we have articulated how we plan to monitor strategy execution from 2024 and introduced more robust
monitoring of in-flight projects and programmes) we have held the risk level unchanged as we have yet to commence execution and monitoring.
We are in the process of identifying and describing any new and changed risks arising from strategy development and execution, in addition
to introducing new mitigations including zero-based budgeting.
Business interruption
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
A major disruption of our operations and ability to deliver
our products, services and programmes could have an
adverse impact on our people, internal facilities or
external supply chain which could result in failure to meet
agreed customer commitments and damage our prospects
of winning future orders.
Disruption could be caused by a range of events such as
extreme weather or natural hazards (e.g. earthquakes or
floods) which could increase in severity or frequency given
the impact of climate change; political events; financial
insolvency of a critical supplier; scarcity of materials; loss
of data; fire; or infectious disease.
—
We invest in capacity, equipment and facilities, dual sources of supply and
in researching alternative materials
—
We provide supplier finance in partnership with banks to enable our suppliers
to access funds at low interest rates
— We hold buffer stock
—
We plan and practice IT disaster recovery, business continuity and crisis
management exercises
— We undertake supplier due diligence
— We take out relevant and appropriate insurance
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Investment reviews
— Supplier strategy and sourcing reviews
— Group security and resilience team
— Audit Committee — Our business model drivers
WHAT HAS CHANGED IN 2023?
This risk replaces business continuity and remains high due to the external threat landscape, such as geopolitical instability disrupting
supply or demand.A description of how we manage supply chain disruption risk can be found on page 13.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
PRINCIPAL RISKS
PRINCIPAL RISKS – DRIVERS Change in risk level:
Increased
Static
Decreased
Climate change
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to become a net zero company by 2050,
leveraging technology to transition from carbon intensive
products and services at pace could impact our ability to
win future business; achieve operating results; attract and
retain talent; secure access to funding; realise future growth
opportunities; or force government intervention to
limit emissions�
In addition, physical risks from extreme weather events
(and/or natural hazards) could potentially materialise, which
may result in disruption.
See pages 38 to 40 for more detail on key climate change
risks and their impact.
—
We invest in reducing carbon impact of existing products and zero carbon
technologies to replace our existing products
— Performance of climate scenario modelling and physical risk impact assessments
— We balance our portfolio of products, customers and revenue streams to reduce
our dependence on any one product, customer or carbon emitting fuel source
—
Communication of the actions we are taking to manage this risk, in order
to demonstrate our alignment to societal expectations and global climate goals
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Strategy reviews
— Technology reviews
— Investment reviews
— Group sustainability team
— Climate steering committee
— Board and its Committees
— Executive Team and its committees
— Our role in society
— Our business model drivers
— Our uniqueness
WHAT HAS CHANGED IN 2023?
This risk currently remains unchanged. Our intention is to complete a comprehensive review of our sustainability, energy transition and climate
related strategy, including redefining group level targets in 2024. See page 32 for details.
Information & data
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to protect the integrity and availability of data,
both physical and digital, from attempts to cause us harm,
such as through a cyber attack. Potential impacts include
hindering data driven decision making, disrupting internal
business operations andservices for customers, or a data
breach, all of which could damage our reputation, reduce
resilience, and cause financial loss.
Causes include ransomware threats, unauthorised access
to property or systems for the extraction, corruption,
destruction of data, or availability of access to critical data
and intellectual property.
—
We deploy web gateways, filtering, firewalls, intrusion, advanced persistent threat
detectors and integrated reporting
— We test software
—
Application of our crisis management framework to govern our response
to potential cyber security incidents and significant IT disruption
— We restrict access to our systems and locations
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
—
Group cyber security team and security
operations centre
— Audit Committee — Our business model drivers
— Our uniqueness
WHAT HAS CHANGED IN 2023?
This risk replaces the previous cyber threat risk and now includes physical data as well as digital. The risk remains high due to factors
including the ongoing evolution of data security threats as well as increasing demands for additional data (e.g. to meet
compliance requirements).
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STRATEGIC REPORT
PRINCIPAL RISKS
PRINCIPAL RISKS – DRIVERS CONTINUED Change in risk level:
Increased
Static
Decreased
Market & financial shock
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
The Group is exposed to market and financial risks, some
of which are of a macro-economic nature (e.g. economic
growth rates, foreign currency, oil price and interest rates)
and some of which are more specific to us (e.g. reduction
in air travel or defence spending, disruption to other
customer operations, liquidity and credit risks).
Significant extraneous market events could also materially
damage our competitiveness and/or creditworthiness and
our ability to access funding. This would affect operational
results or the outcomes of financial transactions.
Demand for our products and services could be adversely
affected by factors such as current and predicted air
traffic, fuel prices and age/replacement rates of customer
fleets. A large proportion of our business is reliant on the
civil aviation industry, which is cyclical in nature.
—
We monitor trends, market demand and future market forecasts and make
investment choices to maximise the related opportunities
—
We incorporate trends, demand and other dependencies in our financial forecasts
— We balance our portfolio with the sale of OE and aftermarket services, providing
a broad product range and addressing diverse markets that have differing
business cycles
— We execute our short, medium and long-term plans
—
Our financial control framework activities are designed to reduce financial
reporting risks
—
We analyse currency and credit exposures and include in-sourcing and
funding decisions
—
We develop, review and communicate treasury policies that are designed to hedge
residual risks using financial derivatives (covering foreign exchange, interest rates
and commodity price risk)
— We raise finance through debt and equity programmes
— We hedge with reference to volatility in external financial markets
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Five-year and strategic planning process
— Strategy reviews
— Technology reviews
— Board
— Audit Committee
— Our business model drivers
WHAT HAS CHANGED IN 2023?
Overall, this risk has remained the same. The external environment is increasingly uncertain, with ongoing inflation and high interest, the
possibility of a recession in the short term across one of more countries and market volatility following elections (see political risk above).
However, improvements made across the Group and strategic plans in place means that we are in a good position to manage this volatility,
as described more on page 13.
Political
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Geopolitical factors leading to an unfavourable business
climate and significant tensions between major trading
parties or blocs could impact our strategy, execution,
resilience, safety and compliance. Examples include
changes in key political relationships explicit trade
protectionism, differing tax or regulatory regimes,
potential for conflict or broader political issues and
heightened political tensions.
—
We develop Group and country strategies and consider associated dependencies
— We horizon scan for political implications and dependencies
—
We include diversification considerations in our investment and procurement
choices
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Strategy reviews
— Technology reviews
— Supplier sourcing teams
— Government relations teams
— Board — Our role in society
— Our business model drivers
WHAT HAS CHANGED IN 2023?
This risk has increased throughout the year, due to external factors including (but not limited to)the recent instability in the Middle East, plus
upcoming elections that could increase geopolitical tensions, depending on the outcome.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
PRINCIPAL RISKS
PRINCIPAL RISKS – DRIVERS CONTINUED Change in risk level:
Increased
Static
Decreased
Talent & capability
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to create a company where our people can build
a successful career with better choices for development
and personal growth will hinder our ability to identify,
attract, retain and apply the critical capabilities and skills
needed in appropriate numbers for the successful
execution of our business strategy.
—
We have implemented a new performance management framework to manage
and reward our staff
— We undertake succession planning and monitor the talent pipeline
— We survey employee opinion
— We develop, implement and review strategic resourcing plans
— We are investing in our learning culture and people’s development
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— People leadership team — Nominations, Culture &
Governance Committee
— Our business model drivers
— Our uniqueness
WHAT HAS CHANGED IN 2023?
This risk was high in 2022 due to the ongoing impacts of the pandemic and has remained high this year due to our current transformation
programme. There have been some year-on-year improvements in agreed key measures and improvement plans in place for others. As part
of our new strategy, we are investing in our learning and skills culture, challenging the way leaders lead whilst managing and rewarding
performance and dealing with poor performance.
People related metrics, including on retention and learning and development, can be found on pages 44 to 48.
Technology
PRINCIPAL RISK DESCRIPTION CONTROLS AND MITIGATING ACTIONS
Failure to become a digitally enabled business using tools
including AI could hinder our ability to enhance the
customer experience, drive the transition to lower carbon,
accelerate product design, improve manufacturing and
empower our people with new tools to improve
productivity, as well as preventing us from creating new
growth opportunities.
— Investment in R&D opportunities
— We scan the horizon for emerging technology threats and opportunities
ASSURANCE ACTIVITIES AND PROVIDERS OVERSIGHT FORUM(S) BUSINESS MODEL
— Disruptive technology horizon
scanning process
— Strategy reviews
— Investment reviews
— Technology reviews
— Safety, Energy Transition & Tech
Committee
— Our role in society
— Our business model drivers
— Our uniqueness
WHAT HAS CHANGED IN 2023?
Disruptive technology, as a threat (previously part of the competitive environment risk), was one of the primary considerations in setting
strategy and is now a key element of the strategic initiatives. This has been reframed following both the strategy reviews and outputs of the
horizon scanning exercise described on page 51. We will continue to develop and evaluate this newly expanded risk.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
PRINCIPAL RISKS
Going concern statement
Overview
In accordance with the requirements of the 2018 UK Corporate
Governance Code, the Directors have assessed the prospects of the
Group, taking into account its current position, the Group’s principal
risks which are described on pages 50 to 57, and the Group’s mid-term
forecasts that considered a range of internal and external factors as
part of the strategic review to support setting the Group’s new mid-term
targets which are set out on pages 8 to 12.
The Strategic Report on pages 3 to 15 sets out the activities of the
Group and the factors likely to impact its future development,
performance and position. The Group’s updated mid-term targets are
set out on page 12�
The Financial Review on pages 19 to 31 sets out the financial position
of the Group, its cash flows, liquidity position and the Group’s capital
framework. The notes to the accounts include the objectives, policies
and procedures over financial risk management including financial
instruments and hedging activities, exposure to credit risk, liquidity
risk, interest rate risk and commodity price risk.
In adopting the going concern basis for preparing the consolidated
and Company financial statements, the Directors have undertaken a
review of the Group’s cash flow forecasts and available liquidity, along
with consideration of possible risks and uncertainties over an 18-month
period from the date of this report to August 2025. The Directors have
determined that an 18-month period is an appropriate timeframe over
which to assess going concern as it considers the Group’s short to
medium-term cash flow forecasts and available liquidity.
Forecasts
Recognising the challenges of reliably estimating and forecasting the
impact of external factors on the Group, the Directors have considered
two forecasts in their assessment of going concern, along with a
likelihood assessment of these forecasts. The base case forecast reflects
the Directors current expectations of future trading. A stressed
downside forecast has also been modelled which envisages a ‘stressed’
or ‘downside’ situation that is considered severe but plausible. Both
forecasts have been modelled over an 18-month period.
Industry forecasts predict a return to 2019 large engine flying levels
in 2024, which is reflected in the Group’s base case forecast.
Macro-economic assumptions have been modelled using externally
available data based on the most likely forecasts with general inflation
at around 2%-3%, wage inflation at an average of 3%-5%, interest rates
at around 3%-4% and GDP growth at around 2%-3%.
The stressed downside forecast assumes Civil Aerospace large engine
flying hours remain at average fourth quarter 2023 levels throughout
the 18-month period to August 2025, reflecting slower GDP growth in
this forecast when compared with the base case. It also assumes a more
pessimistic view of general inflation at around 1%-2% higher than the
base case covering a broad range of costs including energy,
commodities and jet fuel. Wage inflation in the stressed downside is
1%-5% higher than the base case and interest rates in the stressed
downside are 1%-2% higher than the base case. These macro-economic
pressures have been modelled across the whole going concern period.
The stressed downside also considers lower demand as a result of slower
market growth, and potential output risks associated with
increasing volumes and possible ongoing supply chain challenges.
The future impact of climate change on the Group has been considered
through climate scenarios. The climate scenarios modelled do not have
a material impact on either the base case or stressed downside forecast
over the 18-month period to August 2025. Further detail on these climate
scenarios is set out on page 39.
Liquidity and borrowings
During 2023, the Group cancelled a £1bn undrawn UKEF-supported
loan facility that was due to mature in March 2026 and a £1bn undrawn
bank loan facility due to mature in January 2024. The £2.5bn undrawn
revolving credit facility that was due to mature in April 2025 was
refinanced in November 2023 with the new facility having a term of
three years with the banks having the option to extend with two
one-year extension options (3+1+1).
At 31 December 2023, the Group had liquidity of £7.2bn including cash
and cash equivalents of £3.7bn and undrawn facilities of
£3.5bn. The 18-month going concern period includes the maturity of
a €550m bond repayable in May 2024 which we do not intend to
refinance given the Group’s cash and liquidity position, our assessment
of the Group’s cash flow forecasts and available liquidity over the
18-month period.
Based on borrowing facilities available at the date of this report the
Group’s committed borrowing facilities at 31 December 2023
and 31 August 2025 are set out below. None of the facilities are
subject to any financial covenants or rating triggers which could
accelerate repayment�
(£m)
31 December
2023
31 August
2025
Issued bond notes
1
3,995 3,511
UKEF £1bn loan (undrawn)
2
1,000 1,000
Revolving credit facility (undrawn)
3
2,500 2,500
Total committed borrowing facilities 7,495 7,011
1 The value of Issued bond notes reflects the impact of derivatives on repayments of the
principal amount of debt. The bonds mature by May 2028
2 The £1bn UKEF sustainability-linked loan matures in September 2027 (currently undrawn)
3 The refinanced £2.5bn revolving credit facility matures in November 2026 (currently
undrawn)
Taking into account the maturity of these borrowing facilities, the Group
has committed facilities of at least £7bn available throughout the period
to 31 August 2025. The next debt maturity is a $1bn bond that is due to
be repaid in October 2025, which is outside the 18-month going
concern period.
Conclusion
After reviewing the current liquidity position and the cash flow forecasts
modelled under both the base case and stressed downside, the
Directors consider that the Group has sufficient liquidity to continue
in operational existence for a period of at least 18 months from the date
of this report and are therefore satisfied that it is appropriate to adopt
the going concern basis of accounting in preparing the consolidated
and company financial statements.
Viability statement
The viability assessment considers liquidity over a longer period than
the going concern assessment. The downside forecast uses the same
assumptions as the going concern assessment for the first 18 months
and in 2026 to 2028 assumes a slower recovery than assumed in the
base case�
Consistent with previous years, the Directors have assessed viability
over a five-year period which is in line with the Group’s five-year
planning process. The Directors continue to believe that this is the most
appropriate time period to consider as, inevitably, the degree of
certainty reduces over any longer period.
Severe but plausible scenarios have been modelled that estimate the
potential impact of the Group’s principal risks arising over the
assessment period (descriptions of the principal risks and the controls
in place to mitigate them can be found on pages 50 to 57). The risks
chosen and scenarios used are as shown in the table on page 59.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Going concern and viability statements
The cash flow impacts of these scenarios were overlaid on the five-year
forecast to assess how the Group’s liquidity would be affected.
The scenarios assume an appropriate management response to the
specific event which could be undertaken and also consider specific
activities to improve liquidity such as raising additional funds, reducing
expenditure and divesting parts of our business.
Reverse stress testing has also been performed to assess the severity
of scenarios that would have to occur to exceed liquidity headroom.
The assumptions used in these stress tests were not considered
plausible, as shown in the table below.
On the basis described above, the Directors confirm that there is a
reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the next five years.
In making this statement, the Directors have made the following
key assumptions:
1�
the Group continues to have access to its current undrawn facilities
or the ability to obtain equivalent alternative sources of finance;
2�
that implausible scenarios do not occur. Implausible scenarios include
either multiple risks impacting at the same time or where
management actions do not mitigate an individual risk to the degree
assumed; and
3�
that in the event of one or more risks occurring (which has a
particularly severe effect on the Group) all potential actions (such
as but not limited to restricting capital and other expenditure to
only committed and essential levels, reducing or eliminating
discretionary spend, reinstating pay deferrals, raising additional
funds through debt or equity raises, executing disposals and
undertaking further restructuring) would be taken on a timely basis.
This assessment is based on debt maturities over the assessment period
as follows:
a� €550m bond maturing in 2024
b� $1bn bond maturing in 2025
c� £2.5bn revolving credit facility maturing in 2026 *
d. €750m bond maturing in 2026
e� £375m bond maturing in 2026
f. £1bn UKEF loan maturing in 2027 *
g� $1bn bond maturing in 2027
h� £545m bond maturing in 2027
i� €550m bond maturing in 2028
The Group believes it has the early warning mechanisms to identify the
need for such actions and, as demonstrated by our decisive actions
over the course of the pandemic, has the ability to implement them on
a timely basis if necessary.
* Currently undrawn facilities
PRINCIPAL RISK SCENARIO ASSUMPTIONS AND IMPACTS
Safety (product)
Civil Aerospace product safety event resulting in aircraft being grounded, lower engine flying hour revenues,
commercial penalties and additional costs (e.g. unplanned shop visits). The grounding time and number of shop visits
required to exceed headroom are considered remote.
Compliance
A compliance breach resulting in fines (greater than those agreed as part of our DPAs) and loss of new business with
governments and state-owned companies. The probability of triggering the size of fine required to exceed headroom
is considered remote.
Execution
(previously
competitive
environment)
A programme issue on a major programme of the same (proportionate) scale as Trent 1000. The extent to which engine
life would need to be impacted to breach headroom is considered remote.
Business
interruption
(previously
business
continuity)
The loss of a key element of our supply chain resulting in an inability to fulfil Civil Aerospace large engine orders for
12 months. Reverse stress testing would require the time over which orders could not be fulfilled to be extended beyond
what is considered plausible.
Climate change
Transition risk from our 1.5c TCFD scenario where we receive lower revenues from existing Civil Aerospace and Power
Systems products coupled with a business interruption at one of our facilities. The extent of time to over which orders
cannot be fulfilled in order to breach headroom is considered not plausible.
Information &
data (previously
cyber)
A cyber-attack resulting in loss and corruption of data and resulting in business disruption, loss of EFHs, compliance
concerns due to disclosure of data and potentially trigger debarment from government contracts. The time period over
which EFHs would need to be affected to breach headroom is not considered plausible.
Market &
financial shock
Civil Aerospace EFH remain flat at 2023 levels across the first 18 months, reduction in GDP impacts Defence and Power
Systems fail to secure new business opportunities. The extent of additional EFH reductions necessary to breach
headroom was considered not plausible, given this would require EFHs to drop to a quarter of the planned levels, being
significantly below the levels seen in the pandemic.
Political
Sanctions imposed between major trading blocs resulting in supply chain disruption and a loss of sales in impacted
markets. Reverse stress testing showed that sanctions would need to persist over a period of time beyond what is
considered plausible.
59
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
GOING CONCERN AND VIABILITY STATEMENTS
STAKEHOLDER ENGAGEMENT REFERENCE
People
The Directors recognise that the success of our business depends on attracting,
retaining and motivating talented people. The Directors consider and assess the
implications of decisions on our people, where relevant and feasible.
During 2023, our Employee Champions, Bev Goulet and Wendy Mars, continued to
represent the voice of our people in the boardroom. The activities of the Employee
Champions during 2023 and opportunities for further engagement in 2024 were discussed
at the Nominations, Culture & Governance Committee, which itself was changed from
the Nominations & Governance Committee to provide a forum for the Board’s oversight
of the Group’s culture. The Employee Champions provide regular feedback to Board
members on topics of interest and/or concern. This provides a valuable link between
our people and the Board. The Employee Champions continue to meet regularly with
the employee stakeholder engagement committee, which provides support for their
activities. In 2023, the Employee Champions had an engagement schedule of on-site
and hybrid engagement activities which included virtual sessions with the global
inclusion network chairs, inclusion champions and the people leadership team. Site
visits included Bristol, UK and Washington, US.
Our Meet the Board event enabled around 60 colleagues to talk to the Board in an
informal setting. Questions this year related to the transformation programme, workplace
inclusivity and the Board’s personal experiences. The Board was taken through the
refreshed flagship employee wellbeing initiative LiveWell which was relaunched in 2023
to provide more tailored and extensive support to our people and to embed this within
the culture of the Group. Our 2023 employee engagement survey had a record
participation rate, identifying our strengths in progress and commitment to care and
quality and our crowdsourcing activity invited employee views on our purpose
and culture.
We believe that these methods of engagement with our people are effective in building
and maintaining trust and communication whilst providing our people with a forum to
influence change in relation to matters that affect them. Many of our people are also
our shareholders and we encourage their participation in a variety of share plans.
During 2023, the Remuneration Committee has discussed and supported the launch of
a new global all-employee share plan, better aligned with the all-employee share plan
strategy, focused on business performance and supporting the transformation programme.
See page 44
People and
Culture
See page 78
Nominations,
Culture &
Governance
Committee
report
Customers
The Board recognises that the quality of the Group’s customer relationships is based on
mutual trust as well as our engineering expertise. We recognise that we must retain and
strengthen our focus on the transition to a net zero carbon global economy by creating
the sustainable power that our customers require.
We continue to focus on helping our customers deliver their own sustainability agendas.
During 2023, the Chief Executive and members of the Executive Team engaged with
customers at the Paris and Dubai airshows and communicated our achievements
regarding UltraFan and the compatibility of our products with 100% SAF. The Board
regularly receives operational updates, including customer metrics and feedback, across
all the divisions. This greatly influences the Board’s deliberations and its support for the
Executive Team when considering our strategy. The Chair and Chief Executive continued
to meet with key customers during 2023.
See page 3
Our divisions
Suppliers
and partners
The interests of both our suppliers and partners are regularly considered as part of the
Board’s discussions on manufacturing strategy and when reviewing specific projects.
The Board supports our Executive Team who work collaboratively with our suppliers and
partners to continue to improve operational performance through various means. The
Board continued to receive updates from the businesses on supplier performance and
supply chain disruption. One of our Non-Executive Directors attended a global aviation
industry event in 2023 and the Chief Executive engaged with leaders from across the
industry, including attending an event with the Aerospace, Security and Defence
Industries Association of Europe.
See page 6
Chief
Executive’s
Review
Consistent communication with stakeholders is a priority for the Group leadership. The Board and Executive Team maintain regular touchpoints
with stakeholders to remain updated on their views and interests. The points identified through this engagement influence Board decision
making and long-term strategy.
60
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Stakeholder engagement
STAKEHOLDER ENGAGEMENT REFERENCE
Communities
The Board recognises the importance of our communities and understands that
everything we do can have an impact on our local and global communities.
The Group’s charitable contributions and sponsorships committee continued to identify
causes for donation and partnership. During 2023, this included emergency financial
support in response to the earthquake in Turkey and funding the Unnati Scholarships
which support 50 girls annually to pursue engineering degrees in India. The Group
supports education and skills development through STEM outreach programmes. This
included sponsorship of the UK’s 2023 Big Bang Fair and projects with expert partners
in South East Asia, China, Germany, India and Japan. Additionally, the Group entered
into the Defence Aviation Charter with the UK RAF and the Board received updates on
the Group’s engagement during COP28 in the UAE.
See page 44
People and
Culture
Governing
bodies and
regulators
The Board recognises the importance of governments and regulators as stakeholders.
Not only are governments across the world customers but they also support the Group’s
investment in infrastructure and technology.
During 2023, the Chair and Chief Executive held meetings with ministers and senior
officials on topics including the Atlantic Declaration, AUKUS and the SMR programme.
Following the division of the BEIS Department, the Board engaged with and briefed the
new post-holders on the Group’s strategy and performance. The Board is updated on
engagement with tax authorities and the related regulatory landscape. The General
Counsel provides regular updates to the Board on compliance with regulation.
See page 3
Our divisions
Investors
The investor relations team is the key interface between the investment community and
the Board, providing frequent dialogue and feedback.
The Chair and members of the Board make themselves available to meet with institutional
investors and seek to understand and prioritise the issues that matter most. In addition,
the Chief Executive and Chief Financial Officer, supported by members of the Executive
Team and investor relations, interact regularly with investors, most notably after our
financial results, capital markets events, site visits and at conferences.
In November 2023, the Group held its first CMD since the pandemic, at which the Chief
Executive set out the progress of the transformation programme so far and shared with
investors the results of the rigorous and detailed strategic review that had been carried
out during 2023. The CMD was attended by more than 150 guests in person and
broadcast live. The event included Executive Team presentations, investor Q&As and
expo sessions highlighting the capabilities of the Group. Investor interest with the
transformation programme has resulted in greater engagement with the Group
during 2023.
Throughout 2023, the Remuneration Committee Chair and Governance Team engaged
with shareholders and proxy advisers on remuneration proposals ahead of the 2024
AGM at which shareholders will consider our revised remuneration policy.
See page 10
Strategy
See page 84
Remuneration
Committee
report
61
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
STAKEHOLDER ENGAGEMENT
Section 172 and our transformation programme
With the transformation programme guiding decision making in 2023,
our section 172 (s172) statement below sets out how the Directors have
discharged their s172 duty alongside Group-wide reform.
The transformation programme seeks to realign the Group’s values and
purpose to create long-term business success and the Board recognises
that effective engagement with our stakeholders is essential to create
value for them. The Board acknowledges its responsibility to all the
Group’s different but interrelated stakeholder groups and wider
society and recognises their role in shaping and supporting our
transformation programme for the long term.
This section should be read in conjunction with our stakeholder
engagement section, see pages 60 and 61 and the Board’s focus which
contains information on the principal decisions made by the Board over
the year, see pages 75 and 76.
All of our Directors are briefed on their Companies Act 2006 duties
during their induction. The Directors have ensured their duties under
s172 noted below have been considered with regards to the
transformation programme:
a� the likely consequences of any decision in the long term;
b� the interests of the Company’s employees;
c�
the need to foster the Company’s business relationships with
suppliers, customers and others;
d. the impact of the Company’s operations on the community and the
environment;
e� the desirability of the Company maintaining a reputation for high
standards of business conduct; and
f. the need to act fairly between members of the Company.
STRATEGIC REVIEW
Applicable s172 factors (a)-(f)
In considering the strategic review, the Board prioritised the long-term interests of all stakeholders. The Group’s revised investment
priority is to focus on profitable opportunities in new technologies where the Group is differentiated, where the market size is sufficiently
large and where there is a good fit and synergy with the Group’s existing activities. The decisions made will create enduring value for all
stakeholders. Nonetheless, our people’s safety together with product and customer safety remains the Group’s core priority.
Customers Environment
Partners
The Group’s customers are seeking a
solution integrated into a larger system
more than just a product. The Group’s
advantaged manufacturing expertise
allows for the production of complex
parts to exceptionally high specifications
with high performance and reliability.
The Group is refocusing its portfolio
choices into growing markets where the
Group has a differentiated position,
strong customer recognition and
excellent technology.
This allows us to effectively leverage
our expertise into next generation
technologies, including UltraFan and
nuclear micro-reactors�
The Group is committed to becoming a
net zero company by 2050 through
pursuing lower carbon opportunities.
We support our customers to do
the same.
Within our Civil Aerospace and Defence
divisions, integrating sustainable fuels
can deliver 80% reduction in carbon
emissions compared to fossil fuels.
Powering Virgin Atlantic’s commercial
transatlantic 100% SAF flight is evidence
of this ambition.
Variants of our major Power Systems
engine platforms can run on sustainable
fuels such as HVO. We see hydrogen as
a future solution for power generation.
SMRs and micro-reactors will be needed
to decarbonise the grid.
In certain cases, the Group will pursue
growth through partnerships to
strengthen existing market positions
and enter new markets. The Board
evaluates opportunities which will allow
for a mutual exchange of new skills and
capability, as well as a reduction in
capital investment.
Such partnerships could assist with a
re-entry into the narrowbody market or
development of battery energy
storage systems, where we have
transferable capabilities.
Regarding Rolls-Royce SMR, the Group
values its existing partners and
welcomes new ones to assist in
delivering the overall solution.
62
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STAKEHOLDER ENGAGEMENT
COMMERCIAL OPTIMISATION AND WORKING CAPITAL
Applicable s172 factors (a)(c)(e)(f)
The Group is bringing sharper commercial acumen and a more cost conscious culture to everything it does. Working capital is also a key
focus in order to strengthen our balance sheet and improve returns on invested capital. By conducting a deep-dive into the operational
value chain and addressing working capital in its component parts, the Board believes that there are sustainable improvements available.
Building a profitable and sustainable business with a strong balance sheet will drive organisation-wide benefits, generate strong financial
performance and create opportunities for all stakeholders.
Investors Customers
Strengthening the balance sheet and achieving an investment grade credit profile
through optimising working capital will deliver long-term benefits for our shareholders.
Achieving this will enable the Group to better withstand volatility and external shocks
and will provide greater financial flexibility in the future.
Once the Group is confident this has been achieved, it is committed to reinstating and
growing shareholder distributions.
The transformation programme’s focus on the most profitable growth activities will
drive shareholder value.
Pursuing commercial optimisation
means being rewarded by our
customers for the value our products
bring and the risks we take.
Within Civil Aerospace, the Group is
implementing a new value-driven
pricing strategy and addressing onerous
and low margin contracts. The Group is
also driving rigour on contractual terms
and conditions.
In Defence, we have a focus on
commercial optimisation and value-
pricing behaviours as we have in Civil
Aerospace and we are prioritising
investment in areas that benefit from
increased customer funding.
Strategic Report signed
on behalf of the Board
Tufan Erginbilgic
Chief Executive
22 February 2024
EFFICIENCY AND SIMPLIFICATION
Applicable s172 factors (a)(b)(c)(e)
A detailed review of the organisational design of the Group has identified synergies that can be harnessed from the One Rolls-Royce
approach. The opportunity is being taken to right-size its cost base to deliver sustainable cost efficiencies across the whole Group. As part
of this drive for simplification, the Group has brought its core technological expertise together with the introduction of the Group-wide
ET&S business capability which will ensure alignment of standards and compliance.
Employees Suppliers
The Board and Executive Team significantly increased Group-wide employee
engagement during 2023. This included specific engagement following the decisions
to reduce the number of roles across the Group by between 2,000 to 2,500 by the
end of 2025 and an intention to exit Rolls-Royce Electrical.
The Chief Executive held town halls throughout 2023. These were broadcast Group-
wide and included live Q&A sessions allowing for direct conversations with the Chief
Executive and members of the Executive Team. More tailored sessions were held with
individual members of the Executive Team, including inviting business groups across
Germany to a One Rolls-Royce event in Berlin.
The Board has considered the interests of the Group’s employees as part of the
transformation programme. Pursuing One Rolls-Royce seeks to ensure a Group-wide
winning culture which empowers our people. The revised organisational design will
limit duplication of tasks and encourage employee upskilling.
The Group will significantly streamline
how it works with suppliers.
A Group-wide reorganisation of
procurement processes and supplier
management was initiated as part of the
transformation programme. This seeks
to consolidate Group spend, leverage
scale and develop consistent
best-in-class standards.
63
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
STRATEGIC REPORT
STAKEHOLDER ENGAGEMENT
Compliance with the Code ������������������������������������������������������������������������� 65
Chair’s introduction ��������������������������������������������������������������������������������������66
Corporate governance �������������������������������������������������������������������������������� 67
Board of Directors ����������������������������������������������������������������������������������������� 70
Executive Team �������������������������������������������������������������������������������������������������71
Committee reports �����������������������������������������������������������������������������������������78
����Nominations, Culture & Governance ���������������������������������������������������78
����Audit ������������������������������������������������������������������������������������������������������������ 80
����Remuneration �������������������������������������������������������������������������������������������������� 84
�������� Remuneration policy ���������������������������������������������������������������������������� 88
�������� 2023 remuneration report ����������������������������������������������������������������� 99
����Safety, Energy Transition & Tech ����������������������������������������������������������� 111
Responsibility statements ��������������������������������������������������������������������������� 112
GOVERNANCE
REPORT
64
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
COMPLIANCE WITH THE 2018 UK CORPORATE GOVERNANCE CODE
The Company is subject to the principles and provisions of the 2018 UK Corporate Governance Code (the Code), a copy of which is
available at www.frc.org.uk. For the year ended 31 December 2023, the Board considers that it has applied the principles and complied in
full with the provisions of the Code.
Board
leadership and
company
purpose
—
Our Governance Report provides examples of our leadership and our Strategic Report
sets out how we have engaged with our key stakeholders
—
Throughout the year, the Board has provided oversight of the Group-wide
transformation programme
—
Following a review of its Board and Committee structure, the Safety, Energy Transition
& Tech Committee was introduced and the remit of the Nominations, Culture &
Governance Committee was refocused to include ethics and culture
— The Safety, Ethics & Sustainability Committee and Science & Technology Committee
held their last meetings in February 2023
See page 60
Stakeholder
engagement
See page 111
Safety, Energy
Transition &
Tech Committee
report
Division of
responsibilities
— We clearly define the roles of the Chair and the Chief Executive and fully support the
separation of the two roles
—
The Board believes it operates effectively with the appropriate balance of
independent Non-Executive Directors and Executive Directors
—
The Board regularly considers the time commitments of our Non-Executive Directors.
Prior Board approval is required for any external appointments to ensure there is no
conflict or compromise on their time
—
The quality of information and resources available to the Board has enabled us to
operate effectively and efficiently throughout the year
See page 70
Board of
Directors
See page 78
Nominations,
Culture &
Governance
Committee
report
Composition,
succession
and evaluation
— The appointment process for our new Chief Financial Officer and new Non-Executive
Directors was led by the Nominations, Culture & Governance Committee. Further
information on the appointments can be found on page 78
— Our Board comprises a combination of broad skills, experience and knowledge
— We have a clear process when considering appointments to the Board and operate
effective succession planning
— In 2023, Manchester Square Partners carried out an external evaluation of the Board.
The methodology and outcomes can be found on page 77
See page 70
Board of
Directors
See page 73
Board
Composition
Audit, risk and
internal control
—
We recognise the importance and benefits of ensuring the internal audit function and
the external auditors remain independent
— The Board presents a fair, balanced and understandable assessment of the Group’s
position and its prospects
—
Our risk and control environment is reviewed by the Audit Committee. The Board
considered both emerging and principal risks during the year and held deep dive
sessions where relevant
— The Audit Committee also considers the information and data principal risk, including
cyber risk, which forms part of the Committee’s review of business interruption
See page 80
Audit Committee
report
Remuneration
—
The Remuneration Committee, comprising only Non-Executive Directors,
is responsible for developing the policy and determining executive and senior
management remuneration
— During 2023, the Committee also considered the remuneration package for the new
Chief Financial Officer, Helen McCabe, and leaver treatment for Panos Kakoullis
— No Director is involved when deciding their own remuneration outcome
—
The Remuneration Committee engaged with investors on the remuneration policy
which is being proposed to shareholders for approval at the 2024 Annual General
Meeting
See page 84
Remuneration
Committee
report
65
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
Compliance with the Code
As you will see from the Strategic Report, the focus of the Board in
2023 was on a range of aspects of the transformation programme.
Leadership and succession planning
There were a number of changes on the Board this year. Panos
Kakoullis stepped down and Helen McCabe was appointed as Chief
Financial Officer on 4 August 2023. Helen has a track record of
promoting rigorous financial discipline and delivering effective
performance management within complex multinational engineering
organisations. Further information on Helen’s experience can be found
in her biography on page 70. Information on her appointment process
is set out in the Nominations, Culture & Governance Committee Report
on page 78�
There were also a number of Non-Executive Director changes during
the year. As a result of the changes, the gender diversity of our Board
is now at parity and, with the appointment of Helen as Chief Financial
Officer, two senior Board members are now women. This is clear
recognition of the importance we place as a Board on diversity. There
have also been changes to the Executive Team over the year with
gender diversity also improving across this team, increasing to
30% female.
I would like to thank Sir Kevin Smith, Mike Manley and Paul Adams,
all of whom stepped down from the Board in 2023.
Details of the Board changes and our Board diversity policy can be
found in the Nominations, Culture & Governance Committee Report
on page 78�
Effectiveness
In 2023, Manchester Square Partners were appointed to facilitate an
external evaluation of the Board and Committees. A full report on this
review is set out on page 77.
For 2021 and 2022 we worked with Lintstock who supported us with
internal board effectiveness reviews.
Culture
Leadership behaviours, purpose and culture is an important part of
our transformation programme and will be a continuing workstream in
2024. This was an important pillar of the work of our organisational
design that was announced in October.
The Board has continued to engage with our people. Following the
2023 Annual General Meeting, we held an in-person Meet the Board
event where approximately 60 employees from across Rolls-Royce were
able to interact with Board members and share experiences, discuss
concerns and swap insights. Topics discussed included transformation,
workplace inclusivity and the Board’s personal experiences. The event
was a great success and provided the Board with a valuable insight into
the culture within Rolls-Royce and areas where improvements can
bemade.
Bev Goulet and Wendy Mars continued to act as Employee
Champions and reported back to the Board regularly on discussions
they had held with employee groups. Their focus this year was on how
people were feeling during the transformation.
Governance
The Board reviewed and approved changes to the Board committee
structure – as shown on page 67 and explained in the Nominations,
Culture & Governance Report on page 78. The Board committees are
closely aligned to the revised Executive Team’s governance structures
which were introduced at the beginning of the year (see page 69). Our
new Safety, Energy Transition & Tech Committee, which is chaired by
Wendy Mars, focuses on people and product safety, our sustainability
agenda and our technology roadmap.
During 2023, the Board and Audit Committee were kept appraised of
the developments relating to the proposed UK corporate governance
reform. We will continue to keep this under review in 2024.
In May 2023, our Board apprentice programme concluded. The purpose
of the programme was to provide coaching and board experience to a
diverse group of emerging leaders selected from the Group’s talent
pool, whilst also demonstrating our commitment to participants’ career
progression and development as leaders.
Annual General Meeting
I look forward to engaging with shareholders at the Annual General
Meeting on 23 May 2024, which will again be held as a hybrid meeting.
Shareholders are encouraged to join, participate and vote virtually and
we will answer any questions that you may have. We will propose our
revised remuneration policy for approval by shareholders at
that meeting.
Looking forward
Our priority for 2024 is the execution of our agreed strategy,
particularly in relation to the culture of the Group and progress with
our sustainability agenda.
Dame Anita Frew
Chair
66
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Chair’s introduction
THE ROLE OF THE BOARD
The Board is ultimately responsible to shareholders for the direction,
management, performance and long-term sustainable success of
the Group. It sets the Group’s strategy and objectives and oversees
and monitors internal controls, risk management, principal risks,
governance and viability of the Group. In doing so, the Directors
comply with their duties under s172 of the Companies Act 2006
(see pages 62 to 63).
The Board has established certain principal committees to assist it in
fulfilling its oversight responsibilities, providing dedicated focus on
particular areas, as set out below. The chair of each committee reports
to the Board on the Committee’s activities after each meeting.
In addition to the Board’s principal committees, it has established a
sub-committee of Directors who each hold an appropriate level of
UK national security clearance for the purpose of receiving and
considering, on behalf of the Board, any UK classified information
relating to the Group’s programmes and activities.
Bev Goulet, a US national and independent Non-Executive Director,
also sits on the board of Rolls-Royce North America
Holdings, Inc. to create a link between the Board and the Group’s
North American governance structure.
Roles and responsibilities
The roles of the Chair and Chief Executive are clearly defined and the
Board supports the separation of the two roles. The Chair is
responsible for the leadership and effectiveness of the Board. The Chief
Executive is responsible for the running of the Group’s business and
leads the Executive Team which comes together to review, agree and
communicate issues and actions of Group-wide significance.
Non-Executive Directors support the Chair and provide objective and
constructive challenge to management. The Senior Independent
Director (SID) provides a sounding board for the Chair and serves as
an intermediary for the Chief Executive, other Directors and
shareholders when required.
The Chief Governance Officer ensures that appropriate and timely
information is provided to the Board and its committees and is
responsible for advising and supporting the Chair and the Board on
all governance matters. All Directors have access to the Chief
Governance Officer and may take independent professional advice at
the Group’s expense in conducting their duties.
Directors’ independence
We continue to monitor and note potential conflicts of interest that
each Director may have and recommend to the Board whether these
should be authorised and if any conditions should be attached to such
authorisations. The Directors are regularly reminded of their
continuing obligations in relation to conflicts and are required to review
and confirm their external interests at least annually. This helps us to
consider whether each of them continues to be independent.
Following due consideration, the Board determined that all
Non-Executive Directors continued to be independent in both
character and judgement. Furthermore, it was determined that the
Chair was independent on her appointment.
KEY MATTERS RESERVED FOR THE BOARD
Overview of the speak up
programme and cases reported
through the speak up line
Significant changes
inaccounting policies
orpractices
Annual Report and financial
and regulatory
announcements
Annual plan and financial
expenditure and commitments
above levels set by the Board
Changes to the corporate
orcapital structure of
theCompany
The Group’s organisation
andcapability
Stakeholder engagement
Internal controls, governance
and risk management
frameworks
The Group’s long-term
objectives, strategy and
riskappetite
Overall corporate governance
arrangements, including Board
and Committee composition,
committee terms of reference,
Directors’ independence and
conflicts of interest
Board
Chair
Chief Executive
Safety, Energy Transition
& Tech Committee
Remuneration Committee
Audit Committee
Nominations, Culture &
Governance Committee
Executive Team
67
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
Corporate governance
THE ROLE OF EACH COMMITTEE
Nominations, Culture & Governance
Lead the process for appointments to the Rolls-Royce Board
Ensure plans are in place for orderly succession for the Board
and senior executive positions
Oversee the development of a diverse pipeline for succession
Ensure the composition of the Board is appropriate and
relevant so that the Board is in the best position to oversee
operational performance and drive the Group’s strategy
Assess and monitor culture to ensure alignment with the
Group’s policies, practices and behaviours
Oversee the Group’s global diversity and inclusion strategy
and its implementation
Keep the Board’s corporate governance arrangements under
review. Ensure these are consistent with best corporate
governance standards
Principal risks: compliance; talent and capability
See page 78
Remuneration
Determine a policy for executive director remuneration
capable of attracting and retaining individuals necessary for
business success
Set remuneration for the Chair of the Board, Executive
Directors and senior executives
Determine the design, conditions and coverage of incentives
for senior executives and approve total and individual
payments under the plans
Determine targets for any performance-related pay plans and
the issue and terms of all-employee share plans
Oversee any major changes in remuneration
Review workforce remuneration and related policy and the
alignment of incentives and rewards with culture, taking these
into account when setting the policy for executive director
remuneration
See page 84
Audit
Assist the Board in monitoring the integrity of the Company’s
financial statements and any formal announcements relating
to financial performance
Oversight of climate change reporting
Review the internal financial controls and the risk management
and internal control systems and review any concerns of
financial fraud
Recommend to the Board the financial reporting, focusing
on accounting policies, judgements and estimates; disclosures;
compliance with regulations; and that the Annual Report is
fair, balanced and understandable
Monitor and review the effectiveness of the internal audit
function and oversee the Company’s relations with the external
auditor and approve their terms of engagement and fees
Principal risks: business interruption; compliance; information
and data; market and financial shock
See page 80
Safety, Energy Transition & Tech
Provide oversight in respect of:
— product safety
—
HS&E (occupational health and safety, process safety,
maintenance of facilities, asset integrity and personnel security)
—
environment and energy transition, including progress and
delivery against agreed metrics, targets and objectives
Monitor the operation of the Group’s product safety
governance frameworks, scrutinising the development and
implementation of changes in process and practice
Review, challenge and support the Group’s energy transition
strategy, track progress and review the environmental impacts
of products and operations. Provide oversight and assurance
of the Company’s scientific and technological strategy,
processes and investments
Principal risks: climate change; safety (people); safety
(product); technology
See page 111
Nominations, Culture
&Governance
Audit Remuneration
Safety, Energy Transition
& Tech
Dame Anita Frew
Birgit Behrendt
Stuart Bradie
Paulo Cesar Silva
George Culmer
Lord Jitesh Gadhia
Beverly Goulet
Nick Luff
Wendy Mars
Dame Angela Strank
Female representation 50% 25% 33% 60%
Chair of the Committee Member of the Committee Not a member of the Committee
Committee membership
68
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CORPORATE GOVERNANCE
Financial and
operating drivers
review
Business
review
Energy transition &
technology
committee
Executive audit
committee
Commercial
committee
People
committee
Operating
committee
Investment
committee
Executive Team
Executive audit committee
— to consider principal risks
—
to review delivery of in-year internal audit plan and to
finalise internal audit plan for forthcoming year ahead of
Group Audit Committee approval
Operating committee
— to improve Group-wide operational performance
— to review supply chain performance
— to oversee critical enablers of operational performance
People committee
—
to ensure that Rolls-Royce has a winning team to deliver
our strategic priorities
— to keep under review talent and succession, performance
and leadership, reward, purpose and experience
Investment committee
—
to make capital allocation decisions for all investments,
acquisitions and divestments in line with our strategy
— to review performance of in-flight investments
Energy transition & technology committee
—
to ensure the Group is playing a winning role in energy
transition and future technologies
—
to consider rationale for and progress of investments in
energy transition; make capital allocation decisions on
technologies that support energy transition
—
assess strategic opportunity for future technology investments
Financial and operating drivers review
—
to review in-year financial performance and operational
drivers against plan
— to agree interventions where required
Commercial committee
—
to develop Group-wide pricing strategy and commercial
capability
—
to identify and deliver pricing actions and capability
improvements to enable a step change in performance
Business review
—
to review performance by division, focusing on in-year and
five-year horizon
—
includes financial and operational performance, people
and talent, strategic initiatives, principal risks and
engagement with our people
The Chief Executive is responsible for the running of the Group. He leads the Executive Team which comes together to review, agree and
communicate issues and actions of Group-wide significance and is supported by the governance framework introduced in 2023 shown
above in the delivery of its remit. A summary of responsibilities is set out below:
69
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
CORPORATE GOVERNANCE
Position
Board skills and competencies
Key external appointments
DAME ANITA FREW
Chair of the Board
Chair, Nominations, Culture
& Governance Committee
Dame Anita brings a wealth of extensive leadership and global
experience from more than two decades of board
appointments, both in the UK and internationally. Together,
with her skills and reputation with investors and government
institutions, her broad knowledge of strategic management
across a range of sectors is invaluable to the Board and the
Group as a whole.
Current
— Croda International plc, chair
Appointed to the Board
on 1July 2021 and as Chair
on 1October 2021
TUFAN ERGINBILGIC
Chief Executive
Tufan is a proven leader of winning teams within complex
multinational organisations, with over six years as CEO of BP’s
downstream business. He drives a high-performance culture
and delivers results for investors. He has extensive strategic
and operational experience and a firm understanding of
safety critical industries as well as the challenges and
commercial opportunities presented by the drive for low
carbon technologies. He has a strong track record for
execution, delivery and the creation of significant value and
an ambition to deliver the full potential of Rolls-Royce’s
market positions.
Current
— Iveco Group NC, NED
— Global Infrastructure Partners
(GIP), senior adviser
— UK PM’s 2024 Business Council
Past
— GIP, partner
— BP p.l.c., various executive roles
— DCC plc, NED
— Turkiye Petrol Rafinerileri A.S, NED
— GKN plc, NED
Appointed to the Board
on 1January 2023
HELEN MCCABE
Chief Financial Officer
Helen has a track record of promoting rigorous financial
discipline and her experience of delivering effective
performance management within complex multi-national
engineering organisations will be invaluable as the Group
moves, at pace, to transform Rolls-Royce. Her skillset
complements the existing capabilities of the Executive
Team, contributing to Rolls-Royce delivering on its
significant potential.
Past
— BP p.l.c., various leadership roles
Appointed to the Board
on 4August 2023
BIRGIT BEHRENDT
Independent
Non-Executive Director
Birgit brings deep experience across global procurement
and supply chain management to the Board. Alongside this,
she has significant insights into the development and
management of international joint ventures (JV), having led
Ford’s key European JV’s. She also has a strong track record
and an ongoing interest in developing, mentoring and
coaching key talent and encouraging women in particular to
consider a career in STEM. She has worked in the US and
Germany and brings profound experience of working with
unions and works councils.
Current
— Umicore SA, NED
— Thyssenkrupp AG, NED
— KION Group AG, NED
Past
— Ford, various executive roles
— Ford-Werke GmbH, NED
Appointed to the Board
on 11 May 2023
STUART BRADIE
Independent
Non-Executive Director
Stuart brings to the Board a reputation for building strong
relationships and successfully driving comprehensive
organisational transformation. Over the past nine years,
Stuart has guided KBR’s evolution, prioritising a focus on
people alongside strong commercial discipline. KBR delivers
disruptive technologies and digital solutions that address
areas of global importance. Stuart has used a safety and ESG
focus to deliver cultural change and helped make KBR the
number one in its peer group in delivering against its
ESG agenda.
Current
— KBR, President & Chief Executive
Appointed to the Board
on 11May 2023
PAULO CESAR SILVA
Independent
Non-Executive Director
Paulo brings deep expertise in the aerospace industry, a
broad international mindset and an appetite for growth,
change and innovation. Alongside this, he brings a wealth of
strategic, commercial and operational experience to the
Board’s discussions. He also brings considerable finance
experience having spent his early career in senior finance
roles�
Current
— Cemig, NED
— Electra.Aero, advisor
Past
— Embraer S.A ., president & CEO
Appointed to the Board
on 1 September 2023
GEORGE CULMER
Senior Independent
Director
George has a strong track record as a senior finance
professional with significant experience gained in large,
international, highly regulated groups with high cyber threat
profiles and has proven business leadership credentials. With
this experience, together with his strengths in change
leadership and transformation gained from within complex
groups, George makes a significant contribution to the Board.
Current
— Aviva plc, chairman
Past
— Lloyds Banking Group plc, CFO
— RSA Insurance Group plc, group
financial officer
Appointed to the Board
on 2January 2020
70
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Board of Directors
Position
Board skills and competencies
Key external appointments
LORD JITESH GADHIA
Independent
Non-Executive Director
Chair, Remuneration
Committee
Jitesh brings a wealth of complex advisory and transactional
experience to the Board, having spent nearly 25 years in the
banking and private equity sector. He has extensive
remuneration experience, earned from both listed companies
and UK Government Investments and UK Financial
Investments, where he played a key role in compensation
discussions about the Government’s investments in some of
the UK’s biggest companies. This, together with his broad
industry experience, is an asset to the Board and the
Remuneration Committee.
Current
— Taylor Wimpey plc, NED
— Compare the Market Limited, NED
— Accord Healthcare Limited, NED
— Court of Directors of the Bank of
England, NED
Past
— UK Government Investments, NED
— Blackstone Group, senior MD
Appointed to the Board
on 1 April 2022
BEVERLY GOULET
Independent
Non-Executive Director
Rolls-Royce North America
Holdings, Inc., board
member. Lead Employee
Champion
Having spent a considerable amount of her career in the
airline industry, Bev brings valuable knowledge and
operational experience to the Board. She has significant
expertise in finance, treasury, strategy, legal and governance
matters. She has the expertise and experience to be able to
confidently contribute to decision-making and actively take
part in developing and strengthening our businesses.
Current
— Xenia Hotels & Resorts, Inc., NED
— Answer ALS Foundation,
foundation board chair
Past
— American Airlines, Inc., various
executive roles
— American Airlines Federal Credit
Union, chair
—
Atlas Air Worldwide Holdings, Inc.,
NED
Appointed to the Board
on 3 July 2017
NICK LUFF
Independent
Non-Executive Director
Chair, Audit Committee
Nick is an experienced finance executive having been chief
financial officer of a number of listed companies across a
variety of industries. He has broad financial skills and a track
record of driving business performance. His extensive
non-executive and audit committee experience, together
with both financial and accounting expertise and a passion
for engineering, is crucial in his role as Chair of the Audit
Committee and is invaluable to the Board.
Current
— RELX plc, CFO
Past
— Centrica plc, CFO
— Lloyds Banking Group plc, NED
— QuinetiQ Group plc, NED
Appointed to the Board
on 3May 2018
WENDY MARS
Independent
Non-Executive Director
Chair, Safety, Energy
Transition & Tech
Committee
Employee Champion
As a leader, Wendy has overseen diverse teams across sales,
engineering and innovation in 123 countries. She brings
experience and insight across hardware, software and services
with technological transformation of complex global
organisations at her core. Wendy’s knowledge of both the
technical steps needed to foster innovation in a technology
company as well as the challenging realities of its
implementation in organisations at different stages of their
transformation journey is invaluable to the Board and the
Group as a whole. Technology can play a significant role in
helping businesses to achieve their sustainability objectives;
Wendy brings this experience to the Board.
Past
— Cisco Systems, Inc., president
Europe, Middle East and Africa
region (EMEA)
— ThruPoint, Inc., various executive
roles
Appointed to the Board
on 8 December 2021
DAME ANGELA STRANK
Independent
Non-Executive Director
Dame Angela brings a wealth of corporate experience to the
Board and a proven track record in managing engineering
operations and driving technology, science and engineering
programmes. Having actively worked in climate research and
pioneering women in STEM careers, sustainability and
corporate ethics are key areas of interest. As a member of
the Safety, Energy Transition & Tech Committee, Dame Angela
draws on her experience as a member of two other listed
companies’ sustainability committees which is invaluable to
the Group as it develops its sustainability strategy.
Current
— Mondi plc, NED
— SSE plc, NED
— Rio Tinto Innovation Advisory
Committee, member
Past
— Severn Trent plc, NED
— BP p.l.c., various executive roles
Appointed to the Board
on 1May 2020
PAMELA COLES
Chief Governance Officer
Pamela is widely considered an expert in corporate
governance and company law. She has a passion for
engineering and a pragmatic approach to how the
governance team supports the business. Pamela is
instrumental in supporting the Chair and the Non-Executive
Directors to build strong relationships with the Executive
Team and has been able to offer advice and guidance on a
wide range of topics.
Current
— E-Act, NED
— GC100, executive committee
member
—
University of Greenwich, governor
and chair of the audit committee
Appointed on 1 October
2014
71
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
BOARD OF DIRECTORS
1. DR JÖRG STRATMANN
CEO – Rolls-Royce Power Systems AG
5. CHRIS CHOLERTON
Group President
9. ADAM RIDDLE
President – Defence;
Chairman & CEO – Rolls-Royce North America
2. NICOLA GRADY-SMITH
Chief Transformation Officer
6. TUFAN ERGINBILGIC
Chief Executive
10. SIMON BURR MBE
Group Director of Engineering, Technology
& Safety
3. DR ROB WATSON
President – Civil Aerospace
7. SARAH ARMSTRONG
Chief People Officer
4. HELEN MCCABE
Chief Financial Officer
8. MARK GREGORY
General Counsel
Appointment details and career highlights of the members of the Executive Team are available at www.rolls-royce.com
6 7 10 984 5 1 32
72
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Executive Team
COMPOSITION OF THE BOARD AT 22 FEBRUARY 2024
The Board brings a wide range of experience, skills and backgrounds which complement the Group’s strategy.
Balance of the Board Non-Executive Directors’ tenure Board members by gender
Non-Executive
Directors – 10
Executive
Directors – 2
0–3 years – 6
3–6 years – 3
6–9 years – 1
Male – 6
Female – 6
* According to the Company’s Articles, at least
50% of our Directors must be British citizens
Board members by ethnicity Board members by nationality
*
White – 11
British-Asian – 1
British – 9
American – 1
European – 1
Brazilian – 1
Non-Executive
Directors’ skills
andexperience at
22February 2024
Business experience Global experience
People and
product safety
Cyber & digital
Climate change &
sustainability
Engineering, science
& technology
Company leadership
Finance
Audit & risk
management
Remuneration
Transformation
Legal & regulation
Sector specific
Geopolitics
Europe
Americas
Asia & Middle East
Non-Executive Director
Dame Anita Frew
• • • • • • • • • •
Birgit Behrendt
• • • • • • • •
Stuart Bradie
• • • • • •
Paulo Cesar Silva
• • • • • • • • •
George Culmer
• • • • • • • •
Lord Jitesh Gadhia
• • • • • • •
Beverly Goulet
• • • • • • •
Nick Luff
• • • • • • • •
Wendy Mars
• • • • • •
Dame Angela Strank
• • • • • • • •
73
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
BOARD OF DIRECTORS
The table above sets out the Directors’ attendance at Board and
Committee meetings throughout 2023. During the year, we made
changes to the committees’ memberships with the introduction of the
Safety, Energy Transition & Tech Committee in May 2023. Furthermore,
the Nominations, Culture & Governance Committee was renamed in
May 2023 to include the Board’s focus on culture. Further information
on the Board committee realignment can be found on page 67.
Most scheduled meetings end with a private discussion of the
Non-Executive Directors led by the Chair of the Board or Committee,
without the Executive Directors or members of the Executive Team or
management present�
Additional meetings and sub-committee meetings
The Board held one sub-committee meeting in March 2023 to approve
the appointment of Helen McCabe as Chief Financial Officer.
In support of the Board and committees’ work, where there is a
requirement for greater, in-depth discussion, we hold deep dives into
specific areas of focus outside the meeting schedule.
— In July 2023, the Board held a strategy workshop with the Executive
Team to consider in depth the strategic plans for each of the divisions
(see page 75).
— The Safety, Energy Transition & Tech Committee combined a visit to
the Civil Aerospace facilities in Derby, UK in October 2023 with a
deep dive on both product and people safety. More information can
be found on page 111).
Safety, Ethics & Sustainability Committee and Science &
Technology Committee
The Safety, Ethics & Sustainability Committee (SES) and the Science &
Technology Committee (S&T) held their last meetings in February 2023.
These were the only meetings held by these committees in 2023 and
Anita Frew (SES), Wendy Mars (S&T) and Angela Strank (SES and S&T)
were in attendance.
Non-attendance
Board members’ attendance was once again high in 2023. However,
Directors are sometimes unable to participate in certain Board and
Committee meetings due to other business commitments. In this
situation, they communicate their responses to the matters for
consideration to the Chair of the Board and the Committees’ chairs,
where relevant.
Board and Committee
attendance in 2023
Board
8 meetings
Nominations,
Culture &
Governance
6 meetings
Audit
9 meetings
Remuneration
8 meetings
Safety, Energy
Transition & Tech
2 meetings
Dame Anita Frew 8/8 6/6
Tufan Erginbilgic 8/8
Helen McCabe 3/3
Birgit Behrendt 4/4 2/3 2/2
Stuart Bradie 3/4 2/3 2/2
Paulo Cesar Silva 3/3 2/2 1/1
George Culmer 8/8 6/6 9/9 8/8
Lord Jitesh Gadhia 8/8 6/6 8/9 8/8
Beverly Goulet 8/8 6/6 9/9 8/8
Nick Luff 8/8 6/6 9/9
Wendy Mars 8/8 6/6 2/2
Dame Angela Strank 8/8 5/6 1/2
Panos Kakoullis 5/5
Paul Adams 5/5 4/4
Mike Manley 4/4 3/3
Sir Kevin Smith 4/4 3/3 4/4
74
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
BOARD OF DIRECTORS
BOARD FOCUS THROUGH 2023
BOARD FOCUS THROUGH 2023
IN-YEAR PRIORITIES
Transformation
In February 2023, a multi-year transformation programme was launched to deliver sustainable earnings growth and
cash generation. Progress was reviewed regularly by the Board with particular focus on the strategic review,
commercial optimisation, working capital and organisational design.
Strategy
The Board held a strategy workshop with the Executive Team in July 2023. The Board considered the strategic plans
for each of our divisions in light of the transformation programme. The Board also considered the messaging ahead
of the CMD at which the future strategy for the Group was communicated to investors.
Capital markets day
In September 2023, the Board received a comprehensive review of the proposed organisational design and,
in November 2023, the Board reviewed the content and disclosure to be made at the CMD and agreed mid-term
targets and the capital framework.
FINANCIAL
Group budget and five-year plan
The Board approved the 2023 budget and five-year plan in February 2023 and regularly reviewed progress against
both. See page 19 for further information.
Viability statement
The Board agreed the viability statement period to be reported in the Annual Report. The Audit Committee assessed
the Group’s viability, with scenarios created based on the principal risks and modelled by the businesses as part of
the five-year forecasts. Read more on page 58.
Reports and regulatory reporting
On the recommendation of the Audit Committee, the Board reviewed and approved the half year and full year results
announcements, the trading updates issued during the year and Annual Report and Accounts.
RISK MANAGEMENT
Review of effectiveness of risk management and internal controls
The Audit Committee and Board assessed the effectiveness of the risk management and internal controls in place across
the Group. The Board confirms that, where weaknesses in the Group’s internal control environment were identified,
plans for remediation were implemented and aligned to an appropriate timeframe. Read more on page 81.
Product and people safety risk
In October 2023, members of the Safety, Energy Transition & Tech Committee visited a number of our Civil Aerospace
operational sites in Derby, UK. As part of the visit, safety in relation to our products and people were considered.
Further details can be found on page 11.
Principal risk review
To discharge their responsibilities under the 2018 UK Corporate Governance Code, throughout the year the Board
reviewed the principal risks. The Audit Committee reported to the Board that a robust assessment of the principal
risks and emerging risks facing the Group had been undertaken.
Key stakeholders
People Customers Suppliers and partners Communities Governing bodies and regulators Investors
75
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
BOARD OF DIRECTORS
BOARD FOCUS THROUGH 2023 – CONTINUED
SUSTAINABILITY AND ENVIRONMENTAL
TCFD and climate change
The Audit Committee and Safety, Energy Transition & Tech Committee both considered the TCFD recommendations
and the Scope 3 emissions calculations. During the year, the Audit Committee also reviewed the controls in relation
to the data to gain greater oversight of the metrics used in relation to Scope 3 emissions.
Climate commitments
The Safety, Energy Transition & Tech Committee considered the Group’s climate programme including updates of
the activities of the Executive-level energy transition & technology committee.
CULTURE
People and culture
The Nominations, Culture & Governance Committee received an update from the Chief People Officer on people
and culture, including on the progress against our People strategy.
Diversity & inclusion
The Nominations, Culture & Governance Committee continued to review progress against the strategic pillars of our
inclusion strategy: leadership and governance; attract and recruit; engage; and develop. The Committee continued
to review performance against the 2025 diversity targets (see page 44).
GOVERNANCE, LEGAL AND REGULATORY
Committee structure
The Board conducted a review of its Committees and introduced the Safety, Energy Transition & Tech Committee
with effect from May 2023 to focus on safety, the energy transition agenda and to provide oversight and assurance
of the Group’s scientific and technological strategy, processes and investments. In addition, the remit of the
Nominations & Governance Committee was refocused to include ethics and culture and the Committee was renamed
the Nominations, Culture & Governance Committee.
Board succession planning
In line with the Board succession plans, and on the recommendation of the Nominations, Culture & Governance
Committee, the Board approved the appointments of Helen McCabe as Chief Financial Officer and Birgit Behrendt,
Stuart Bradie and Paulo Cesar Silva as Non-Executive Directors. Their biographies can be found on pages 70 and71.
Board effectiveness evaluation
An external evaluation of the effectiveness of the Board and its Committees was conducted by Manchester Square
Partners. Further information on the process and findings from the evaluation can be found on page 77.
Key stakeholders
People Customers Suppliers and partners Communities Governing bodies and regulators Investors
76
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
BOARD OF DIRECTORS
AREAS OF FOCUS
Review of the Board and Committees
Manchester Square Partners (MSP) were appointed in September to
carry out an independent review of the Board’s effectiveness for 2023.
MSP were appointed following a desk top review and benchmarking
exercise, conducted by the Chief Governance Officer, on the basis of
cultural fit, overall approach and fee level. A review of the Board’s
Committees was undertaken at the same time. MSP have not provided
any other service to the Company during the year and have agreed
this disclosure.
The review took the form of confidential one-to-one discussions with
each of the Directors and the Chief Governance Officer; attendance
at a Board meeting and at meetings of the Committees; and a review
of Board papers and agendas over the year. The scope of the review
was agreed with the Chair in advance and included: strategy, including
challenges, risks, values and culture; the role of the Board, Board
dynamics and engagement; structure, including composition and
succession; and governance, including execution and leadership.
MSP reported back their findings to the Nominations, Culture &
Governance Committee, which all Board members attended, at the
Committee’s meeting in February 2024.
In addition to this review, during a private meeting of the
Non-Executive Directors, the Senior Independent Director led a review
of the Chair’s performance without the Chair present. The Nominations,
Culture & Governance Committee has an item at the end of each agenda
without any management present and, during these sessions, regularly
discussed the performance of the Chief Executive throughout his first
year; the Chair also conducted the Chief Executive’s annual performance
review having sought feedback on his performance from the Board.
These meetings concluded that both the Chair and the Chief Executive
were effective and feedback was shared with each of them.
Each Committee chair considers feedback for the Committees for which
they are responsible.
STAGES OF THE BOARD EFFECTIVENESS REVIEW
SEPTEMBER 2023
Decision reached
to undertake an
externally facilitated
Board effectiveness
review and tender
exercise carried out
SEPTEMBER
MSP appointed
to carry out the
effectiveness review
NOVEMBER/DECEMBER
Interviews undertaken
with individual
Directors, Board
papers reviewed and
attendance at Board
and Committee
meetings
JANUARY
Report reviewed
by Chair and Chief
Governance Officer
FEBRUARY 2024
Report presented
to the Board by MSP
and action plan for
2024 agreed
BOARD EFFECTIVENESS
2023 FOCUS IDENTIFIED IN 2022 PROGRESS IN 2023 FOCUS IN 2024
Board structure, composition
anddynamics
Changes were made to both the Executive
Team’s governance structures early in the
year (and as reported in 2022) and the
structure of the Committees (see pages 69
and 78).
The Board reached gender parity and two
senior Board members are women (Chair
and Chief Financial Officer) (see page 79).
Review Board inductions and ongoing
training.
Board to review executive governance
and its own committee structure.
Continue to work towards our diversity
and inclusion ambitions.
The Board’s role
The Group’s strategy was reviewed and
communicated to shareholders at the CMD
in November.
Continued focus on strategic progress,
ambitions and options.
Oversight of the continuing transformation
particularly around culture, people and
succession�
Focus on risk management as the
enterprise continues to change and
respond to the external environment.
Focus on strategic choices.
The Board at work
Stakeholders were a key part of the
discussions throughout the year on the
transformation programme (see pages 60
to 63).
Board site visits and deep-dives to
continue to build on Directors’ induction,
training and development.
Continued focus on stakeholder
engagement, ensuring Board sponsorship
of the transformation programme.
77
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
BOARD OF DIRECTORS
Board and committees’ composition
The Committee is responsible for keeping the structure, size and
composition of the Board and its Committees under review. During
2023, the Committee oversaw the search and appointment of a new
Chief Financial Officer, Helen McCabe. Helen succeeded Panos
Kakoullis as Chief Financial Officer on 4 August 2023.
The Committee oversaw a number of changes to the Non-Executive
Directors. As reported in our 2022 Annual Report, Birgit Behrendt
joined and Mike Manley stepped down from the Board at the 2023 AGM
in May. In addition, Sir Kevin Smith stepped down from the Board in
May and Paul Adams stepped down in September. Stuart Bradie was
appointed in May and Paulo Cesar Silva joined the Board in September.
Furthermore, during the year, the Committee considered the
re-appointment terms of Dame Angela Strank, for a second three-year
term, and Bev Goulet. Bev was appointed for an annual term as all
Non-Executive Directors are appointed annually once they have served
six years on the Board.
Prior to making any new appointments to the Board, the Committee
considers the skills and attributes required and agrees a profile. The
Committee also provides input into a shortlist of candidates and is
involved in the interview process for all appointments. The Committee
recommends the appointments to the Board for approval. All
Non-Executive Directors are appointed to the Nominations, Culture &
Governance Committee and to other Board committees, depending
on the skills they bring. The Company used MWM Consulting for all
appointments to the Board in 2023. MWM Consulting has no
connection with individual directors.
The Chief Governance Officer ensures that new Directors have a
thorough and appropriate induction programme. Each programme is
tailored for the individual depending on the role they will be taking up
or the Board Committees they will join.
Summary biographies for the Directors can be found on pages 70 to
71. Full biographies can be found at www.rolls-royce.com
Board Committee re-alignment
In March 2023, the Committee considered a revised Board Committee
structure, which was subsequently put in place from May 2023. This
action followed from the 2022 Board evaluation and also brought the
Board and Executive Team’s governance structures, which were also
reviewed in the year, into closer alignment.
The work of the Safety, Ethics & Sustainability Committee and the
Science & Technology Committee was reviewed and those committees
were stepped down. A new committee, the Safety, Energy Transition &
Tech Committee was formed to focus on safety and the energy
transition agenda as well as to provide oversight of the Company’s
scientific and technology strategy, processes and investments. Wendy
Mars became chair of the Safety, Energy Transition & Tech Committee
from its inception.
KEY AREAS OF FOCUS IN 2023
Revised Board committee structure
Board composition and diversity
Organisational design
The Nominations & Governance Committee was renamed the
Nominations, Culture & Governance Committee and leads the Board’s
focus on culture, which was identified as a priority in 2022. Specific
areas now additionally come under the remit of this Committee
including human rights, speak up line reporting and feedback from the
employee champions. These, in addition to its existing focus on
diversity and inclusion; talent and succession; Group policies and the
Code will enable the Committee to develop metrics and build a
dashboard to provide better oversight of the Group’s culture and
behaviours. The Executive Directors join the Committee meetings for
discussion on these topics so that there is dedicated Board time for
these important areas. This will be an area of focus in 2024 as work
continues on the purpose and culture workstream as part of the
transformation programme.
The role of each committee is on page 68. The full terms of reference
and terms of reference applicable to all Committees can be found at
www.rolls-royce.com
See page 68 for our current Board committee membership.
Board appointment, induction and development
The Committee, led by the Chair, oversaw the search and appointment
of the new Chief Financial Officer. An internal and external search
and benchmarking exercise was followed by an interview process.
Helen brings more than 25 years of experience in senior finance
and performance management roles within complex multinational
organisations.
The Chair and Chief Governance Officer arrange a comprehensive,
tailored induction programme for newly-appointed Non-Executive
Directors, which includes dedicated time with the Executive Team and
senior management and scheduled trips to business operations. The
programme is tailored based on experience and background of the
individual and the requirements of the role. All Directors visit the Group’s
main operating sites as part of their induction and are encouraged to
make at least one visit to other sites every year. Site visits are an
important part of the induction process, as well as for continuing
education. They help Directors understand the Group’s activities through
the direct experience of seeing our facilities and operations and by
having discussions with a diverse group of our people.
It is important that the Directors continue to develop and refresh their
understanding of the Group’s activities. The Board’s engagement with
its stakeholders is set out on pages 60 to 63. It is also important that
the Directors regularly refresh and update their skills and knowledge
and receive relevant training when necessary. Members of the Board
also attend relevant seminars, conferences and training events to keep
up-to-date on developments in key areas.
Culture
During 2023, the Committee started to pull together its agenda to look
at the culture of the organisation. Reports were received from the speak
up line and Employee Champion directors and a presentation on the
enterprise-wide human rights programme was received in December.
In August 2023, there was a discussion on the behavioural expectations
of senior leadership, following events in the wider UK corporate
environment. As well as updates on diversity and inclusion, talent and
succession, the Committee received a detailed briefing in September
2023 on the organisation design work that was undertaken as part of
the wider transformation programme. This included presentations and
discussion on enterprise skills and capabilities and purpose and
culture enablement.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Nominations, Culture & Governance
Committee report
Members All Non-Executive Directors
Biographies are on pages 70 and 71
Remit See page 68
Diversity and inclusion
In 2023, the Committee continued its work to maintain a balance on
the Board of individuals representing a wide cross-section of
experience, cultural backgrounds and specialisms. The Board diversity
policy aims for gender parity and we are delighted to report that
during 2023 we met the Board’s ambition. We have also exceeded the
Board’s intention that at least one senior Board member will be a woman.
With the appointment of Helen McCabe, both the Chair of the Board
and the Chief Financial Officer are women. One of our Board members
is from a non-white ethnic minority background. The Board diversity
policy is available at www.rolls-royce.com
The Committee continued to receive regular updates on progress with
our diversity and inclusion strategy across the Group and received
updates on progress against key metrics and targets in February and
September 2023�
Diversity in our Executive Team has improved and now stands at 30%,
increased from 18% at the end of 2022. The Committee continues to
support and monitor Group activities to increase the percentage of
women and other under-represented groups in the senior management
population (see page 69). We recognise that there is still more to do.
Improvements in ethnicity balance are beginning to be seen, particularly
in the US leadership group as well as in the wider Group across the
graduate and high potential populations.
Improving diversity and inclusion remains a priority and we continue
to track progress. More on our progress against our targets can be
found on page 47. Disclosures under Listing Rule 9.8.6 can be found
on page 220�
Succession planning
The Committee considers the current skills, experience and tenure of
the Directors and assesses future needs against the longer-term
strategy of the Group. The skills and experience criteria for incoming
directors is discussed and agreed before the recruitment process
is commenced.
The Committee plays a vital role in promoting effective Board and
leadership succession, making sure it is fully aligned to the Group’s
strategy. In 2023, the Committee appointed Helen McCabe as Chief
Financial Officer and had full discussions with Tufan Erginbilgic on the
changes to the Executive Team throughout the year. The Committee
also considered succession planning for the Chief Executive. The
Committee were fully briefed on the changes to the organisational
design before they were announced in October.
Principal risk review
The Committee considers the principal risk of talent and capability as
part of the regular discussion on succession planning and, in 2023, in
light of the discussions on transformation and the organisational design
for the Group. The development of our leaders is critical to ensuring
the right culture and behaviours are embedded enterprise wide and
to ensure we maintain the right skills and capability to meet our
strategic plan. In addition, the Board met as a whole to receive an
update from the chief people officer on overall enterprise capabilities,
including a deep dive on engineering.
Directors’ conflicts of interest
As required under the Code, any additional external appointments
taken up by Directors during the year are considered by the
Committee and approved by the Board prior to the Directors
accepting such appointments. The Committee considers any conflicts
that may arise as a result of any external appointments taken up by the
Directors and the Board monitors the extent of those interests and the
time commitment required to fulfil them to ensure that effectiveness is
not compromised. As part of the Committee’s discussions, external
appointments are considered against the parameters set by ISS. The
Committee has found this to be a useful gauge when discussing whether
there is potentially any impact on Directors’ time commitments when
taking on additional external appointments.
In 2023, the Directors demonstrated a strong commitment to the
Company, as shown by their high levels of attendance at all our
meetings (see page 74). During the year, the Board considered two
external appointments for directors who subsequently stepped down
from the Board. One of the appointments was with a company which
Rolls-Royce has a joint venture relationship with, although not material
in nature. The Board agreed appropriate mechanisms to recuse the
director from any discussions that may arise concerning that
relationship. The Board concluded that neither of these external
appointments were considered time restrictive.
Engagement with shareholders
For information on how the Board has engaged with stakeholders
during the year, see pages 60 to 63.
Corporate governance
Throughout 2023, we have continued to watch the evolving agenda in
the UK on audit and corporate governance reform. We will continue
to keep good governance at the core of all we do and are pleased to
report another full year of compliance with the 2018 UK Corporate
Governance Code, as reported on page 65. During 2024, we will be
working on our internal governance arrangements to ensure they are
aligned with our organisational design.
The extracts from the Group’s governance framework, which is also
applied to our subsidiary companies and is our response to the Wates
principles, are available at www.rolls-royce.com
Dame Anita Frew
Chair of the Nominations, Culture & Governance Committee
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
NOMINATIONS, CULTURE & GOVERNANCE COMMITTEE REPORT
I am pleased to present the 2023 report of the Audit Committee which
provides an overview of the areas of focus for the Committee during
the year, as well as its key activities and the framework within which it
operates�
The composition of the Committee has not changed during 2023 and
the membership is set out on page 83. George Culmer, Bev Goulet and
I have recent and relevant financial experience. The Board remains
confident that the Committee members have the appropriate knowledge,
skills and experience to fulfil the duties delegated to the Committee
and that the Committee as a whole has the competence relevant to the
Company’s sector�
In 2023, we were pleased to have the opportunity to meet with several
shareholders in person as well as hear from shareholders virtually at
our 2023 AGM, where we were able to answer questions both in person
and via the live stream of the meeting. Members of the Committee
attended the capital markets day in November 2023, either in person
or virtually.
This report sets out the work of the Committee in 2023 with a focus on
the issues relevant to the Group’s financial reporting, considering how
business performance is reflected in financial reporting, assessing key
accounting judgements and ensuring ongoing quality of the related
disclosures. In our meetings, we have robust conversations to ensure
management are challenged, to satisfy ourselves that the judgements
taken and the disclosures made are appropriate for the Group.
We continue to support the Board in its considerations of climate
change risks and opportunities. The Committee has reviewed and
approved the TCFD recommendations (see page 35) and noted the
progress during the year as the disclosures were being prepared for
the 2023 Annual Report. We have continued to ensure that the impact
of climate change, where material, is reflected in the financial statements
and disclosed accordingly, including the assumptions used in the
forecasts for the assessment of going concern and viability, long-term
contract accounting, impairment testing and deferred tax asset
recognition.
We undertook deep dives of the principal risks we oversee. We met
with each of the divisions’ presidents during the year to discuss their
business governance, including the risks and internal control
frameworks, and to consider their business continuity risks. While
previously data and cyber security had been the remit of the Data
Security sub-committee of the Audit Committee, throughout 2023 the
Audit Committee has addressed data security as part of its review of
business continuity with each division. The Committee also receives
regular reports from the director of cyber security as part of the
Committee’s consideration of the cyber threat.
We also meet regularly with the head of tax to review the management
of tax and customs risks. The Committee approves annually our tax
policy to ensure it remains appropriate for the Group and we receive
updates on its application as well as changes to relevant laws and
regulations. We have discussed the changing external reporting
requirements.
The Committee continues to oversee the assurance activity conducted
by internal audit. The Committee monitored delivery of their 2023
internal audit plan, considered the findings from internal audit reports
and ensured that actions identified were implemented. We also approved
their 2024 plan, confirming the focus on key risks and adequate cover
of all material operations and appropriate geographical coverage. We
have scheduled an independent effectiveness assessment of internal
audit for 2024.
During 2023, we have engaged with the Financial Reporting Council
(FRC) following their evaluation of the 2022 Annual Report and Accounts.
This review was part of a regular assessment of the quality of corporate
reporting in the UK undertaken by the FRC. We welcome the FRC’s
engagement and, as a result of our communications, we have enhanced
several existing disclosures, including a change in accounting policy
following a reassessment of a judgement previously taken which resulted
in a change in the classification within the cash flow statement.
Additional disclosures are included in our 2023 reporting in relation
to this (see note 1 of the Consolidated Financial Statements on
page 188).
Financial reporting
The Group has complex long-term contract accounting and every year
the Committee spends much of its time reviewing the accounting
policies and judgements implicit in the Group’s financial results. In 2023,
we have considered the implications on our assumptions and key
accounting judgements of the recovery in air travel globally, the
improved financial performance of the Group and the Group-wide
transformation programme, as well as changes in the global
macro-economic and political environment. We have ensured that the
disclosures in respect of all key areas of judgement are appropriate
and balanced. We assess and consider the sensitivity of the estimates
to changes in key assumptions which are summarised in note 1 of the
Consolidated Financial Statements on page 188.
Fair, balanced and understandable
As part of its review of the 2023 Annual Report, the Committee
considered whether the report, taken as a whole, was fair, balanced
and understandable and that it provided the information necessary for
shareholders to assess the Group’s position, performance, business
model and strategy. In so doing, the Committee considers the financial
reporting procedures and internal controls in place in preparing the
report. There is a robust governance framework with well documented
planning and procedures for the preparation of the report and a
collaborative approach across all those who contribute to the report.
The Committee concluded that the basis of preparation was consistent
with financial reporting throughout the year and that all significant
issues had been considered. The Committee was satisfied that the
process was effective and that the messaging was consistent,
particularly the narrative reflecting the financials, and confirmed to
the Board that, when taken as a whole, the Annual Report is fair,
balanced and understandable.
KEY AREAS OF FOCUS IN 2023
Ensured our business performance is fairly presented with
equal prominence of statutory and alternative performance
measures
Reporting of climate change and environmental data and
the interaction with accounting assumptions and financial
reporting, including in relation to TCFD recommendations
Implications for our financial reporting of the recovery in
air travel globally and of our Group-wide transformation
programme
Continued oversight of internal controls improvement
programmes and of effectiveness of risk management with
a focus on cyber security and on business continuity,
including supply chain dependencies
80
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Audit Committee report
Significant issues relating to the 2023 financial statements:
A summary of the principal matters we considered in respect of the 2023 Consolidated Financial Statements is set out below.
AREA OF FOCUS CONSIDERATIONS
Alternative Performance
Measures (APMs)
As in previous years, the Committee reviewed the clarity of the definitions and the reconciliation of each APM to
its statutory equivalent. The Committee concluded that there was no undue prominence of the APMs in the Annual
Report. See page 213 for a reconciliation of APMs to their statutory equivalents. New KPIs were introduced
during 2023, following the strategic review. The Committee challenged the calculation underpinning these KPIs
to ensure the conclusions reached resulted in appropriate additional KPIs being disclosed.
Long-term contract
accounting
The Committee considered the assessment of estimates of future revenue and costs on the Group’s long-term
contractual arrangements. This has continued to be a particular focus for the Committee due to the complex
nature of long-term contract accounting, the recovery in air travel globally, the changing macro-economic
conditions and the Group-wide transformation programme. As part of our considerations, we reviewed
onerous contracts given their sensitivity to changes in revenue and cost assumptions. We also reviewed
catch-ups to understand the changes to revenue and cost assumptions driving them and looked at
accounting for risk and revenue sharing arrangements. We reviewed the disclosures and concluded these,
together with the assessments, were appropriate. See note 1 in the Consolidated Financial Statements.
Deferred tax assets
The Committee discussed the recoverability of deferred tax assets and the forecasts, assumptions and
sensitivities applied in order to ascertain the recognition and recoverability of the deferred tax assets. The
Committee discussed the basis for the recognition of the UK deferred tax assets and considered the
judgements and estimates necessary to assess the recoverability of the UK deferred tax assets. This was
particularly important during 2023 due to the strategic review, the improved financial performance and the
higher mid-term targets that have been communicated. We considered this in light of the requirements set
out in IAS 12 Income Taxes to assess probable profits when considering the recognition of the UK deferred
tax assets. We confirmed the approach, which remained consistent with that taken in 2022, together with the
disclosures set out in note 1 to the Consolidated Financial Statements.
Impact of climate change
The approach taken by management to assess the impact of climate change, the conclusions reached and
the disclosures presented have been reviewed by the Committee, including considering the related TCFD
recommendations. We have received updates on the improving internal controls in relation to process and
data and considered progress made with the Group’s reporting. The Committee has ensured it understands
and has continued to challenge the assumptions in the climate scenarios used by management to sensitise
forecasts in respect of viability, long-term contract accounting, impairment assessments and deferred tax
asset recognition. See note 1 in the Consolidated Financial Statements.
Accounting for complex
treasury instruments
The Committee continued to consider numerous topics in relation to the Group’s complex treasury
instruments including the GBP:USD hedge book and associated hedge book rates and the long term planning
rate used by management beyond the hedge book period. This included understanding and challenging
management on the assumptions, the approach, the accounting and reporting.
Transformation programme:
organisational design
The Committee considered the impact of the transformation programme, including the organisational design,
on the assumptions and accounting judgements, and monitored whether the criteria required for a
restructuring and transformation provision had been met.
Risk management and the internal control environment
Our risk management and internal control framework is described in
the Principal Risks section on page 50. During the year, we focused on
the effectiveness of risk controls and their assurance, ensuring actions
to mitigate where needed and to manage risks in relation to our
appetite for taking risk as described on page 50. We will continue to
focus on embedding risk mitigation controls and risk appetite in 2024,
embedding these more firmly as part of our routine processes and
decision making, including in relation to strategic planning.
We also satisfied ourselves that the processes for identifying and
managing risks are appropriate and that all principal risks and
mitigating actions had been subject, during the year, to a detailed
review by the Board or an appropriate Board Committee. Based on this
and on our other activities, including consideration of the work of
internal and external audit and attendance at the Committee meetings
by divisional and functional risk owners, the Board confirmed that a
robust assessment of the principal risks and emerging risks facing the
Group had been undertaken. Details of our principal risks are set out
on pages 50 to 57. The Board allocated certain principal risks to the
Committee and we considered these in detail throughout the year, as
described below. From our discussions, we are satisfied that the
principal risks that we oversee have received appropriate management
attention during 2023:
— Business continuity: the Committee received updates on the status
of the continuity risk management of each business, including the
risks to internal facilities and in the external supply chain, as well as
an assessment of risk management effectiveness.
—
Cyber: the Committee received updates on the status of cyber
security risk, including lessons learnt from incidents and an
assessment of risk management effectiveness. The cyber security
strategy was kept under review during the year.
— Financial shock: the Committee has reviewed the Group’s policies,
procedures and controls for identifying, managing and mitigating
financial shock. The Group is exposed to a number of financial risks,
some of which are of a macro-economic nature (for example, foreign
currency, oil price and interest rates) and some of which are more
specific to the Group (for example, liquidity and credit risks).
81
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
AUDIT COMMITTEE REPORT
Internal financial control
The Committee specifically reviews the Group’s internal financial
controls (see page 50). During 2023, we reviewed the results of self-
attestation and testing performed by the internal control and internal
audit teams to confirm the effective operation of key financial controls
across the Group. We monitored progress against the 2023 financial
controls programme to strengthen the financial reporting and
compliance controls. We confirmed completion of identified key
activities. We also considered the external auditor’s observations on
the financial control environment.
Effectiveness of risk management and internal control systems
The Committee has conducted a review of the effectiveness of the
Group’s risk management and internal control systems, including those
relating to the financial reporting process. We consider that our review
of the risk management and internal control systems, in place
throughout 2023 and up to the date of this report, satisfies the
requirements of the Code, the DTR and the FRC’s guidance on risk
management. To support this:
— we monitor changes to regulatory requirements with respect to risk
management on an ongoing basis;
—
we review relevant policies and procedures and update where
necessary, in line with regulatory changes and our perspective on
effective approaches to risk management;
— our risk management team and relevant assurance functions, such
as internal audit, review key business processes, including long-term
contract pack reviews and the budgeting process with periodic
reforecasting, identifying key risks and opportunities;
—
we assess and monitor management responses to key audit findings,
including the design of mitigations and developments to existing
controls;
—
a defined anti-bribery and corruption policy has been
implemented; and
— where necessary, we report to the Board and its Committees on key
risk and regulatory matters.
During the course of the financial year, any control weaknesses
identified through the operation of our risk management and internal
control processes were subject to monitoring and resolution in line
with our normal business operations. In 2023, no significant weaknesses
were identified.
To further support the enhancement of the existing internal control
environment:
—
risk management specialists have been assigned to review and
monitor the implementation of actions, to ensure these remain
appropriate and aligned to the risks to which they relate;
—
policies and procedures are subject to review and are updated to
align to changes in the underlying control environment; and
—
risk owners remain informed of the risks they are accountable for,
and their key responsibilities with regards to managing these risks.
In addition, and on an ongoing basis, the Board reviews the
effectiveness of the Group’s risk management and internal control
system and continues to:
—
monitor reports from the Executive Team, relating to their assessment
of risks and internal control systems;
—
monitor assurance received from the Executive Team regarding
compliance to relevant policies;
— monitor assurance received on the effectiveness of the Company’s
internal control environment;
— review reports from this Committee, the Internal Audit function and
the external auditor;
— review the Company’s response to incidents and threats, including
those related to cyber security and safety; and
—
review information gathered from the Company’s formal
whistleblowing process where issues relate to financial misconduct.
Where opportunities for improvement were identified, action plans
have been put in place and progress is monitored by the
AuditCommittee.
Going concern and viability statements
Having regard to the net liabilities of £3,629m on the Group’s 2023
balance sheet, we paid particular attention to these assessments. With
consideration to the available information, the Audit Committee confirms
it maintains a reasonable expectation that the Group is able to continue
to meet its liabilities as these fall due, over the five-year period to
31 December 2028�
We reviewed the processes and assumptions underlying the going
concern and viability statements set out on pages 58 and 59,
considering in particular:
— the Group’s forecast funding position over the next five years;
— the forecasts for material subsidiaries making up this position;
—
an analysis of impacts of severe but plausible risk scenarios, ensuring
that these included relevant principal risks;
— the impact of multiple risks occurring simultaneously;
—
additional mitigating actions that could be taken in extreme
circumstances; and
—
the current borrowing facilities in place and the availability of
futurefacilities.
As a result, we are satisfied that the going concern and viability
statements have been prepared on an appropriate basis.
Internal audit
The director of risk and internal audit regularly attends and reports to
the Committee on risk and internal audit matters including:
—
identifying key trends and headline findings from internal audit
reports issued in the period;
—
details of any specific significant findings raised by internal audit
that warrant the Committee’s attention;
— status of agreed actions arising from internal audit work;
— the plan of internal audit work for the following year; and
—
progress against the current year’s internal audit plan and any changes
to the plan.
I meet the director of risk and internal audit regularly throughout the
year to discuss risk matters and the nature of internal audit findings in
more depth. We continue to focus on the nature of issues raised by
internal audit and the timescales to complete the related actions. The
future work plan is risk-based, including risks to both short and longer-
term objectives and balancing focus on principal risk areas and on
business-as-usual transactional activity where controls are understood
to be mature and established. Internal audit also considers the activities
of our second line assurance functions in their approach. We reviewed
the effectiveness of the Group’s internal audit function, including
resources, plans and performance as well as the function’s interaction
with management. Based on the reports and discussion, we are satisfied
that the scope, extent and effectiveness of internal audit work are
appropriate for the Group and that there is an appropriate plan in place
to sustain this. We are also planning an independent review of the
effectiveness of internal audit in 2024.
82
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
AUDIT COMMITTEE REPORT
External audit
PwC were appointed as the Group’s external auditor for the financial
year, commencing on 1 January 2018, following a formal tender process
in 2016. As required by auditor rotation rules, Ian Morrison took over
as lead audit partner for the 2023 audit, replacing Ian Chambers who
was required to rotate after five years. Other key audit partners are
also required to rotate every five years.
The external audit contract will be put out to tender at least every ten
years. Any future audit tenders will be carried out in line with the FRC’s
practice aid for audit committees. The Committee currently expects to
undertake an audit tender during 2026, with a view to a new audit firm,
if there is a change from PwC, being appointed as external auditor for
the financial year commencing 1 January 2028. We believe that this
timing for the audit tender strikes an appropriate balance between
continuity for the current audit firm and consideration of alternative
firms.
Other than the services detailed below, PwC have no other connection
with the Company or its Directors.
During 2023, the Company complied with the relevant provisions of
The Statutory Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014.
2023 audit
The Committee reviewed the quality of the external audit throughout
the year and considered the performance of PwC. This year, to support
this, the Committee members and senior finance personnel have
undertaken an internal evaluation, focusing on a range of factors we
consider relevant to audit quality. The findings from this evaluation and
agreed actions were reviewed and approved by the Committee in
February 2024. Feedback was also received from the auditors on their
performance against their own objectives.
Based on these reviews, the Committee concluded that there had been
appropriate focus and challenge by PwC on the primary areas of the
audit and that they had applied robust challenge and scepticism
throughout the audit. Consequently, the Committee has recommended
to the Board that they be reappointed at the 2024 AGM.
In November 2023, PwC presented its formal audit plan, which
identified its assessment of the key audit risks and the proposed scope
of audit work. Reflecting on findings from the half-year review and the
developments in the Group, we agreed the approach and scope to be
undertaken. Key risks and the audit approach to these risks are discussed
in the Independent Auditor’s Report (pages 196 to 208), which also
highlights the other risks that PwC drew to our attention.
As part of the reporting of the half-year and full-year results, in August
2023 and February 2024 PwC reported to the Committee on its
assessment of the Group’s judgements and estimates in respect of these
risks and the adequacy of the reporting. Where effective to do so, PwC
also reported on its assessment of the Group’s controls.
I meet with the lead partner regularly throughout the year and the
whole Committee has a private meeting with PwC at least once a year.
Non-audit services
To safeguard the auditor’s independence and objectivity, and in
accordance with the FRC’s ethical standard, we do not engage PwC
for any non-audit services, except where it is work that they must, or
are clearly best-suited to, perform. Accordingly, our policy for the
engagement of the auditor to undertake non-audit services broadly
limit these to audit-related services such as reporting to lenders and
grant providers, where there is a requirement by law or regulation to
perform the work. All other non-audit services are considered on a
case-by-case basis in light of the requirements of the ethical standards
and in compliance with our own policy.
Fees paid to PwC are set out in note 7 to the Consolidated Financial
Statements on page 149. All proposed services must be pre-approved
in accordance with the policy which is reviewed and approved annually.
Above defined levels, my approval is also required before PwC is
engaged. We also review the non-audit fees charged by PwC on a
quarterly basis. Our non-audit services policy can be found at
www.rolls-royce.com
Non-audit related fees paid to the auditor during the year were £0.9m
(2022: £1.5m), representing 7% (2022: 11%) of the audit fee. This included
£0.7m (2022: £0.7m) relating to the review of the half-year results. Our
annual review of the external auditor takes into account the nature and
level of all services provided.
Based on our review of the services provided by PwC and discussion
with the lead audit partner, we concluded that neither the nature nor
the scale of the non-audit services gave any concerns regarding the
objectivity or independence of PwC.
Nick Luff
Chair of the Audit Committee
Members Nick Luff (Chair)
George Culmer
Lord Jitesh Gadhia
Beverly Goulet
Biographies are on pages 70 and 71
Remit See page 68
83
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
AUDIT COMMITTEE REPORT
I am pleased to present my second report as Chair of the Committee
and would like to thank my fellow Committee members for their support
during a busy year. I would like to acknowledge the support provided
by Sir Kevin Smith who served on the Committee for seven years prior
to his retirement in May 2023.
This letter outlines the key decisions taken by the Committee during
2023, both in relation to the implementation and review of policy and
to the changes in leadership, with the appointment of Helen McCabe
as Chief Financial Offer and changes across the Executive Team.
Business context for 2023
2023 has witnessed a material improvement in performance levels with
very strong progress made on the Group’s transformation. At the CMD,
Tufan Erginbilgic and the Executive Team presented a clear vision for
Rolls-Royce to become a high performing, competitive, resilient and
growing business. Our ambitious mid-term targets will take Rolls-Royce
significantly beyond any previously achieved level of financial
performance. Achieving our ambition will require intense focus and
rigour from the management team to drive the transformation and
deliver a cultural shift in performance management.
Review of the remuneration policy
To drive focus on urgent restructuring requirements and to navigate
the challenges of setting long-term incentive targets during the
pandemic, in 2021 we implemented a market atypical single incentive
plan that was primarily focused around in-year annual targets with some
trailing long-term targets included for 2022 and 2023. This bespoke
solution, which was supported by our shareholders, was developed to
respond to the specific challenges the Group faced at that time with
the aim of placing more of an emphasis on short-term performance
whilst also motivating and retaining key talent through a phase of
stabilisation and recovery. The structure was specific to the
circumstances at the time and we signalled an intent to review the
arrangements as our circumstances changed.
Return to a market-typical incentive structure
Given the Group has now returned to a more normal operating
environment and we have articulated medium-term commitments, the
Committee believes it is appropriate to return to a more conventional
remuneration structure that will include a separate annual bonus with
mandatory deferral, combined with a market-standard performance
share plan with a three-year performance period plus two year holding
period. We strongly believe that clear, forward-looking, stretching
targets aligned with our medium-term ambition will motivate and align
participants to the Group’s strategy for the benefit of our stakeholders.
We have consulted with our largest shareholders, proxy advisors and
employee groups and are grateful for the feedback and support
provided during this process. The feedback received has consistently
confirmed support for a return to a more conventional incentive
structure, with a focus on stretching long term performance targets
aligned to our transformation, with quantum aligned to typical FTSE
50 levels.
Alignment with mid-term targets
Performance measures in both the annual bonus and the LTIP place
emphasis on cash flow and profit, reinforcing the Group’s stated
ambition to return to investment grade, which in turn will enable the
Group to make appropriate portfolio choices and reintroduce
shareholder payments.
ESG
The Committee is extremely mindful of the Group’s responsibilities in
reducing global carbon emissions. In 2024, there will be a full strategic
review of sustainability, delivering a granular net zero emissions
plan with defined metrics and targets. The Committee envisages
introducing a climate-related performance measure aligned to the
strategic review within the life of the new policy, focusing on a
reduction in Scope 1 + 2 emissions. The 2024 annual bonus scorecard
will continue to be partly assessed against safety, our number one
priority, in addition to employee engagement.
Cascade of remuneration policy
To create alignment between the Executive Directors and senior
management, the revised incentive structure will be cascaded across
the top three management levels of the Group. In doing so,
remuneration will be rebalanced towards the long-term and the clear
three-year financial targets will help foster a high-performance culture
aligned to the objectives of the transformation.
New appointments
During 2023, we were delighted to welcome Helen McCabe as our new
Chief Financial Officer and new appointments across the Executive
Team. The Committee oversaw and approved the remuneration
arrangements for all appointments as well as the exit terms for Panos
Kakoullis and other members of the Executive Team. In the case of
Helen McCabe, the Committee also carefully reviewed the buyout of
share awards forfeited as a result of her resignation from her previous
employment. The incentive plans forfeited included a mix of performance
shares, restricted stock and stock options. The details of Helen’s buyout
are disclosed on page 103. We have also included additional context
for the buyout disclosed last year for Tufan Erginbilgic on pages 102
and 103.
The selection processes for the appointments provided clear insight
to the level of compensation required to recruit experienced talent in
international markets. There has been a lot of external coverage of the
need to ensure that the UK remains a competitive market for executive
recruitment and we would echo the sentiments and issues highlighted
by the capital markets industry taskforce. It is important that UK
packages are globally competitive to allow us to attract and retain
talent within the markets in which we operate.
Remuneration decisions related to 2023
The current remuneration policy was agreed by shareholders at the
AGM in 2021 and was in place for 2023. Key features of the policy can
be found on page 86 and how it operated during 2023 on pages 86
and 87.
Incentive outturn in respect of 2023
The Incentive Plan measures for 2023 were weighted 80% towards
Group performance and 20% towards personal performance. The Group
performance metrics for 2023 originally were intended to represent
an evolution of the policy, transitioning from a 100% focus on
short-term performance in 2021 to a 50:50 split of annual metrics and
cumulative three-year metrics in 2023. The arrangements for Tufan
Erginbilgic and Helen McCabe were structured to ensure that their
outturns only relate to performance in 2023, thus ensuring that they
were rewarded for business performance during their tenure only. The
outturn applicable for Panos Kakoullis’ pro-rated incentive reflects the
blend of annual and three-year cumulative performance metrics.
At Group level, both free cash flow of £1,285m and underlying
operating profit of £1,590m were significantly ahead of the original
KEY AREAS OF FOCUS IN 2023
Development of a revised remuneration policy proposal
and the cascade to the wider workforce in support of the
Group’s transformation
Support for changes to the Executive Team as part of the
Group-wide transformation programme
Determining remuneration for 2023, taking into account
the experience of key stakeholders
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Remuneration Committee report
target and maximum threshold for performance. This is exceptional
performance relative to target and to prior years and rightly reflects
maximum outturns for these elements of the scorecard. New for 2023
was the inclusion of two new strategic measures to incentivise quality
of financial performance. Underlying operating margin performance
of 10.3% was ahead of the level required to trigger maximum payout,
reflecting very significant year-on-year improvement. Operating cost
performance was ahead of target, with this portion vesting at 91% of
maximum.
Non-financial performance metrics for 2023 were also ahead of target.
Our people engagement, measured by our annual engagement survey
delivered by Gallup, showed another year of improvement to achieve
upper quartile status relative to manufacturing peers. We achieved a
5% improvement in participation to reach 80% and an overall score of
3.99, which was marginally above target with 63% of maximum vesting.
Colleague safety performance relative to target was also strong with
this portion vesting at 91% of maximum.
In reviewing incentive outturns, the Committee did consider the
experience of internal and external stakeholder groups, in particular
our employees and shareholders. Our global incentive arrangements
will ensure that our wider workforce benefit from the excellent progress
in 2023 and there has been an extremely positive experience for our
shareholders given the market reactions to our 2023 performance,
strategic review and medium-term guidance. In this context, the
Committee is very pleased to be able to recognise this excellent
performance in an overall outturn of 97% of maximum for Tufan and
90% of maximum for Helen. As referenced above, the measures
applicable for Panos’ pro-rated incentive include cumulative
performance metrics covering the period 2021-2023. For this reason,
Panos’ outturn is 89% of maximum.
All of these awards will be delivered in shares which will be granted in
March 2024, using the share price at that time. As per the approved
remuneration policy, 40% of the shares will be required to be held until
2027 and 60% held until 2028.
Wider workforce context
Global inflationary pressures have continued for our colleagues across
many of our locations worldwide. We also continue to see extremely
competitive talent markets. These factors have required specific reward
interventions to continue in 2023. Since 1 January 2022, we have
delivered base pay increases of 13.4% plus one-off lump sums of £2,000
to the majority of our UK employees (including all of our lowest paid
employees). In 2023, the median base pay increase in the UK was 6.5%,
with an average increase across the UK workforce of 5.8%. In Germany,
a tariff deal covering the period from October 2022 to September 2024
provided an increase of 5.2% from June 2023 and 3.3% from May 2024,
plus two one-off payments of €1,500 each, paid over two years.
In parallel with the remuneration policy review, we have reviewed our
all-employee share plan offering to the wider workforce. We currently
offer tax approved sharesave and sharepurchase plans in the UK and
a cash settled phantom sharesave plan for colleagues outside the UK.
As our multi-year transformation programme delivers improvements in
our business performance, we will invest in a new plan which will allow
more colleagues to share in our success, enabled by affordable share
ownership. Subject to shareholder approval being granted for the new
share plan, we intend to launch this for our people in the second half
of 2024.
Looking ahead – summary implementation of the
remuneration policy in 2024
Salary
The Committee has reviewed the salaries for the Chief Executive and
Chief Financial Officer and has concluded to make an award of 4.5%
for both Tufan Erginbilgic and Helen McCabe effective 1 March 2024.
This is in line with the average increase for the broader UK management
population and reflects prevailing wage inflation for executive roles.
Base pay increases for the wider UK workforce are subject to
negotiation and increases for 2024 have not yet been agreed.
Incentives
As outlined earlier in my letter, subject to shareholder approval, the
Group will be returning to a market-typical annual bonus and a separate
long-term incentive plan (LTIP).
Annual bonus
Subject to approval of the remuneration policy, the maximum annual
bonus for Executive Directors in 2024 will be 200% of salary with 50%
of any payment delivered in shares which will be deferred for threeyears.
The 2024 annual bonus measures and weightings will be the same as
operated in the 2023 combined incentive plan. These measures include:
free cash flow (40%); operating profit (20%); and strategic objectives
which are split equally between operating cost (15%); operating profit
margin (15%); and people (10%), which includes health and safety and
employee engagement�
Long-term incentive
Subject to approval of the remuneration policy, the LTIP award will be
375% of salary for the Chief Executive and 275% for the Chief Financial
Officer. Following the three-year performance period, any vest will be
subject to a mandatory two-year holding period. The proposed LTIP
measures include free cash flow (30%), operating profit margin (30%),
return on capital (10%) and relative TSR (30%) assessed in equal parts
against the FTSE 100 and the S&P Global Industrials index constituents.
Remuneration Committee advisers
During 2023, the Committee had access to advice from WTW. Total
fees for the advice provided to the Committee during the year by WTW
were £174,500 (2022: £108,200). Fees are based on a time and
materials basis. WTW also provided human capital and benefits services
to the Group. No Directors have a connection to WTW.
The Committee requests that WTW attend meetings periodically
during the year. The Committee is exclusively responsible for reviewing,
selecting and appointing its advisers and is satisfied that the advice it
has received has been objective and independent and that there is no
conflict of interest associated with any advice provided. WTW is a
member of the remuneration consulting group and, as such,
voluntarily operates under the code of conduct in relation to executive
remuneration consulting in the UK.
Summary
I have been delighted with the progress that is being made on the
transformation programme and am excited about the role that the
Committee has to reinforce the performance culture that we are
striving for.
I would like to reiterate my appreciation to those shareholders who
provided feedback to our policy proposals and I look forward to your
support at the forthcoming AGM.
Lord Jitesh Gadhia
Chair of the Remuneration Committee
Members Lord Jitesh Gadhia (Chair)
George Culmer
Beverly Goulet
Biographies are on pages 70 and 71
Remit See page 68
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Executive Directors summary policy and implementation table 2023
Base salary
Purpose and link
to strategy
To attract and retain individuals of the right calibre to develop and execute the business strategy.
Key features of
current policy
Salaries are reviewed annually but not necessarily increased. Decisions on salary are informed but not led by
reference to companies of a similar size, complexity and international reach.
30% of salary for the Chief Executive and 20% for the Chief Financial Officer is delivered in deferred shares.
Implementation in 2023
The Chief Executive joined the Group on 1 January 2023, with a base salary of £1.25m, and the Chief Financial Officer
joined the Group on 1 August 2023, with a base salary of £725,000. Salaries for both remained unchanged
throughout 2023.
A salary increase of 4% was awarded to Panos Kakoullis effective 1 March 2023. This increase was in line with the
average increase for the UK management population and lower than the average increase for wider workforce.
Throughout 2023, 30% of salary for the Chief Executive and 20% for the Chief Financial Officers who served
during the year was deferred into shares for two years.
Benefits
Purpose and link
to strategy
To attract and retain individuals of the right calibre to develop and execute the business strategy.
Key features of
current policy
Benefits may include car allowance and related costs, financial planning assistance, private medical insurance,
life assurance and other appropriate benefits at the discretion of the Committee.
Implementation in 2023
No changes to benefits.
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Remuneration at a glance
This section provides a summary of the current remuneration policy and its implementation that was approved by a binding shareholder vote at
the 2021 AGM (see page 110). The full policy can be found at www.rolls-royce.com
Details of a revised policy, which will be taken to the AGM in May 2024 for a binding shareholder vote, can be found on pages 88 to 98.
Summary of our current remuneration policy
Fixed pay
Variable pay
Malus and clawback – incentive awards are subject to malus and clawback provisions where there has been a material
misstatement of audited results; serious financial irregularity; material financial downturn or an event causing a material
negative impact on the value of the Group; material failure of risk management; a serious breach of Our Code; individual
misconduct or actions that materially damage the Group; a breach of or inadequate response to a significant HSE or other
environmental issue; failure to adequately manage/supervise others which in turn led to one of the above triggers; and/
or materially incorrect calculation of an award. For awards issued under the Incentive Plan these provisions apply from
the start of the performance period to three years after date of grant or the settlement date, if later.
Shareholding requirement – in line with the Rolls-Royce shareholding requirements policy, Executive Directors are required
to establish and maintain a level of share ownership in proportion to a percentage of base salary. The shareholding
requirement is 400% for the Chief Executive and 300% for the Chief Financial Of ficer. Executive Directors are also required
to retain the lower of their shareholding requirement or their actual shareholding at the date of leaving for 12 months after
leaving and then half of that amount for the following 12 months.
Base salary
Benefits
Pension
Incentive Plan
Annual financial metrics
2023 – profit, cash, operating
cost, operating profit margin
Annual non-financial
metric: people –
engagement and safety
Goals and
leadership
behaviours
All awards to be made at the end of the performance period in shares, 40%
settled after three years and 60% after four years
80% Group performance
20% personal
performance
Long-term metrics set in 2021
– cumulative cash (three-year),
TSR, CO
2
sustainability
Executive Directors summary policy and implementation table 2023 continued
Retirement allowance
Purpose and link
to strategy
To attract and retain individuals of the right calibre to develop and execute the business strategy.
Key features of
current policy
Executive Directors are offered membership of a defined contribution plan. A cash allowance may be payable
in lieu of pension contributions.
The maximum contribution is 12% of base salary only, in line with the rate offered to the wider UK workforce.
Implementation in 2023
Contribution/allowance of 12%, in line with the rate for the wider UK workforce.
Incentive plan
Purpose and link
to strategy
To incentivise the execution of the business strategy, delivery of financial targets and the achievement of
personal objectives.
Key features of
current policy
Maximum opportunity is 385% (220% target) for the Chief Executive and 333% (190% target) for the Chief
Financial Officer.
Targets are set based on Group financial performance and individual performance and may include both annual
and long-term metrics. Non-financial metrics may also be included.
All of the incentive is deferred into shares, 40% for three years and 60% for four years.
The Committee may apply discretion to any formulaic outturn.
The Incentive Plan is subject to malus and clawback.
Implementation in 2023
For 2023, the Incentive Plan metrics were based on in-year performance only for Tufan Erginbilgic and
HelenMcCabe, ensuring that they were measured on business performance during their tenure. The Incentive Plan
metrics for Panos Kakoullis and the wider leadership team were based on a combination of annual and
longer-term targets.
An outturn of 170% of target, 97% of maximum for Tufan Erginbilgic; 157% of target, 90% of maximum for Helen
McCabe, and 156% of target, 89% of maximum for Panos Kakoullis. All deferred into shares, 40% held for three
years and 60% for four years.
The award for Panos Kakoullis was pro-rated to reflect his employment during the performance period. Further
details of the exit arrangements for Panos can be found on page 103.
Shareholding requirement
Purpose and link
to strategy
To align the interests of Executive Directors to those of shareholders by requiring Executive Directors to build a
high level of personal shareholding in the Company during their employment and for a specified post-employment
holding period.
Key features of
current policy
Under the 2021 policy, the shareholding requirement for the Chief Executive was 250% and for the Chief Financial
Officer was 200%.
Upon appointment, the shareholding requirement was increased to 400% for Tufan Erginbilgic and 300% for
Helen McCabe.
Executive Directors are required to retain the lower of their actual shareholding at the date of leaving for 12 months
after leaving and then half of that amount for the following 12 months.
Planned implementation
in 2023
Shareholdings as a % of salary as at 31 December 2023:
Chief Executive – 877%
Chief Financial Officer – 285%
Alignment with shareholders
The current policy was designed to ensure alignment with shareholders through a significant part of the overall reward package being delivered
in shares with long holding periods.
Under the current policy, 30% of salary for the Chief Executive and 20% for the Chief Financial Officer is deferred into shares for two years.
Allincentive awards are delivered in shares in the March following the performance year, 40% held for three years and 60% for four years.
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Introduction
The policy will take effect from immediately after the AGM to be held on 23 May 2024, subject to shareholder approval.
Key policy themes
At the 2021 Annual General Meeting, shareholders approved a new remuneration policy which was put in place as a direct response to the impact
that the pandemic had on the aerospace sector, which in turn had a profound impact on the Group. The 2021 policy reflected the urgency of
the challenges faced at the time and was designed to incentivise restoration of the balance sheet and the reduction of net debt. The main features
of the policy were a combined incentive plan which focused initially on short-term financial metrics, with longer-term metrics added in year two
and three of the policy. Given the rights issue in 2020, the policy was also designed to heavily align the interests of the Executive Directors with
the interests of shareholders, with all of the incentive plan awards delivered in deferred shares and 30% of salary for the Chief Executive and
20% for the Chief Financial Officer also delivered in deferred shares. The existing policy was considered by the Committee to be a temporary
intervention and always considered that a return to a more market-standard arrangement would happen when the Group returned to a more
normal operating environment.
Since 2021, both the external and internal environment have changed significantly, with engine flying hours recovering and Rolls-Royce
delivering a strong financial performance in 2023. The 2023 strategic review has culminated in a granular strategy which Tufan Erginbilgic set
out at the CMD with a clear proposition to shareholders (see page 10).
The proposed remuneration policy has been developed by the Committee with the shareholder proposition central to decision making.
The Committee have also focused on the following key themes:
— Talent attraction and retention – Ensure we have the right talent in our organisation to deliver the strategic priorities. We are proposing to
transition from the bespoke single incentive which is heavily weighted to annual targets to a more market-standard annual bonus and LTIP
structure, with a market-aligned maximum opportunity and market standard delivery of cash versus shares. This plan will cascade to the
Executive Team and senior management. The simplicity of the plan, combined with competitive quantum and metrics which are directly aligned
to our mid-term targets, will help with talent attraction and retention.
— Behaviours and cultural change – The Committee has considered the need for the remuneration policy to align with the Group’s values and
behaviours, as well as to support the creation of a performance culture. In relation to performance culture, the Committee focused on:
enterprise thinking; driving both cost and growth; commercial optimisation; and a culture where year-on-year improvement is normalised. The
Committee has ensured that the structure of the incentive scheme, in addition to the metrics used, reinforces the strategic priorities and the
cultural change required to deliver this and, in particular, enables a cascade through to individual objectives throughout the organisation.
— Alignment with the mid-term targets – Metrics in both the annual bonus and the LTIP place emphasis on cash flow and profit, reinforcing the
Group’s stated ambition to return to investment grade, which in turn will enable the Group to make appropriate portfolio choices and to
reintroduce shareholder payments.
— ESG – A full strategic review of sustainability will be carried out in 2024, delivering a granular net zero emissions plans with defined metrics
and targets. The Committee envisage introducing a climate related performance measure aligned to the strategic review within the life of the
new policy, focusing on a reduction in Scope 1 + 2 emissions. The annual bonus will continue to have metrics aligned to safety, which is our
number one priority, as well as employee engagement.
— Ensuring alignment between Executive Directors and the wider organisation – Our policy will cascade throughout the organisation and all
employees are rewarded for delivery and execution of our strategy.
Changes to policy design
When considering how we transition away from the previous bespoke policy the Committee explored various incentive structure designs,
including value creation/absolute return structures, as well as the more market standard structures. There was a strong consensus among the
Committee that moving to a market conventional structure with a separate annual bonus and market typical LTIP for the next policy period would
be the preferred option.
The Committee unanimously agreed that given the proposal to move to a market-standard annual bonus and LTIP structure, we should also align
to a market standard quantum. The selection and appointment process undertaken in 2023 in respect of the various changes to the Executive
Team gave the Committee a good insight into the competitive level of reward for our key talent markets. A benchmarking review was
commissioned against several peer groups, including the FTSE 100 and the FTSE 50, both excluding financial services; a European Industrials
Index; and a US Industrials bespoke group. Although Rolls-Royce competes in an international industrial talent market, the Committee believes
that having a primary benchmarking perspective around the UK market is important given the UK headquarters and listing. Given this
perspective and also that Rolls-Royce is firmly positioned in the FTSE 50, the Committee propose to align incentives for Executive Directors to
the FTSE 50 market median.
The Committee believes that the proposed policy supports alignment with shareholder interests and enables metrics to be set that are
strategically aligned and linked directly to the financial commitments set out at the CMD. A description and explanation of all significant changes
from the policy approved in 2021 are set out below.
No Executive Director or Executive Team member was present during discussion of his or her own remuneration package and they were not
involved in the final approval of the new remuneration policy design.
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Remuneration policy
Annual bonus
The bonus may be based on a combination of financial, operational and individual metrics which the Committee will review on an annual basis,
with the weightings and allocation between financial and non-financial depending on the strategic focus of the Group from year-to-year. At least
50% of the annual bonus targets will be financial.
In 2024, the metrics will remain the same as the annual metrics used in the 2023 single incentive plan, free cash flow (40%); operating profit
(20%); strategic objectives, split equally between operating cost and operating profit margin (30%); and people (10%).
The target annual bonus for Executive Directors is proposed to be 100% of salary, with a maximum of 200% of salary. 50% of any payment will
be delivered in shares which will be deferred for three years. This is in contrast to the previous policy where the entire combined incentive was
delivered in shares, with 40% held for three years and 60% for four years.
LTIP
The Committee determines performance targets each year to ensure that the targets are stretching and support value creation for shareholders
while remaining motivational for management. The precise metrics and weightings will be determined by the Committee on an annual basis and
will depend on the strategic focus of the Group year-to-year. The LTIP performance period will be three-years, followed by a two-year
holding period.
Measures for the 2024 award include free cash flow (30%); profit margin (30%); relative total shareholder return (30%); and return on
capital (10%).
The maximum potential award under the LTIP will be 375% of salary for the Chief Executive and 275% of salary for the Chief Financial Officer.
Increase in incentive opportunity
The maximum incentive opportunity when the annual bonus and LTIP plans are combined will be 575% of salary for the Chief Executive and 475%
of salary for the Chief Financial Officer. This compares to a maximum opportunity under the previous policy of 385% of base salary for the Chief
Executive and 333% of base salary for the Chief Financial Officer. This is a significant increase in quantum when compared to the previous
policy but the Committee is comfortable that, given the peer group review and the significant change in the internal and external landscape
since 2021, that the maximum opportunity is proportionate and fair.
Minimum shareholding requirement
The minimum shareholding requirement under the previous policy was 250% for the Chief Executive and 200% for the Chief Financial Officer.
On appointment, the minimum shareholding requirement changed to 400% of salary for the Chief Executive and 300% of salary for the Chief
Financial Officer and it is proposed that this continues into the new policy period.
Removal of deferral of salary into shares
Under the previous policy 30% of the Chief Executive’s salary and 20% of other Executive Directors’ salary was delivered in shares which were
then deferred for two years. Under the proposed policy, salary will be delivered entirely in cash.
Consideration of shareholder feedback
During the policy review, we have consulted with our largest shareholders and the proxy agencies to provide context for the proposed new
policy and gain feedback on how it could be improved. We have been pleased that the feedback that we have received has been positive, with
shareholders understanding the rationale to return to more market-standard incentives and quantum broadly aligned to FTSE 50 levels. The
overall feedback from this consultation was:
— support for transitioning to a market standard incentive structure;
— the increase in quantum was noted but was not called out as a concern so long as incentive metrics were stretching, aligned to strategy and
reward true business performance;
— mixed views on the inclusion of relative TSR in the LTIP metrics, with some investors preferring the use of absolute rather than relative TSR;
— the use of profit and cashflow in both the annual bonus and the LTIP was noted but not highlighted as a concern due to these being central
to the shareholder proposition outlined on page 10; and
— support for the measured approach proposed in relation to the introduction of a CO
2
metric, with investors expressing views that strategic
alignment of metrics is of upmost importance.
These views have been considered in the final policy design for 2024.
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Remuneration policy table
The table below sets out each element of Executive Directors’ remuneration.
Base salary
Purpose and link
to strategy
We provide competitive salaries to attract and retain individuals of the highest calibre to develop and execute the
business strategy.
Operation
Salaries are reviewed annually but not necessarily increased. Decisions on salary are informed but not led by
reference to:
— companies of a similar size, complexity and international reach;
— size and scope of the role;
— skills and experience of the individual;
— market competitiveness of the broader remuneration package;
— performance of the Group and individual;
— wider market and economic conditions; and
— increases made across the Group.
The Committee has the flexibility to set the salary of a new hire at a discount to the market and to realign it in
subsequent years as the individual gains experience in the role. In exceptional circumstances, the Committee may
agree to pay above market levels to secure or retain an individual who is considered by the Committee to possess
significant and relevant experience that is critical to the delivery of the Group’s strategy.
No recovery or withholding applies.
Maximum opportunity There is no formal maximum. Any salary increases will be assessed annually and will not normally exceed average
increases for employees in other appropriate parts of the Group. Where the Committee considers it necessary or
appropriate, larger increases may be awarded in individual circumstances, including but not limited to: where there
is a significant change in the scale, scope or responsibility of a role; where the organisation has undergone
significant change; development within a role; and/or significant market movement.
Performance measures Not applicable, although overall individual and business performance is considered when setting and reviewing
base salary.
Benefits
Purpose and link
to strategy
We provide competitive benefits suitable to attract and retain individuals of the right calibre to develop and
execute the business strategy and support wellbeing.
Operation A range of benefits may be provided including, but not limited to, provision of a company car or car allowance,
financial planning and tax assistance, private medical insurance, life assurance and other appropriate benefits at
the discretion of the Committee.
Relocation support or support for accommodation and travel may be offered to executives where necessary.
Executive Directors may participate in all-employee share plans including ShareSave and the Share Incentive Plan.
No recovery or withholding applies.
Maximum opportunity There is no formal maximum. The cost of benefits is not pre-determined reflecting the need to allow for increases
associated with the provision of benefits. Benefit costs are reviewed regularly to ensure they remain cost-effective.
Participation in any tax advantaged share schemes is capped at the same level as other participants which is
determined by the Group within the bounds of any applicable legislation which may change from time to time.
Performance measures Not applicable�
Retirement
Purpose and link
to strategy
We provide a competitive retirement savings plan suitable to attract and retain individuals of the right calibre to
develop and execute the business strategy.
Operation Executive Directors are offered membership of a retirement savings plan. A cash allowance may be payable in lieu
of contributions to the plan.
In certain jurisdictions it may be more appropriate to offer more bespoke pension arrangements. The Committee
will give due consideration to local employment legislation, market practices and the cost of the plan.
Maximum opportunity The maximum employer contribution for the Executive Directors is aligned with that made available to the wider
workforce, being 12% of base salary.
Performance measures Not applicable�
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Remuneration policy table continued
Annual bonus
Purpose and link
to strategy
We reward annual performance against stretching financial, strategic and individual targets aligned to delivery of
the Group’s strategy.
Mandatory deferral reinforces retention and enhances alignment with shareholders by encouraging longer-term
focus and sustainable performance.
Operation The Group operates an annual bonus scheme which may be based on a combination of financial, operational or
individual performance measures aligned to the Group’s strategy.
At least half the bonus awarded in any year will be deferred into shares, normally for a period of three years. The
Committee has discretion to permit a dividend equivalent amount to accrue on shares delivered under the deferred
bonus arrangement. Vesting of deferred shares is dependent on continued employment or good leaver status, as
described in the notes to the policy table on page 93.
The Committee retains the discretion, acting fairly and reasonably, to alter the bonus outcome in light of the
underlying performance of the Group, taking account of any factors it considers relevant. Clawback will apply to
cash bonuses paid and to any deferred shares within the three-year deferral period.
Maximum opportunity The maximum annual bonus opportunity for the Executive Directors is 200% of base salary.
Performance measures The bonus may be based on a combination of financial, operational and individual measures which the Committee
will review on an annual basis. The precise allocation between financial and non-financial measures, as well as
weightings within these metrics, will depend on the strategic focus of the Group from year-to-year. At least 50%
of the performance measures will be financial.
Up to 25% of the maximum bonus opportunity is paid for achieving a threshold level of performance and the
maximum bonus is paid for delivering stretching levels of business performance and outstanding personal
performance. No bonus is payable if threshold levels of performance are not achieved.
Long-term incentive plan
Purpose and link
to strategy
We incentivise the execution of strategy, drives long-term value creation and alignment with long term returns
toshareholders.
Operation Awards under the LTIP are conditional rights to receive shares subject to continued employment or good leaver
status and the achievement of any relevant performance conditions.
Awards are subject to performance targets normally assessed over three year financial years. The number of shares
will be adjusted to reflect performance on the third anniversary of the grant, and the shares will vest on the five
year anniversary of the grant, after a two year holding period. The Committee has discretion to set different
performance periods if it considers it appropriate.
The Committee shall determine the extent to which the performance measures have been met. The Committee may
make adjustments to performance targets if an event occurs or circumstances arise which causes the Committee
to determine that performance conditions are no longer appropriate. The performance targets will be at least as
challenging as the ones originally set.
The Committee has discretion to permit a dividend equivalent amount to accrue on shares during the holding
period under the LTIP. Awards under the LTIP are subject to the malus and clawback policy which takes account
of exceptional and adverse circumstances as described in the notes to the policy table.
The Committee has the ability to exercise discretion in adjusting the formulaic outcome of incentives to ensure the
outcome is reflective of the performance of the Group and the individual over the performance period.
Maximum opportunity The maximum long-term incentive award for Executive Directors is 375% of base salary.
Performance measures The Committee determines performance measures each year and will ensure that the targets are stretching and
support value creation for shareholders whilst remaining motivational for management. The precise measures and
weightings will be determined by the Committee on an annual basis and will depend on the strategic focus of the
Group year-to-year. A minimum of 90% of measures will be financial.
Measures for the 2024 award include free cash flow (30%); operating margin % (30%); relative total shareholder
return (30%); and return on capital % (10%). For each performance element, achievement of the threshold
performance level will result in no more than 20% of the maximum award paying out. For achievement of the
maximum performance level, 100% of the maximum pays out. Normally, there is straight-line vesting between these
points. No amount is payable if threshold levels of performance are not achieved
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Remuneration policy table continued
Share ownership
Purpose and link
to strategy
Ensures alignment with shareholders’ interests.
Operation
Executive Directors are required to build a holding of beneficially-owned shares equivalent in value to a
percentage of their base salary. For the Chief Executive this requirement is 400% of salary and for the Chief
Financial Officer and any other Executive Directors this requirement is 300% of base salary. Where requirements
are not met, Executive Directors must retain at least one half of after-tax shares released from the legacy single
Incentive Plan, the deferred bonus arrangements and the LTIP until this requirement is met.
Post-cessation, Executive Directors are normally required to retain the lower of: the shareholding requirement or
their actual shareholding at leaving date for 12 months and then 50% of that amount for the following 12 months.
Maximum opportunity Not applicable�
Performance measures Not applicable�
The table below sets out the main elements of Non-Executive Directors’ remuneration.
Fees
Purpose and link
to strategy
To reward individuals for fulfilling their role and attract individuals of the skills and calibre required.
Operation The Committee makes recommendations to the Board on the Chair’s remuneration. The Chair and the Executive
Directors determine the remuneration of the Non-Executive Directors.
The fees for Non-Executive Directors are set at a level which is considered appropriate to attract individuals with
the necessary skills and experience. Fees are periodically reviewed to ensure they remain appropriate in the
context of: the role scope; company size, complexity and global breadth; and wider market conditions.
The Chair is normally paid a single fee which reflects the commitment, demands and responsibility of the role and
may be paid in either or cash, shares, or a combination of both.
Other Non-Executive Directors are normally paid a base fee and additional fees for Board Committee chairmanship
and membership responsibilities. The Senior Independent Director and Employee Champion receive an additional
fee for these additional duties. Non-Executive Director fees may be paid in either or cash, shares or a combination
of both.
Non-Executive Directors are not eligible to participate in the annual bonus or LTIP.
Maximum opportunity
The current limit on the aggregate fees is set out in the Articles of Association which may be amended by a
shareholder vote.
Performance measures Not applicable�
Benefits
Purpose and link
to strategy
To reimburse Non-Executive Directors for reasonable expenses incurred fulfilling the duties of their role.
Operation
Reimbursement for expenses that may include but not limited to: travel, hotel and subsistence incurred when
attending meetings. The Group may provide support with tax matters for Non-Executive Directors based outside
the UK. The Chair may have occasional use of chauffeur services. The Group may pay tax on benefits provided to
Non-Executive Directors.
Maximum opportunity Not applicable�
Performance measures Not applicable�
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Remuneration policy – worked examples for 2024
The tables below provide an illustration of what could be received by each Executive Director for the 2024 performance year, assuming minimum,
on-target, and maximum levels of performance. The maximum with share price increase scenario shows the impact of a 50% share price growth
on the LTIP shares.
Tufan Erginbilgic
Chief Executive £000
Helen McCabe
Chief Financial Officer £000
100%
26% 23%
17% 29% 54%
13% 23% 43% 21%
51%
£1,493
£5,738
£9,004
£11,453
Minimum
On-target
Maximum
Maximum
assuming
50% increase
in share price
100%
30% 26%
20% 34% 47%
16% 27% 38% 19%
43%
£879
£2,886
£4,477
£5,519
Minimum
On-target
Maximum
Maximum
assuming
50% increase
in share price
Fixed pay Annual bonus LTIP Share price increase
Minimum Fixed remuneration (salary, retirement, benefits)
On-target Fixed remuneration, on-target annual bonus (equivalent to 100% of salary for both the Chief Executive and Chief Financial Officer)
and 60% vesting of the LTIP (equivalent to 225% for the Chief Executive and 165% for the Chief Financial Officer)
Maximum Fixed remuneration, maximum annual bonus (equivalent to 200% of salary for both the Chief Executive and Chief Financial Officer)
and 100% vesting of the LTIP (equivalent to 375% for the Chief Executive and 275% for the Chief Financial Officer)
Maximum assuming 50%
increase in share price
All elements the same as the maximum but assumes a 50% increase in the share price from the date that the shares are granted
Alignment with shareholders
The table below illustrates how the policy aligns the interests of Executive Directors with the long-term interests of shareholders. A significant
portion of the total compensation package will be delivered in shares. 50% of the annual bonus will be deferred into shares for a period of three-
years and the long-term incentive plan will have a three-year performance period followed by a two-year holding period.
Year 5Year 4Year 3Year 2Year 1
One year performance
period. 50% in cash
50% in shares deferred for three years.
No further performance conditions attached to the award
Three-year performance period Two-year holding period
Annual bonus
LTIP
Fixed pay
(salary and bene�ts)
Notes to the policy table
Performance measure selection and setting
The annual bonus measures are determined annually to reflect matters which the Committee considers to be areas of specific focus for the
Executive Directors over the short term. The Committee believes that using a number of measures provides a balanced incentive. The measures
themselves are aligned to, and are designed to support the delivery of, the Group’s strategic objectives.
The Committee sets performance conditions relating to the LTIP awards which are designed to align the interests of management and
shareholders, incentivise management to deliver the Group’s strategic objectives and reward performance over the longer term.
Targets for the annual bonus and performance measures for the LTIP awards are reviewed before the awards are made, based on a number of
internal and external reference points, including strategic plans and analyst consensus, to reflect market expectations, where available. The
Committee intends that the targets will be stretching and will align management’s interests with those of shareholders. The measurement of
performance is at the Committee’s discretion, which may include appropriate adjustments to financial or non-financial elements and/or
consideration of overall performance in the round. Adjustments may be either upwards or downwards.
In exceptional circumstances, performance conditions may also be replaced or varied if an event occurs or circumstances arise which cause the
Committee to determine that the performance conditions have ceased to be appropriate.
Malus and clawback provisions
A malus provision applies to awards granted under the LTIP and to unvested awards under the Incentive Plan which were granted under the
previous policy, to new awards granted under the proposed policy, and the mandatory bonus deferral arrangements. This would allow the
Committee, in its absolute discretion, to determine, at any time prior to the vesting of an award, to reduce or cancel the award in certain
circumstances, including:
— a material misstatement of audited results;
— serious financial irregularity;
— material financial downturn or an event causing a material negative impact on the value of the Group;
— material failure of risk management;
— a serious breach of Our Code;
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— individual misconduct or actions that materially damage the Group;
— acting in a way which has materially damaged the reputation of the Group or any member of the Group;
— a breach of or inadequate response to a significant HSE or other environmental issue;
— materially incorrect calculation of an award; and/or
—
failure to adequately manage/supervise others which in turn led to one of the above triggers and/or materially incorrect calculation of
an award.
A clawback provision applies to vested awards granted under the LTIP, the mandatory bonus deferral arrangements and deferred shares granted
under the Incentive Plan, as well as annual bonuses paid previously. This would allow the Committee, in its absolute discretion, to claw back from
individuals some or all of the vested awards or paid bonus in the circumstances described above.
These provisions apply from the start of the performance period to three years after date of grant or the settlement date, if later.
Policy on new appointments
The Committee will appoint new Executive Directors with a package that is in line with the remuneration policy. Base salary may be set at a higher
or lower level than the previous incumbent. The maximum incentive opportunity on appointment will be no higher than the maximum of the
shareholder approved remuneration policy, which is 200% of the annual bonus and 375% for the LTIP.
Remuneration forfeited on resignation from a previous employer may be compensated. This will be considered on a case-by-case basis and may
comprise cash or shares. In general:
— if such remuneration was in the form of shares, compensation will be in the Company’s shares;
— if remuneration was subject to achievement of performance conditions, compensation will, where possible, be subject to performance (either
Rolls-Royce performance conditions or actual/forecast performance outturns from the previous company); and
— the timing of any compensation will, where practicable, match the vesting schedule of the remuneration forfeited.
Legacy terms for internal appointments may be honoured, including any outstanding incentive awards. If an Executive Director is appointed
following a merger or an acquisition of a company by Rolls-Royce, legacy terms and conditions may be honoured.
Where an Executive Director is required to relocate from their home location to take up their role, the Committee may provide reasonable
relocation assistance and other allowances including expatriate assistance. Global relocation support and any associated costs or benefits
(including but not limited to housing, school fees, tax preparation and filing assistance and flights back to the home country) may also be provided
if business needs require it. Should the Executive’s employment be terminated without cause by the Group, repatriation costs may be met by
the Group.
The Company may agree to pay the reasonable legal fees incurred by a new appointee for advice received in relation to his/her contract of
employment or service agreement.
Wider workforce considerations
The Committee has responsibility for overseeing pay arrangements of all our people and reviews broader workforce policies and practices in
order to support decisions on executive pay. When setting remuneration for Executive Directors and senior management, the Committee
carefully considers wider remuneration across the Group, including salary increases, bonus awards, share plan participation and pay ratios
between Executive Directors and employees.
Paying our people fairly relative to their role, skills, experience and contribution is central to our approach to remuneration. The Group’s reward
framework and policies fundamentally support this. The remuneration policy for senior executives and other employees is determined based on
similar principles to Executive Directors. For roles below the Board, the exact structure and balance are tailored based on various factors
including the scale, scope or responsibility of the role, development within the role and local market practice.
We drive alignment through the organisation with our incentives and our all-employee share plans. The annual bonus plan metrics cascade from
Executive Directors to the vast majority of our wider workforce and our LTIP plan cascades to a large proportion of our global management
population as well as our key talent groups (c. 12% of the global workforce). This drives alignment of organisational and individual objectives,
ensuring that the wider workforce is driving the key metrics which will help us to continue to deliver a step change in our performance and
enable future strategy.
The Committee is supportive of providing all employees with the opportunity to become shareholders, again aligning the interests of the wider
workforce, the Executive Directors and our shareholders. In 2024, we are implementing a new all-employee share plan, moving from a ShareSave
plan which is cash settled outside of the UK, to a global purchase plan where the Company has the opportunity to match personal investment
up to a certain value each month. Our new plan will enable share ownership from the outset, driving engagement with business and share price
performance and reinforcing the message that we all benefit if the business succeeds.
Input on the new remuneration policy was sought from employee groups at all levels within the organisation, including the European works
council and representatives of our global management population. Input was received by both face-to-face and virtual meetings. We shared
how reward packages for Executive Directors are typically structured and received input on appropriate performance measures to determine
pay outcomes and how incentive structures should cascade to the wider organisation.
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Share plans
The Committee retains a number of discretions consistent with the relevant share plan rules. For example, in the event of any variation in the
share capital of the Company, a demerger, special dividend, distribution or any other transaction which will materially affect the value of shares,
the Committee may make an adjustment to the number or class of shares subject to awards.
The treatment of leavers in our ShareSave and Share Incentive Plan is covered by the respective plan rules. Change of control provisions in
respect of employee share plans are set out below.
Service contracts
A summary of the key elements of the Executive Directors’ service agreements as they relate to remuneration are as follows:
Contract duration No fixed term.
Notice period 12 months’ notice (both to and from the Executive Director).
Payment in lieu of
notice (PILON)
Employment can be terminated with immediate effect by undertaking to make a PILON comprising base salary,
pension contributions or allowance, car allowance and a sum representing the cost of private medical insurance.
The Company may elect to provide private medical insurance and/or to allow an Executive Director to retain his or
her company car through the notice period (or the balance of it) as an alternative to making cash payments.
The Company is entitled to make the PILON on a phased basis, subject to mitigation, so that any outstanding
payment(s) would be reduced or stopped if alternative employment is obtained.
Change of control If there is a change of control of the Company (or other specified Company events), the relevant plan rules contain
details on the impact for awards. In most cases, this is likely to result in the awards vesting early but subject to still
meeting any applicable performance conditions (as decided by the Committee, who may have regard to projected
performance over the whole period) and applying time pro-rating. Alternatively, awards may be exchanged for new
awards over shares in the acquiring company in some circumstances.
Other entitlements
on termination
There is no contractual entitlement to notice or any other payments in respect of the period after cessation of
employment if the individual is summarily dismissed.
Please see payments for loss of office below for a summary of other entitlements which may be due upon
termination (and which relate to remuneration).
Payments for loss of office
The Company’s policy on payments for loss of office is as follows:
The relevant share plan rules govern the treatment of in-flight share awards when an Executive Director leaves. The table below summarises
leaver provisions for good leavers.
Good leavers are those who have left the Group due to death; ill-health, injury or disability; redundancy; retirement with the agreement of the
Group; the sale or transfer of the business in which the Executive Director is employed to a Company which is not a member of the Group; the
participant’s employing company ceasing to be a member of the Group; and other such circumstances approved by the Committee.
All awards will normally lapse if an individual leaves the Company for any reason other than a good leaver reason.
The Committee will not exercise discretion where a participant is dismissed for gross misconduct.
Component Approach
Annual bonus
Individuals who are determined by the Committee to be good leavers may be considered for an annual bonus in
relation to the year in which their active employment ceases.
When deciding whether to exercise its discretion to allow a payment in respect of an annual bonus (and, if so, its
amount and the terms on which it may be paid), the Committee will consider such factors as it considers to be
appropriate, including performance against bonus targets, the performance of the individual and the Group in
general and the circumstances in which the individual is leaving office. Any payment to a good leaver in respect of
an annual bonus will typically be made at the same time as annual bonuses are paid to other employees. Clawback
will continue to apply to the cash element of any payment made in respect of an annual bonus. The Committee will
determine if it is appropriate in the particular circumstances to apply bonus deferral.
Deferred shares allocated in part satisfaction of annual bonuses shall vest in full on the vesting date if an individual
is determined by the Committee to be a good leaver unless the Committee, in its absolute discretion, determines
that an award will vest on such earlier date on or following the date of such cessation as it may specify. Otherwise,
they will lapse on exit.
LTIP If an individual is determined by the Committee to be a good leaver, LTIP awards will normally continue to vest on
the original vesting date and any holding period will normally still apply (subject to the satisfaction of performance
conditions and unless the Committee exercised its discretion to waive time pro-rating, time-pro-rating which will
apply to reflect the period worked). If an individual leaves during the holding period for any reason (except summary
dismissal) the award will not lapse or be pro-rated for time but the holding period will normally remain in force.
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Component Approach
SIP and SAYE
schemes
The Executive Directors are subject to the same leaver provisions as all other participants, as prescribed by the rules
of the relevant scheme or plan.
Legacy commitments
Any remuneration payments and/or payments for loss of office made under legacy arrangements prior to the approval of the remuneration
policy may be paid out subject to the terms of the remuneration policy in place at the time they were agreed. For these purposes, payments
include satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment will be agreed at the time
the award is granted. Unvested incentive plan awards issued under the previous policy, along with any salary that was deferred into shares, will
vest on the usual vesting dates, consistent with the terms of that policy. LTIPs granted under previous policies remain in place, consistent with
the terms of that policy.
Minor amendments
The Committee may make minor amendments to the policy (for regulatory, exchange control, tax or administrative purposes or to take account
of a change in legislation) without obtaining shareholder approval.
Provision 40, section 41 disclosures
When developing the proposed remuneration policy and considering its implementation, the Committee was mindful of the Code and considers
that the executive remuneration framework appropriately addresses the following factors:
Clarity
We provide open and transparent disclosures regarding our Executive remuneration arrangements. We have
explained the changes to our proposed remuneration policy in a way that highlights alignment to both our vision
and strategy as well as the provisions of the Code.
Simplicity
Remuneration arrangements for our Executive Directors and our wider workforce are simple in nature and well
understood by both participants and shareholders.
Predictability Our remuneration policy contains details of maximum opportunity levels for each component of pay, with actual
incentive outcomes varying depending on the level of performance achieved against specific measures.
Proportionality, risk and
alignment to culture
The metrics used to measure performance for incentive awards drive behaviours that are closely aligned to our
vision and strategy. In particular, our variable pay arrangements continue to focus on delivering an unprecedented
level of transformation.
The Committee considers that our variable pay structures do not encourage inappropriate risk-taking.
The incentives are subject to the achievement of stretching performance targets and the Committee’s holistic
assessment of performance that can result in the application of discretion.
The use of holding periods, the payment of fixed salary in shares with holding periods and our shareholding
requirements (including after leaving employment with the Group) provide a clear link to the ongoing performance
of the business and, therefore, alignment with shareholders.
Malus and clawback provisions also apply to the Incentive Plans.
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Implementation of proposed remuneration policy for 2024 (subject to shareholder approval)
Base salary
A salary increase of 4.5% for the Chief Executive and 4.5% for the Chief Financial Officer is proposed. This is in line with the
average increase for the broader UK management population and reflects prevailing wage inflation for executive roles. Base
pay increases for the wider UK workforce are subject to negotiation and increases for 2024 have not yet been agreed.
Until a new policy is approved, 30% of Tufan Erginbilgic’s salary and 20% of Helen McCabe’s salary will continue to be
deferred into shares for two years. We expect that, from 1 June 2024, all base salaries will be paid as cash.
Benefits
There will be no change to our approach to benefits in 2024, which includes car allowance, financial planning assistance,
insurances and other benefits.
Retirement
The cash allowance for Tufan Erginbilgic and Helen McCabe is 12% of salary, in line with the rate made available to the wider
UK workforce.
Annual
incentive
In line with the proposed policy, the annual incentive for 2024 will be based on 80% Group performance and 20%
individual performance, with a maximum opportunity for both Tufan Erginbilgic and Helen McCabe of 200% of salary. Fifty
percent of any incentive payable will be delivered in shares which will vest after three years. If shareholding requirements
are not met at the point of vesting, Executive Directors may only dispose of up to 50% of shares vesting.
As we transition from the combined Incentive Plan to a more conventional STIP and LTIP structure, the Committee
considered whether the three-year targets set at the start of 2022 should form part of the annual incentive for 2024, so that
long-term business performance continues to be measured and rewarded. Business performance for 2023 has exceeded
expectations and ambitious targets have been set for future performance. Because of this, the 2024 metrics which are set
out in the 2023 remuneration report will not be reflected in the 2024 incentives for any of the workforce. Instead, the
metrics associated with both the long and short-term incentive plans reflect the ambitious targets that were laid out at
the CMD.
The metrics and associated weightings will be:
Metric Weighting Link to strategy
Free cash flow 40%
A fundamental KPI which helps to measure the level of value we are
creating for our shareholders. It enables the business to fund growth,
reduce debt and make shareholder distributions.
Operating profit 20%
Indicates how the effect of growing revenue and control of our costs
delivers value for shareholders.
Strategic objectives
(split equally between
operating cost and
operating profit margin)
30%
Incentivises the delivery of key annual objectives linked to the
transformation.
Cost and margin controls are critical to increasing the quality of financial
returns.
People (split equally between
engagement and safety index)
10% Safety is the Group’s licence to operate and sits at the heart of everything
we do.
Employee engagement is an objective way of assessing how engaged our
employees are with the business and its leaders.
Where targets are set with a one-year performance period, these are considered to be commercially sensitive and will be
disclosed following the end of the performance period, along with performance against targets and the details and context
for the assessment of performance.
The Committee may make appropriate adjustments and use judgement in assessing performance outcomes. It retains its
overriding ability to apply discretion to adjust any formulaic outcome to ensure that the final outcome is fair and justified in
the context of the overall performance of the business.
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Implementation of proposed remuneration policy for 2024 (subject to shareholder approval) continued
Long-term
incentive
The proposed long-term incentive will have a three-year performance period and a two-year holding period, with a maximum
opportunity of 375% of salary for Tufan Erginbilgic and 275% for Helen McCabe.
The metrics for the 2024 long-term incentive covering the performance period from 1 January 2024 to 31 December 2026
are set out on page 91�
Metrics Weighting
Threshold ¹
(20% vesting)
Maximum ¹
(100% vesting) Link to strategy
Free cash flow (three-year cumulative) 30% £5,600m £7,300m A fundamental KPI which helps to measure
the level of value we are creating for our
shareholders. It enables the business to fund
growth, reduce debt and make shareholder
distributions.
Operating margin % (average over
three-year performance period)
30% 10.9% 12.7% Reflects the quality of performance and will
encourage continued cost focus across the
Group�
Relative TSR (50% versus the FTSE 100
constituents and 50% versus the S&P
global industrials index constituents)
30% Median Upper
quartile
Closely aligns executive pay outcomes with
the shareholder experience, a measure
favoured by a large proportion of our
shareholder base.
Return on capital % (average over
three-year performance period)
10% 11.3% 13.8% Reflects the Group’s ability to generate
returns on our investments for the benefit of
our shareholders.
1 Outturn between threshold and maximum will be calculated on a sliding scale
The Committee may make appropriate adjustments and use judgement in assessing performance outcomes. It retains its
overriding ability to apply discretion to adjust any formulaic outcome to ensure that the final outcome is fair and justified in
the context of the overall performance of the business.
The long-term incentive opportunities and time horizons will operate as per the remuneration policy.
REMUNERATION POLICY
Executive Directors’ remuneration
The following pages show how we have applied our remuneration policy during 2023 and disclose all elements of remuneration received by our
Executive Directors.
Executive Directors’ single figure of remuneration (audited)
Tufan Erginbilgic Helen McCabe Panos Kakoullis
2023
£000
2022
£000
2023
£000
2022
£000
2023
£000
2022
£000
Salary (a) 875 242 395 555
Salary as deferred shares 375 60 84 139
Benefits (b) 29 13 16 26
Incentive Plan (c) 4,680 908 1,430 1,705
Long-Term Incentive Plan – – – –
Pension (d) 150 36 57 83
Previous employer buy-outs (e) 7,500 2,537
Total remuneration 13,609 3,796 1,982 2,508
Total fixed remuneration 1,429 465 552 803
Total variable remuneration
12,180 3,331 1,430 1,705
* Helen McCabe was appointed on 1 August 2023. Panos Kakoullis stepped down from the Board on 4 August 2023
a) Salary (audited)
The Company provides suitable competitive salaries to attract and retain individuals of the right calibre to develop and execute the business
strategy.
Discrepancies between single figure of remuneration salary and base salary:
— from the date of their appointments, 30% of Tufan Erginbilgic’s salary and 20% of Helen McCabe’s salary is deferred into shares for two years.
From June 2021 and 20% of Panos Kakoullis’ salary was deferred into shares for two years. The shares are not subject to performance
conditions nor conditional on continued employment. However, if the Executive Director is summarily dismissed as a result of their actions or
the result of actions of others acting under their instruction, the shares will immediately lapse.
In February 2024, the Committee reviewed the base salaries of Tufan Erginbilgic and Helen McCabe and agreed an increase of 4.5%. This is in
line with the average increase for the broader UK management population and reflects prevailing wage inflation for executive roles.
Base salary as at
1 March 2024
Base salary as at
1 March 2023
Tufan Erginbilgic £1,306,250 £1,250,000
Helen McCabe £757,625 £725,000 *
Panos Kakoullis n/a £724,880
* Helen McCabe was appointed on 1 August 2023
b) Benefits (audited)
Benefits are provided to ensure that remuneration packages remain sufficiently competitive to attract and retain individuals of the right calibre
to develop and execute the business strategy and to enable them to devote themselves fully to their roles. The taxable value of all benefits paid
to Executive Directors is shown below.
Car or car
allowance
£000
Medical
insurance
£000
Travel and
subsistence
£000
Tax
benefit
£000
Total
£000
2023 2022 2023 2022 2023 2022 2023 2022 2023 2022
Tufan Erginbilgic 15 – 14 – – 29 –
Helen McCabe 6 1 6 – – 13 –
Panos Kakoullis 10 15 1 1 4 8 1 2 16 26
c) Incentive Plan (audited)
The Incentive Plan is designed to incentivise the execution of the business strategy, delivery of financial targets and the achievement of personal
objectives. Incentive Plan awards are made in March each year, following the performance period. All of the incentive is deferred into shares,
40% for three years and 60% for four years, and include the right to receive an amount equal in value to any shareholder distributions issued
during the deferral period. The shares are conditional on continued employment but do not have further performance conditions. The annual
maximum for the Chief Executive is 385% of salary and 333% for the Chief Financial Officer.
— 80% of the award is based on Group performance; and
— 20% of the award is based on individual performance.
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2023 remuneration report
For 2023, the Incentive Plan metrics were based on in-year performance only for Tufan Erginbilgic and Helen McCabe, ensuring that they are
only rewarded for business performance during their tenure. The Incentive Plan metrics for Panos Kakoullis and the senior leadership team were
based on a combination of annual and longer-term targets.
The Committee reviewed the 2023 outturn against the performance measures.
2023 Incentive Plan performance outturn
Weighting for
prior Chief
Financial Officer
and wider
leadership
Weighting for
Chief Executive
and Chief
Financial Officer
Threshold
(50% outturn)
1
Target
(100%)
Maximum
(175%)
1
Performance
pre-adjustments
Performance
post-adjustments
% of
target
% of
maximum
Annual targets:
Free cash flow
2
20% 40% £525m £750m £975m £1,285m £1,275m 175% 100%
Actual £1,275m
Operating profit
3
10% 20% £850m £1,050m £1,250m £1,590m £1,568m 175% 100%
Actual £1,568m
People
4
5% 10%
– Gallup Q12 2.5% 5% 3�73 3�97 4�11 3�99 3�99 111% 63%
Actual 3.99
– Safety Index score 2.5% 5% 85% 90% 95% 94% 94% 160% 91%
Actual 94%
Key strategic objectives
5
15% 30%
– Operating cost
6
7.5% 15% £(6,088)m £(5,988)m £(5,888)m £(6,062)m £(5,909)m 159% 91%
Actual £(5,909)m
– Operating profit margin
3
7.5% 15% 6% 7.6% 9.2% 10.3% 10.2% 175% 100%
Actual 10.2%
Weighting for 12 month
targets 50% 100%
Outcome for 12 month targets
169% 97%
Longer-term targets:
Cumulative cash
(three year)
7
20% n/a (£1,606m) (£706m) £194m £266m £266m 175% 100%
Actual £266m
Relative TSR (50% versus
the FTSE 100 constituents
and 50% versus the S&P
Global Industrials index
constituents) 25% n/a Median
Upper
Quartile 175% 100%
Actual (99th percentile against FTSE
100; 96th percentile against S&P)
CO
2
sustainability
8
5% 50% 100% 175% 148% 148% 148% 85%
Actual 148%
Weighting for
three-year targets 50% n/a
Outcome for longer-term targets
172% 98%
Total scorecard outcome (combined annual and
longer-term)
170% 97%
1 Payout between threshold and target and target and maximum is calculated on a straight line sliding scale
2 Free cash flow has been adjusted to account for FX changes in order to ensure that targets and assessments are measured on a like-for-like basis
3 Operating profit has been adjusted to account for FX changes (see footnote 2) and to reflect consistent target and outturn treatment for transformation costs
4 The people objective was weighted 50% to the Gallup engagement score and 50% to an internal safety measure
5 Key strategic objectives aligned to the broader transformation objectives and were weighted 50% to operating cost and 50% to operating profit margin
6 Operating cost has been adjusted to reflect transformation costs (see footnote 3); FX changes (see footnote 2) and discretion has been applied to neutralise the impact of costs directly
linked to fully funded customer business and above target incentive accruals
7 Cumulative cash targets have been re-stated to reflect adjustments made in prior years, including removing the cash and profit contributions associated with business disposals (ITP and
Airtanker), and for FX purposes (see footnote 2)
8 CO
2
sustainability was calculated using an average of the divisions’ targets, which were a mix of product related milestones including proving compatibility with sustainable fuels across all
our core platforms
The Committee considered adjustments to targets resulting from events which were not anticipated at the time the targets were set, to ensure
that targets and assessments are measured on a like-for-like basis. The details of the adjustments are included in the footnotes above.
As a result of these adjustments, the incentive plan outturns are:
— combined annual and three-year targets, as applies to Panos Kakoullis and senior management: 170% of target and 97% of maximum.
— in-year targets only, as applies to Tufan Erginbilgic and Helen McCabe: 169% of target; 97% of maximum.
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2023 REMUNERATION REPORT
Panos Kakoullis Tufan Erginbilgic Helen McCabe
Group performance (% of maximum) – weighting 80% 97% 97% 97%
Individual performance (% of maximum) – weighting 20% 100% 175% 110%
Actual award – % of maximum 89% 97% 90%
Actual award – % of salary 197% 374% 125%
Actual award – £000 £1,430 £4,680 £908
All of the incentive outturn will be delivered in deferred shares, 40% for three years and 60% for four years, and for Tufan Erginbilgic and Helen
McCabe will vest subject to continued employment. No further performance conditions are attached.
Definitions used for performance measures:
Operating profit – adjusted Group underlying operating profit before tax for 2023.
Free cash flow – adjusted Group free cash flow.
Operating cost – adjusted Group operating costs (which exclude direct procurement of parts and components).
Operating profit margin – adjusted Group underlying operating profit margin.
People – weighted 50% to the Gallup engagement survey and 50% to an internal safety measure, the safety index. The Gallup score increased
from 3.92 in 2022 to 3.99 in 2023 and participation increased from 75% to 80%. This exceeded our target score of 3.97 which was set in 2019
when the target was set to achieve upper quartile status versus Gallup’s manufacturing peer group. This is another meaningful improvement and
an extremely positive result. The safety index is an established internal KPI used by all divisions and was included for the first time as an incentive
metric for 2023.
CO
2
sustainability – Calculated using an average of the three divisional targets which were mainly based on product compatibility with
sustainable fuel.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
2023 REMUNERATION REPORT
Individual performance
Subject to achievement of a minimum financial threshold, the Executive Directors have 20% of their incentive based on the achievement of their
personal objectives. The financial threshold for 2023 was to deliver a Group free cash flow of a minimum of £300m. Personal performance
objectives are set at the beginning of the year and are aligned with the Group’s priorities.
Objective Measure Assessment against objective
Chief Executive:
Tufan Erginbilgic
Deliver the 2023 plan
Deliver free cash flow of £800m; deliver
operating profit of £1,050m; deliver
operating cost of no more than £5,988m
Financial targets all exceeded, with maximum incentive targets achieved
for free cash flow and operating profit margin. Operating cost was ahead
of target but slightly below maximum.
Deliver the transformation
programme
Deliver improvement in earning and cash
potential through creating credible business
improvement plans
The key strategic objectives of operating cost and operating profit
margin are key indicators of the success of the transformation
programme, and maximum incentive targets were achieved for
operating profit, and slightly below maximum for operating cost.
Safety
Ensure focus on safety of our people,
measured through progressing the safety
index score of 90%, maintaining TRIR below
0.38%, and maintaining world-class
performance of product safety
Tufan has been clear that safety is our number one priority and is at the
heart of everything we do. The metrics are the safety index, which
achieved a score in 2023 of 94% (target 90%), and the total reported
injury rate (TRIR) which was 0.31 against a target of 0.38.
People
Deliver effective people strategy which
ensures capability and engagement. Impact
measured by Gallup score of 3.97, as well as
progress against our 2025 D&I commitments
The Group Gallup engagement score was 3.99 against a target of 3.97.
The Committee considers this to be a very strong outcome given the
amount of change being implemented at pace.
Strategic Review
Complete the strategic review, obtain Board
approval and engage with our investors in
the second half of the year
The strategic review was completed to plan, and a successful capital
markets day was held in November. Investors have been actively engaged
in the process, and our share price has responded favourably.
Overall personal performance assessment: 175%
Chief Financial Officer *
Helen McCabe
Deliver the 2023 plan
Deliver free cash flow of £800m; deliver
operating profit of £1,050m; deliver
operating cost of no more than £5,988m
Financial targets all exceeded, with maximum incentive targets achieved
for free cash flow and operating profit margin. Operating cost was ahead
of target but slightly below maximum.
Deliver the transformation
programme
Execute a smooth transition of leadership
within the finance function and deliver CMD
following strategic review
Helen has transitioned seamlessly into the Chief Financial Officer role,
and has played a fundamental part in the preparation for and execution
of the successful capital markets day.
Risk management
Ensure effective risk management and
internal control over business operations
Helen quickly identified the key priority areas and put in place robust
transition plans including cyber; delegations; segregation of duties;
intercompany activity; and balance sheet assurance
People
Lead delivery of the transformation for
Finance, GBS and IT/Digital. Gallup target of
3�97
Organisation design complete and new ways of work being embedded
to drive performance culture. Gallup participation increased compared
to 2022, and the Finance score increased to 4.1, which was above the
Group average of 3.99.
Strategic Review
Ensure robust financial plans in place to
deliver five-year plan. Embed cash framework
and deploy new investment criteria and
investment approach
Robust plan in place for delivery of five year plan. Strategically aligned
framework for M&A in place and being executed and risk managed.
Overall personal performance assessment: 110%
* The objectives for Helen McCabe applied equally to Panos Kakoullis who left the business on 31 August 2023. Panos fulfilled his objectives during this period, delivering the half-year
results and also ensuring a smooth and effective handover of responsibilities to Helen. The Committee has determined that Panos’ performance was in line with expectations and he was,
therefore, awarded 100% for the personal element of his 2023 incentive
d) Pension (audited)
Executive Directors are offered membership of a defined contribution plan with a maximum employer contribution of 12% of salary (or cash
allowance of equivalent value). This aligns to the average rate for the UK workforce.
In 2023, Tufan Erginbilgic, Helen McCabe and Panos Kakoullis received a cash allowance in lieu of employer contributions.
e) Compensation for remuneration forfeited from previous employment (audited)
Chief Executive
As disclosed in the 2022 annual report, in line with the remuneration policy Tufan Erginbilgic was compensated for remuneration forfeited from
previous employment. Tufan joined Rolls-Royce from private equity where remuneration arrangements are fundamentally different to listed
companies. The arrangements are commercially sensitive, confidential and cannot be disclosed in the same way that disclosures are made for a
UK listed company. A robust process was undertaken by the Committee to ensure that compensation awarded was fair and prudent considering
the compensation forfeited, with the value awarded positioned at the lower end of a fair value range. The vesting period applied to the awards
(with 50% vesting after four years and 50% vesting after five years) ensures long-term alignment with the interests of shareholders.
102
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2023 REMUNERATION REPORT
The compensation was in the form of two grants of shares valued at £7.5m. The awards were made in March 2023 and the number of shares
subject to the awards was calculated using the average closing share price during the month prior to joining (December 2023). The number of
shares awarded and the respective vesting dates are shown below:
— 4,128,138 shares which will vest in March 2027 subject to continued employment
— 4,128,138 shares which will vest in March 2028 subject to continued employment
Chief Financial Officer
Helen McCabe became Chief Financial Officer on 1 August 2023 and, in line with the remuneration policy, has been compensated for
remuneration forfeited from previous employment with a total value of £2.54m. Compensation for the loss of equity, both in-flight LTIPs and share
options, was issued in the form of a grant of Rolls-Royce Holdings plc shares. Compensation for the loss of cash bonus for the period January
to July 2023 will be paid in cash in March 2024.
Long-Term Incentives: In-flight LTIPs valued at £1.58m were converted into Rolls-Royce Holdings plc shares using the average closing BP share
price and the average closing share price in the three months prior to Helen joining Rolls-Royce, being May to July 2023. Restricted stock awards
were replaced on a like-for-like basis; performance share awards were replaced with Rolls-Royce performance shares, with the vesting schedule
aligned to the original BP vesting schedule. The number of shares awarded and the respective vesting dates are shown below:
— 813,292 shares which will vest between February 2024 and March 2026 subject to continued employment
— 118,156 shares which will vest in March 2025 subject to the long-term incentive plan performance conditions set for the wider Group in 2022
being met. The performance conditions include a free cash flow target (45% weighting, threshold target of £874m and maximum target of
£2,674m); a cumulative operating profit target (45% weighting, threshold target of £1,705m and maximum target of £2,905m); and a CO
2
sustainability target (10% weighting, calculated as an the average achievement of CO
2
sustainability milestones across the divisions, subject
mainly to product compatibility with sustainable fuels)
—
99,212 shares which will vest in March 2026 subject to the long-term incentive plan performance conditions set for the wider Group in
November 2023 being met. The performance conditions are equally weighted to operating profit (threshold target of £4.4bn, maximum of
£5.4bn) and free cash flow (threshold target of £4bn and maximum of £5.3bn)
Share options: Compensation for the loss of 500,000 share options valued at £844,000. The options had no performance conditions other than
requiring continued BP employment and were valued using a Black-Scholes model on the day before Helen joined the Group, 31 July 2023. The
value of the options was then converted to Rolls-Royce Holdings plc shares using the average closing Rolls-Royce share price during the month
prior to joining, July 2023. As a result, 536,966 shares were granted which will vest in March 2025 subject to continued employment.
Cash bonus: A cash payment of £113,750 will be made to Helen in March 2024. This assumes an on-target award of 65% of base salary.
Malus and clawback
Awards to compensate for remuneration forfeited from previous employment for both Tufan and Helen are subject to the Rolls-Royce malus and
clawback policy.
Payments to past directors (audited)
Warren East stepped down from the Board on 31 December 2022. In January 2023, he received a payment of £14,821 for leave not taken
during 2022.
Jasmin Staiblin stepped down as a Non-Executive Director from the Board on 13 May 2021. Jasmin was appointed as a member of the supervisory
board of Rolls-Royce Power Systems AG on 10 June 2021 and as chair of their supervisory board, executive committee, audit committee and
mediation committee on 11 June 2021. Payments of £270,948 have been made to Jasmin in 2023 in relation to her appointment (2022: £300,200).
No other payments have been made to past directors during the year.
Payments for loss of office (audited)
It was announced on 31 March 2023 that Panos Kakoullis would be leaving the business. He stepped down from the Board on 4 August 2023 and
left the Group on 31 August 2023. The Committee agreed that Panos would receive a payment in lieu of notice for the seven unworked months
of his twelve month notice period, reflecting base pay, a cash allowance in lieu of pension plan provision and the cost of providing benefits.
Apay in lieu of notice payment of £483,221 was therefore paid to Panos on exit. Panos was deemed a good leaver in respect of his unvested
Incentive Plan awards from 2021 and 2022, all of which were delivered in shares in March 2022 and March 2023, and which will vest in accordance
with the original vesting schedule between March 2025 and March 2027.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
2023 REMUNERATION REPORT
Executive Directors’ shareholdings and share interests
Executive Directors’ share interests (audited)
The Directors and their connected persons hold the following interests in the ordinary shares of the Company:
Ordinary shares owned outright
Conditional shares not subject
toperformance conditions (salary
as deferred shares)
Conditional shares not subject
toperformance conditions
(Incentive Plan)
Conditional shares subject to
performance conditions (LTIP)
22 February
2024
31 December
2023
22 February
2024
31 December
2023
22 February
2024
31 December
2023
22 February
2024
31 December
2023
Tufan Erginbilgic – – 227,742 217,547 – n/a 8,256,276 n/a
Helen McCabe – n/a 30,490 n/a – n/a 1,567,626 n/a
Panos Kakoullis * n/a n/a 258,585 214,858 2,439,039 2,439,039 – –
* Panos Kakoullis stepped down from the Board on 4 August 2023
Executive Directors’ share awards (audited)
The following sets out details of share awards that were granted, outstanding and vested during the year. See pages 102 and 103 for
compensation for remuneration forfeited from previous employment in respect of the 2023 LTIP grants made during 2023 for Tufan Erginbilgic
and Helen McCabe.
Tufan Erginbilgic
Balance at
31 December
2022
Granted
during
the year
Vested
during
the year
Lapsed
during
the year
Balance at
31 December
2023
Date of
grant
Market price
at date of
grant (p)
Date of
vest/
lapse
Market price
at date of
vest/lapse (p)
Face value
of award *
(£000)
Salary as deferred
shares
– 217,547 – – 217,547 21/12/2023 Various 21/12/2025 n/a 375
2023 LTIP (buyout) – 4,128,138 – – 4,128,138 08/03/2023 90�84 08/03/2027 n/a 3,750
2023 LTIP (buyout) – 4,128,138 – – 4,128,138 08/03/2023 90�84 08/03/2028 n/a 3,750
Helen McCabe
Balance at
31 December
2022
Granted
during
the year
Vested
during
the year
Lapsed
during
the year
Balance at
31 December
2023
Date of
grant
Market price
at date of
grant (p)
Date of
vest/
lapse
Market price
at date of
vest/lapse (p)
Face value
of award *
(£000)
Salary as deferred
shares
– 26,548 – – 26,548 21/12/2023 Various 21/12/2025 n/a 60
2023 LTIP (buyout) – 1,030,660 – – 1,030,660 29/11/2023 153�00 29/11/2028 n/a 1,577
2023 LTIP (buyout) – 536,966 – – 536,966 29/11/2023 157�00 29/11/2028 n/a 843
Panos Kakoullis
Balance at
31 December
2022
Granted
during the
year
Vested
during
the year
Lapsed
during
the year
Balance at
4 August
2023
Date of
grant
Market price
at date of
grant (p)
Date of
vest/
lapse
Market price
at date of
vest/lapse (p)
Face value
of award *
(£000)
Salary as deferred
shares
223,931 56�827 22,173 – 258,585 28/07/2023 Various 28/07/2025 Various 84
2022 Incentive Plan 1,316,606 1,122,433 – – 2,439,039 08/03/2023 151�87 08/03/2026 – 1,705
Salary as deferred
shares *
30% of Tufan Erginbilgic’s salary and 20% of Helen McCabe’s and Panos Kakoullis’ salary was deferred into shares
for two years. During 2023, shares were awarded on a monthly basis from January to December at market price under
the rules of the Incentive Plan (the date of grant in the table above is the last grant made in 2023). These shares will
vest on a monthly basis from January 2025 (the date of vest/lapse in the table above is the vest date of the last grant
made in 2023). The face value has been determined using the market price of each monthly award in 2023 set out
below. The shares are not subject to performance conditions nor conditional on continued employment. However, if
the Executive Director is summarily dismissed as a result of their actions or the result of actions of others acting under
their instruction, the shares will immediately lapse.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
£1.13 £1.45 £1.44 £1.52 £1.49 £1.55 £1.90 £2.02 £2.19 £2.01 £2.43 £2.99
2021 and 2022
Incentive Plan
Both Warren East and Panos Kakoullis were granted an award of shares under the Incentive Plan in March 2022 in
respect of the 2021 financial year, and in March 2023 in respect of the 2022 financial year. The average closing share
price in the three days prior to the award was used to calculate the number of shares. 40% of each award was deferred
for three years, vesting in March 2025 and March 2026 respectively, and 60% for four years, vesting in March 2026
and March 2027 respectively. The awards are subject to malus and clawback. The performance outturn was assessed
before the award was granted.
LTIP 2019 and 2020
Warren East was awarded an LTIP in 2019 and 2020. The performance conditions of both awards were assessed at
the end of the 2021 and 2022 respectively and were not met. The performance adjustments were made on the three-
year anniversary of the grants and the awards will formally lapse on the five-year anniversary of the grant (March
2024 and March 2025 respectively).
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2023 REMUNERATION REPORT
Executive Directors’ shareholding requirements (audited)
In line with our shareholding requirements policy, Executive Directors are required to establish and maintain a level of share ownership in
proportion to a percentage of base salary. The shareholding requirement is 400% for the Chief Executive and 300% for the Chief Financial
Officer. Share interests that are included in the shareholding requirements are as follows: shares vested from Company share plans; shares held
in the individual’s own name or by a nominee; shares held by a person closely associated (PCA) (as defined by UK Market Abuse Regulation)
where the PCA has given express permission; shares held as part of the SharePurchase Plan; and, the estimated net-of-tax shares held in trust
as part of unvested awards under the Incentive Plan where the awards are not subject to any performance conditions.
Individuals are expected to meet the shareholding requirement within five years of becoming subject to the policy. Where the shareholding
requirements are not met, individuals may only dispose of shares in the following circumstances: to cover taxation; to cover any costs associated
with the vesting or exercise of a share award; up to 50% of any shares acquired following the vesting of an award under the Incentive Plan; in
connection with the operation of the malus and clawback policy; or where the Committee determines there are exceptional circumstances.
At 31 December 2023, Tufan Erginbilgic’s shareholding represented 877% of his base salary and Helen McCabe’s shareholding represented 285%
of her base salary. They had been subject to the policy since January and August 2023 respectively. These percentages have been calculated
by reference to the three-month average share price to 29 December 2023, being the last working day of the year.
Executive Directors are also required to retain the lower of their shareholding requirement or their actual shareholding at the date of leaving
for 12 months after leaving and then half of that amount for the following 12 months. Warren East and Panos Kakoullis have agreed to hold shares
in accordance with the shareholding requirements policy until January 2025 and August 2025 respectively. Warren East’s shareholding
represented 1004% of his base salary and Panos Kakoullis’ shareholding represented 486% of his base salary at 31 December 2023. Panos had
been subject to the policy since May 2021.
These percentages had been calculated by reference to the three-month average share price to 29 December 2023, being the last working day
of the year.
Executive Directors’ contractual arrangements
Each Executive Director has a service agreement that sets out their contract with the Company.
Effective date of contract Notice period from Company Notice period from individual
Tufan Erginbilgic 1 January 2023 12 months 12 months
Helen McCabe 4 August 2023 12 months 12 months
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
2023 REMUNERATION REPORT
Pay across the organisation
This section of the report enables our remuneration arrangements to be seen in context by providing:
—
a comparison of the percentage change in our Directors’ remuneration with the change in our UK employees average remuneration over
twoyears;
— a ten-year history of our Chief Executive’s remuneration;
— our TSR performance over the same period;
— an indication of the ratio between our Chief Executive’s remuneration and the remuneration of employees;
— gender pay reporting; and
— a year-on-year comparison of the total amount spent on employment costs across the Group and shareholder payments.
Percentage change in Directors’ remuneration
The following table compares the percentage change in each of the Director’s salary/fees, benefits and incentive to the average percentage
change in salary, benefits and incentive for all UK employees for the past three years.
2022–2023 2021–2022 2020–2021 2019–2020
Salary/
fees
%
Benefits
%
Incentive
award
%
Salary/
fees
%
Benefits
%
Incentive
award
%
Salary/
fees
%
Benefits
%
Incentive
award
%
Salary/
fees
%
Benefits
%
Incentive
award
%
Dame Anita Frew n/a (61.54) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Panos Kakoullis
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Tufan Erginbilgic
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Helen McCabe
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Paul Adams
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Birgit Behrendt
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Stuart Bradie
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Paulo Cesar Silva
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
George Culmer
2
n/a 6.25 n/a 14�29 150 n/a n/a n/a n/a n/a n/a n/a
Lord Jitesh Gadhia
1
38.46 (50) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Beverly Goulet
3
6.25 28.85 n/a 14�29 1,633.33 n/a 7�69 – n/a (7.5) (72.27) n/a
Nick Luff
4
n/a – n/a 5�56 – n/a 38�46 – n/a (7.5) – n/a
Mike Manley
1
n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Wendy Mars
1
18.57 60 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Sir Kevin Smith
1,5
n/a n/a n/a (20.95) 50 n/a 8�25 ∞
6
n/a (7.5) (79.32) n/a
Dame Angela Strank
7
(14.44) (50) n/a 8�43 300 n/a n/a n/a n/a n/a n/a n/a
UK employees average
8,9
5.77 (1.87) 25.42 5�71 3�8 3 1�03 (9.13) 1,435 1�96 2�23 (89.94)
1 Appointed or stepped down during 2023, 2022 or 2021 and therefore unable to provide percentage change for a full year’s remuneration
2 George Culmer was appointed Senior Independent Director (SID) on 12 May 2022 and received an increase in fees
3 Beverly Goulet was appointed Lead Employee Champion on 12 May 2022 and received an increase in fees
4 Nick Luff was appointed Chair of the Audit Committee on 13 May 2021 and received an increase in fees
5 Sir Kevin Smith stepped down as SID and as Chair of the Science & Technology Committee on 12 May 2022 and received a decrease in fees
6 Unable to show percentage change as the increase was from zero
7 Dame Angela Strank was appointed Chair of the Safety, Ethics & Sustainability (SES) Committee on 13 May 2021 and received an increase in fees. She stepped down as Chair of the SES
Committee on 11 May 2023
8 UK employees were chosen as a comparator group in order to avoid the impact of exchange rate movements over the year. UK employees including apprentices, graduates and interns
make up 50% of the total employee population and are employed by Rolls-Royce plc or its relevant subsidiaries. Rolls-Royce Holdings plc has no employees
9 There was an incentive award for only a very small population in 2020, hence the significant increase in 2021
Chief Executive pay
Year Chief Executive
Single figure of
total remuneration
£000
Incentive award as
a % of maximum
LTIP as a % of
maximum
2023 Tufan Erginbilgic 13,610 97% –
2022 Warren East 3,835 74 –
2021 Warren East 3,950 79�7 –
2020 Warren East 1,110 – –
2019 Warren East 2,528 52 53
2018 Warren East 4,075 60 100
2017 Warren East 2,331 68 –
2016 Warren East 2,089 55 –
2015 Warren East 543 – –
John Rishton 754 – –
2014 John Rishton 2,596 – 45
John Rishton retired on 2 July 2015 and Warren East was appointed as Chief Executive on 3 July 2015.
Warren East retired on 31 December 2022 and Tufan Erginbilgic was appointed as Chief Executive on 1 January 2023. Tufan received
compensation for remuneration forfeited from previous employment in 2023 (see pages 102 and 103).
106
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2023 REMUNERATION REPORT
TSR performance
The Company’s TSR performance over the previous ten years compared to a broad equity market index is shown in the graph below.
The FTSE 100 has been chosen as the comparator because it contains a broad range of other UK-listed companies. The graph shows the change
in value of a hypothetical £100 holding in the Company’s ordinary shares over ten years (prior years adjusted for the rights issue), relative to the
FTSE 100 index.
Rolls-Royce
FTSE 100
20132013 2014 2015 2016 2017 2018 2019 2020 2022 20232021
100
200
300
£
Chief Executive pay ratio
The Committee is mindful of the relationship between the remuneration of the Chief Executive and the wider employee population. This is the
sixth year that we have published our Chief Executive pay ratio and we have continued to use option A. We believe that this is the most accurate
and robust methodology because it relies on calculating actual full time equivalent remuneration for all relevant employees rather than rely on
data collected for other purposes. We have used the full time equivalent total remuneration of all UK employees at 31 December 2023.
Year Method 25th percentile Median 75th percentile
2023 Option A 254:1 219:1 185:1
2022 Option A 75:1 64:1 55:1
2021 Option A 88�1 76�1 63�1
2020 Option A 26:1 22:1 19:1
2019 Option A 66:1 56:1 48:1
2018 Option A 92:1 77:1 66:1
For 2023, the salary and total remuneration for the three employees identified at the 25th, median and 75th percentiles are as follows:
Year 25th percentile Median 75th percentile
Salary
*
£42,453 £52,104 £60,852
Total remuneration £53,545 £62,168 £73,618
* Calculated using base pay as at 31 December 2023
The 2023 pay ratio is significantly higher than it has been in previous years driven primarily by the award of shares valued at £7.5m at the time
of grant to the Chief Executive as compensation for remuneration forfeited from previous employment. If this value was removed from the
calculation the pay ratio would be 98:1. The Chief Executive has a larger proportion of his total reward based on variable elements linked to
performance than other UK employees, as well as a significant proportion of his total package delivered in shares ensuring a direct link between
his reward and share price performance. The Committee recognises that the pay ratio for 2023 is significantly higher than in recent years,
relating primarily to the £7.5m award of shares. The Committee considers this to be appropriate considering the exceptional performance
delivered in 2023.
There is good alignment between the reward structure for the Chief Executive and that of the wider workforce, with the majority of employees
participating in an incentive plan with aligned financial metrics. We also encourage all eligible employees to join our all-employee share plans,
with approximately 50% of our global population enrolling in our most recent ShareSave plan and approximately 35% of the UK population
participating in our SharePurchase Plan. In 2024, we will be broadening our all-employee share plan offering, launching a global purchase plan
which will be structured to offer matching free shares for every share purchased up to maximum monthly limit. This aligns to our broader strategy
to increase employee share ownership and links directly to the transformation programme.
107
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
2023 REMUNERATION REPORT
Relative importance of spend on pay
The following chart sets out the percentage change in payments to shareholders and overall expenditure on pay across the Group.
Payment to shareholders (£m) Group employment costs (£m)
(Consolidated cash flow statement)
2023
2
022
0 (0%)
0 (0%)
(Note 8, employee information – see page 150)
2023
2
022
3,768 (8.7%) *
3,468 (8.2%)
* Excludes ITP employment costs. ITP Aero sale was completed September 2022
Gender pay reporting
The Company is committed to creating a diverse and inclusive place to work where our people can be themselves and be at their best.
More information about this can be found in the People and Culture section, pages 44 and 48. We published our UK gender pay gap in
February 2024, which showed:
Median gender pay gap across all employees in the UK Mean gender pay gap across all employees in the UK
2023
2
022
3.7%
3.6%
2023
2
022
1.2%
1.6%
The reducing pay gap in the UK is explained by the changing distribution of our workforce, with proportionately more women than men in higher
paid positions. We continue to pursue diverse and under represented talent, including women, at all levels.
108
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2023 REMUNERATION REPORT
Non-Executive Directors’ remuneration
Non-Executive Directors’ single figure of remuneration (audited)
Fees
(£000)
Benefits
(£000)
Total remuneration
(£000)
2023 2022 2023 2022 2023 2022
Dame Anita Frew 490 490 5 13 495 503
Birgit Behrendt
1
45 n/a 10 n/a 55 n/a
Stuart Bradie
1
45 n/a 1 n/a 46 n/a
Paulo Cesar Silva
2
23 n/a 8 n/a 31 n/a
George Culmer
3
85 80 5 5 90 85
Lord Jitesh Gadhia
4
90 65 1 2 91 67
Beverly Goulet
5
85 80 67 52 152 132
Nick Luff 95 95 – – 95 95
Wendy Mars
6
83 70 8 5 91 75
Dame Angela Strank
7
77 90 2 4 79 94
Paul Adams
8
54 83 6 10 60 93
Irene Dorner
9
n/a 39 n/a – n/a 39
Lee Hsien Yang
10
n/a 70 n/a 19 n/a 89
Mike Manley
11
26 70 3 7 29 77
Sir Kevin Smith
12
26 83 1 3 27 86
Total 1,224 1,315 117 120 1,341 1,435
1 Birgit Behrendt and Stuart Bradie were appointed as Non-Executive Directors on 11 May 2023
2 Paulo Cesar Silva was appointed as a Non-Executive Director on 1 September 2023
3 George Culmer was appointed Senior Independent Director (SID) on 12 May 2022, when Sir Kevin Smith stepped down as SID
4 Lord Jitesh Gadhia was appointed as a NED on 1 April 2022 and as Chair of the Remuneration Committee on 12 May 2022
5 Beverly Goulet was appointed Lead Employee Champion on 12 May 2022
6 Wendy Mars was appointed Chair of the Safety, Energy Transition & Tech Committee on 11 May 2023
7 Dame Angela Strank stepped down as Chair of the Safety, Ethics & Sustainability Committee on 11 May 2023
8 Paul Adams stepped down from the Board on 1 September 2023 and as Chair of the Science & Technology Committee on 11 May 2023
9 Irene Dorner stepped down from the Board on 12 May 2022
10 Lee Hsien Yang stepped down from the Board on 31 December 2022
11 Mike Manley stepped down from the Board on 11 May 2023
12 Sir Kevin Smith stepped down from the Board on 11 May 2023
Non-Executive Directors’ fees
The Chair’s fee is reviewed by the Board as a whole on the recommendation of the Committee. The review of the other Non-Executive Directors’
base fees is reserved to the Chair and Executive Directors. No individual may be involved in setting his or her own fee. In December 2023, the
Chair’s fee and those of the other Non-Executive Directors were reviewed and it was agreed to change these with effect from 1 June 2024. No
changes had been made to the Non-Executive Directors’ fees since 2014. Fees from 1 June 2024 are set out in the table below. The
Non-Executive Directors are not eligible to participate in any of the Group’s share schemes, incentive arrangements or pension schemes.
A facility is in place which enables Non-Executive Directors (who reside in a permitted dealing territory) to use some or all of their fees, after the
appropriate statutory deductions, to make market purchases of shares in the Company on a monthly basis. Wendy Mars and Birgit Behrendt use
this facility.
1 June 2024
£000
2023
£000
2022
£000
Chair 630 490 490
Other Non-Executive Directors base 90 70 70
Chair of the Audit Committee 35 25 25
Chair of the Remuneration Committee 35 20 20
Chair of the Safety, Energy Transition & Tech Committee 35 – –
Chair of the Safety, Ethics & Sustainability Committee – 20 20
Chair of the Science & Technology Committee – 20 20
Committee member 15 – –
Senior Independent Director 35 15 15
Lead Employee Champion 20 15 15
UK Employee Champion 15 – –
North American board member 15 – –
Non-Executive Directors’ benefits (audited)
The benefits for Non-Executive Directors relate predominantly to travel, hotel, and subsistence incurred in attending meetings.
For Non-Executive Directors based outside the UK, the Company may also pay towards tax advice and the cost of making tax filings.
109
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
2023 REMUNERATION REPORT
Non-Executive Directors’ share interests (audited)
The Non-Executive Directors and their connected persons hold the following interests in the ordinary shares of the Company:
22 February 2024 31 December 2023 23 February 2023 31 December 2022
Dame Anita Frew 350,000 350,000 350,000 350,000
Birgit Behrendt
1, 2
1,092 379 n/a n/a
Stuart Bradie
1
95,437 95,437 n/a n/a
Paulo Cesar Silva
3
94,546 94,546 n/a n/a
George Culmer 37,960 37,960 37,960 37,960
Lord Jitesh Gadhia 50,000 50,000 50,000 50,000
Beverly Goulet 40,972 40,972 40,972 40,972
Nick Luff 120,000 120,000 120,000 120,000
Wendy Mars
2
34,339 33,155 23,026 19,546
Dame Angela Strank 60,583 60,583 13,780 13,780
Paul Adams
4
n/a n/a 10,000 10,000
Irene Dorner
5
n/a n/a n/a n/a
Lee Hsien Yang
6
n/a n/a n/a 76,089
Mike Manley
7
n/a n/a – –
Sir Kevin Smith
8
n/a n/a 116,540 116,540
1 Birgit Behrendt and Stuart Bradie were appointed as Non-Executive Directors on 11 May 2023
2 Both Birgit Behrendt and Wendy Mars have entered into a share purchase agreement allocating a percentage of their net fees for the monthly purchase of shares at market price
3 Paulo Cesar Silva was appointed as a Non-Executive Director on 1 September 2023. He holds a percentage of his share interests as American Depository Receipts
4 Paul Adams stepped down from the Board on 1 September 2023
5 Irene Dorner stepped down from the Board on 12 May 2022
6 Lee Hsien Yang stepped down from the Board on 31 December 2022
7 Mike Manley stepped down from the Board on 11 May 2023
8 Sir Kevin Smith stepped down from the Board on 11 May 2023
Non-Executive Directors’ letters of appointment
Our Non-Executive Directors serve two, three-year terms followed by three, one-year terms (nine years in total).
Original appointment date
Current letter of
appointment end date
Dame Anita Frew 1 July 2021 30 June 2024
Birgit Behrendt 11 May 2023 10 May 2026
Stuart Bradie 11 May 2023 10 May 2026
Paulo Cesar Silva 1 September 2023 31 August 2026
George Culmer 2 January 2020 1 January 2026
Lord Jitesh Gadhia 1 April 2022 31 March 2025
Beverly Goulet 3 July 2017 2 July 2024
Nick Luff 3 May 2018 2 May 2024
Wendy Mars 8 December 2021 7 December 2024
Dame Angela Strank 1 May 2020 30 April 2026
Shareholder voting
The remuneration policy was last approved by shareholders at our 2021 AGM held on 13 May 2021 and the remuneration report was last approved
by shareholders at our 2023 AGM held on 11 May 2023. Details of voting are shown in the table below.
For % For Against % Against Withheld
Approval of the remuneration policy (2021) 5,662,106,630 97�04 172,496,155 2�96 14,886,550
Approval of the remuneration report (2023) 4,894,967,977 88�17 656,792,687 11�83 1,563,614
Withheld votes are not counted towards the total percentage of votes cast.
Statutory requirements
The Committee’s composition, responsibilities and operation comply with the principles of good governance, as set out in the Code, the Listing
Rules (of the Financial Conduct Authority) and the Companies Act 2006. The Directors’ remuneration report has been prepared on the basis
prescribed in the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
110
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
2023 REMUNERATION REPORT
The Remuneration Report, comprising the Remuneration Committee
report, the remuneration policy and the 2023 remuneration report,
hasbeen approved by the Board and signed on its behalf by:
Lord Jitesh Gadhia
Chair of the Remuneration Committee
22 February 2024
I am pleased to present the first report of the Safety, Energy Transition
& Tech (SETT) Committee. This Committee was introduced in May 2023
and I became chair from its inception. The SETT Committee focuses on
safety and the energy transition agenda and provides oversight and
assurance of the Company’s scientific and technological strategy,
processes and investments. A summary of the SETT Committee’s remit
can be found on page 68. The Committee members, all Non-Executive
Directors, bring deep experience between them in the Committee’s
areas of focus which they have gained in their various external
executive roles. This is invaluable to the Committee in its oversight role
and enables appropriate and robust challenge.
The Committee has met twice in 2023 and also visited our Civil
Aerospace facilities in Derby, UK with a particular focus on safety, both
product and people.
The Committee is supported at executive-level by the newly created
appointment of the director of engineering, technology & safety and
the chief transformation officer, who has responsibility for the energy
transition strategy, and the Executive-level energy transition &
technology committee. The Group’s chief engineer also attends every
meeting of the Committee.
Safety
Both product and people safety are the main priority for the Group.
During 2023, we reviewed the updated product safety policy and
considered in detail the product safety principal risk. We have paid
close attention to the effectiveness of the product safety management
system and the relevant controls as the Group’s transformation is
progressed, in particular the organisational design. The Committee
reviewed reports from the Group’s chief engineer detailing the status
of product safety issues across the Group and are working with him to
develop more granular reporting to support the Committee with greater
understanding of the divisional safety management control
effectiveness. The Committee also reviewed relevant internal audit
reports in relation to product safety.
People safety updates were received at both meetings of the
Committee, including a summary of performance in 2023 and the
associated action plans for 2024 to ensure continuous improvement in
embedding Group-wide standards and policies.
In October 2023, members of the Committee visited Derby, UK to meet
different teams across various Civil Aerospace division’s facilities and
to learn at first hand the management and importance of both product
and people safety. We visited the service control centre and the major
events centre as well as the Group’s newest testbed facility and two
separate manufacturing facilities: new engine and turbine blade.
We gained insight into the management of in-service fleets and how
technologies were being developed to grow the capability. We also
learnt how the right response teams would be assembled in the event
of a major incident and how this would then be managed. The tour of
the new product facility provided an understanding of how product
and people safety was managed and we were taken through an
assessment of both within the facility. The visit ended with a tour of the
turbine blade manufacturing facility and the Committee members were
able to see the degree of technology and automation deployed.
As part of the visit, the Committee was taken through an overview of
the people safety framework and gained a detailed understanding of
the approach and standards across the Group. The people safety risks
were defined and the importance of the speak up line for both product
and people risks was highlighted. Safety briefings were given to the
Committee at each facility and the importance of personal protective
equipment stressed.
Energy Transition
The focus of the Committee is to provide oversight of the Group’s
energy transition strategy and to receive progress reports against
policies, strategies, KPIs, plans, capability, process and systems. At our
first meeting, the Committee was updated on the focus of the Executive-
level energy transition & technology committee (see page 69). At the
same meeting, the head of sustainability provided an introduction to
the Group’s climate programme and its role in ensuring the reporting
obligations of the Group are met and aligned with the strategic plan
and financial forecasts. At our subsequent meeting, we reviewed
progress made in 2023 with Scope 1 + 2 GHG emissions reduction plans
and the Scope 3, category 11 (use of sold products) emissions reporting
(see page 41). We also discussed the progress with the energy transition
and climate agendas. At our meeting in February 2024, as part of the
year-end reporting, the Committee reviewed the Sustainability report
set out on pages 32 to 43 and recommended it to the Board for approval.
Tech
Following the strategy presentation at the capital markets day in
November 2023, the Committee had initial discussions on the
technology strategy and roadmap, considering prioritisation of
investment, funding and partnership approaches, the roadmapping
process and organisation and potential disruptions and threats. The
Committee’s oversight of the technology strategy will ensure alignment
with the climate change strategy.
Wendy Mars
Chair of the Safety, Energy Transition & Tech Committee
KEY AREAS OF FOCUS IN 2023
Principal risk reviews and deep dives into product and
people safety. Site visit with safety focus to Civil Aerospace
facilities in Derby, UK
Review of progress of with the energy transition and
climate agendas; review of Sustainability report for
recommendation to the Board
Initial discussions on tech strategy and roadmap
Members Wendy Mars (Chair)
Birgit Behrendt
Stuart Bradie
Paulo Cesar Silva
Dame Angela Strank
Biographies are on pages 70 and 71
Remit See page 68
111
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
GOVERNANCE REPORT
Safety, Energy Transition & Tech Committee report
Statement of Directors’ responsibilities in respect of the
financial statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law, the Directors have prepared the
Group Financial Statements in accordance with UK-adopted international
accounting standards and the Company Financial Statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101
Reduced Disclosure Framework and applicable law).
Under company law, Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and Company and of the profit or
loss of the Group for that period. In preparing the financial statements,
the Directors are required to:
—
select suitable accounting policies and then apply them consistently;
—
state whether applicable UK-adopted international accounting
standards have been followed for the Group financial statements
and United Kingdom Accounting Standards, comprising FRS 101 have
been followed for the Company financial statements, subject
to any material departures disclosed and explained in the
financial statements;
—
make judgements and accounting estimates that are reasonable and
prudent; and
— prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Group and Company will
continue in business.
The Directors are responsible for safeguarding the assets of the Group
and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are also responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s and
the Company’s transactions and disclose with reasonable accuracy at
any time the financial position of the Group and the Company and
enable them to ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Directors’ confirmations
The Directors consider that the Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s and the
Company’s position and performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the
Directors’ Report confirm that, to the best of their knowledge:
—
the Group financial statements, which have been prepared in
accordance with UK-adopted international accounting standards,
give a true and fair view of the assets, liabilities, financial position
and profit of the Group;
—
the Company financial statements, which have been prepared in
accordance with United Kingdom Accounting Standards, comprising
FRS 101, give a true and fair view of the assets, liabilities and financial
position of the Company; and
— the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group and the
Company, together with a description of the principal risks and
uncertainties that it faces.
In the case of each Director in office at the date the Directors’ Report
is approved:
— so far as the Director is aware, there is no relevant audit information
of which the Group’s and the Company’s auditors are unaware; and
—
they have taken all the steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit
information and to establish that the Group’s and the Company’s
auditors are aware of that information.
By order of the Board
Pamela Coles
Chief Governance Officer
22 February 2024
112
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Responsibility statements
Consolidated Financial Statements
Primary statements
Consolidated income statement �������������������������������������������������������������� 114
Consolidated statement of comprehensive income ��������������������������115
Consolidated balance sheet ���������������������������������������������������������������� 116
Consolidated cash flow statement ���������������������������������������������������������� 117
Consolidated statement of changes in equity ���������������������������������������120
Notes to the Consolidated Financial Statements
1 Accounting policies������������������������������������������������������������������������������ 122
2 Segmental analysis ������������������������������������������������������������������������������� 137
3 Research and development ��������������������������������������������������������������� 144
4 Net financing ������������������������������������������������������������������������������������������ 144
5 Taxation ���������������������������������������������������������������������������������������������������� 145
6 Earnings per ordinary share ���������������������������������������������������������������149
7 Auditors’ remuneration ���������������������������������������������������������������������������149
8 Employee information �������������������������������������������������������������������������� 150
9 Intangible assets ������������������������������������������������������������������������������������� 151
10 Property, plant and equipment �������������������������������������������������������������� 154
11 Right-of-use assets ���������������������������������������������������������������������������������������155
12 Investments ��������������������������������������������������������������������������������������������������156
13 Inventories �����������������������������������������������������������������������������������������������158
14 Trade receivables and other assets ���������������������������������������������������158
15 Contract assets and liabilities ����������������������������������������������������������� 159
16 Cash and cash equivalents ����������������������������������������������������������������� 160
17 Borrowings and lease liabilities ����������������������������������������������������������� 160
18 Leases ������������������������������������������������������������������������������������������������������ 161
19 Trade payables and other liabilities ������������������������������������������������ 162
20 Financial instruments ����������������������������������������������������������������������� 163
21 Provisions for liabilities and charges ������������������������������������������������173
22 Post-retirement benefits ������������������������������������������������������������������ 174
23 Share capital ������������������������������������������������������������������������������������������� 179
24 Share-based payments ������������������������������������������������������������������������ 180
25 Contingent liabilities and commitments ����������������������������������������� 181
26 Related party transactions �������������������������������������������������������������������181
27 Acquisitions, disposals, held for sale and discontinued
operations �������������������������������������������������������������������������������������������������� 182
28 Derivation of summary funds flow statement ������������������������������ 184
Company Financial Statements
Primary statements
Company balance sheet ���������������������������������������������������������������������������� 185
Company statement of changes in equity ������������������������������������������� 186
Notes to the Company Financial Statements
1 Accounting policies ��������������������������������������������������������������������������� 187
2 Investments – subsidiary undertakings ����������������������������������������� 188
3 Trade payables and other liabilities ������������������������������������������������188
4 Financial liabilities �����������������������������������������������������������������������������188
5 Share capital �������������������������������������������������������������������������������������������189
6 Reconciliation of net assets between
Rolls-Royce Holdings plc Group and Company ��������������������������189
7 Contingent liabilities ����������������������������������������������������������������������������189
8 Other information ��������������������������������������������������������������������������������������������� 189
Subsidiaries ����������������������������������������������������������������������������������������������������190
Joint ventures and associates �������������������������������������������������������������������194
113
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL
STATEMENTS
Consolidated income statement
Year ended 31 December 2023
Notes

|  | 2023 | 2022
|  | £m | £m
Continuing operations |  |  |
Revenue | 2 | 16,486 | 1 3, 52 0
Cost of sales |  | (12,866) | (1 0 ,76 3)
Gross profit | 2 | 3 ,620 | 2 ,7 57
Commercial and administrative costs | 2 | (1 ,11 0) | (1,07 7)
Research and development costs | 2, 3 | (739) | (891)
Share of results of joint ventures and associates | 12 | 173 | 48
Operating profit |  | 1,944 | 8 37
Gain arising on disposal of businesses | 27 | 1 | 81
Profit before financing and taxation |  | 1,945 | 918
Financing income | 4 | 1 ,1 63 | 355
Financing costs | 4 | (6 81) | (2 ,7 7 5)
Net financing income/(costs) |  | 482 | (2, 420)
Profit/(loss) before taxation |  | 2 ,427 | (1 , 50 2)
Taxation | 5 | (2 3) | 308
Profit/(loss) for the year from continuing operations |  | 2 ,4 04 | (1 ,1 94)
Discontinued operations |  |  |
Profit for the year from ordinary activities | 27 | – | 6 8
Loss on disposal of discontinued operations | 27 | – | (14 8)
Loss for the year from discontinued operations |  | – | (80)
Profit/(loss) for the year |  | 2, 404 | (1 , 2 74)
Attributable to: |  |  |
Ordinary shareholders |  | 2 , 412 | (1 , 269)
Non-controlling interests (NCI) |  | (8) | (5)
Profit/(loss) for the year |  | 2, 404 | (1 , 2 74)
Other comprehensive (expense)/income (OCI) |  | (171) | 522
Total comprehensive income/(expense) for the year |  | 2, 233 | (752)
Earnings/(loss) per ordinary share attributable to ordinary shareholders: | 6 |  |
From continuing operations: |  |  |
Basic |  | 28. 85p | (14 . 24)p
Diluted |  | 28 .7 0p | (14 . 24)p
From continuing and discontinued operations: |  |  |
Basic |  | 28. 85p | (15. 20)p
Diluted |  | 28 .7 0p | (1 5 .2 0)p

1
2
1 Cost of sales includes a net release for expected credit losses (ECLs) of £48 m (2022: charge of £7 3 m). Further detail can be found in note 14
2 Included within net financing are fair value changes on derivative contracts. Further details can be found in notes 2, 4 and 20
114
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of comprehensive income
Year ended 31 December 2023
Notes

|  | 2023 | 2022
|  | £m | £m
Profit/(loss) for the year |  | 2, 404 | (1 , 2 74)
Other comprehensive income/(expense) (OCI) |  |  |
Actuarial movements on post-retirement schemes | 22 | 116 | (156)
Revaluation to fair value of other investments | 12 | (4) | (4)
Share of OCI of joint ventures and associates | 12 | 1 | 2
Related tax movements | 5 | (4 3) | 89
Items that will not be reclassified to profit or loss |  | 70 | (69)
Foreign exchange translation differences on foreign operations |  | (226) | 452
Foreign exchange translation differences reclassified to income statement |  |  |
on disposal of businesses | 27 | 1 | 65
Hedging reserves reclassified to income statement on disposal of businesses |  | – | 111
NCI disposed of on disposal of businesses |  | – | 1
Movement on fair values charged to cash flow hedge reserve |  | (82) | (7)
Reclassified to income statement from cash flow hedge reserve |  | 61 | (5 5)
Costs of hedging |  | – | 10
Share of OCI of joint ventures and associates | 12 | 1 | –
Related tax movements | 5 | 4 | 14
Items that will be reclassified to profit or loss |  | (2 41) | 591
Total other comprehensive (expense)/income |  | (171) | 522
Total comprehensive income/(expense) for the year |  | 2, 233 | (752)
Attributable to: |  |  |
Ordinary shareholders |  | 2 , 241 | (74 8)
NCI |  | (8) | (4)
Total comprehensive income/(expense) for the year |  | 2, 233 | (752)
Total comprehensive income/(expense) for the year attributable to ordinary |  |  |
shareholders arises from: |  |  |
Continuing operations |  | 2 , 2 41 | (6 73)
Discontinued operations |  | – | (7 5)
Total comprehensive income/(expense) for the year attributable to ordinary shareholders |  | 2 , 2 41 | (74 8)

115
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheet
At 31 December 2023
Notes

|  | 2023 | 2022
|  | £m | £m
ASSETS |  |  |
Intangible assets | 9 | 4 ,00 9 | 4,0 98
Property, plant and equipment | 10 | 3 ,7 2 8 | 3,936
Right-of-use assets | 11 | 905 | 1,061
Investments – joint ventures and associates | 12 | 479 | 42 2
Investments – other | 12 | 31 | 36
Other financial assets | 20 | 360 | 542
Deferred tax assets | 5 | 2, 998 | 2 ,7 31
Post-retirement scheme surpluses | 22 | 782 | 613
Non-current assets |  | 13, 292 | 13 ,4 39
Inventories | 13 | 4 ,84 8 | 4,7 0 8
Trade receivables and other assets | 14 | 8 ,1 2 3 | 6, 936
Contract assets | 15 | 1 ,2 42 | 1, 481
Taxation recoverable |  | 80 | 127
Other financial assets | 20 | 34 | 141
Short-term investments | 20 | – | 11
Cash and cash equivalents | 16 | 3,784 | 2, 607
Current assets |  | 18 ,111 | 16 ,011
Assets held for sale | 27 | 109 | –
TOTAL ASSETS |  | 31 , 512 | 29, 450
LIABILITIES |  |  |
Borrowings and lease liabilities | 17 | (8 09) | (35 8)
Other financial liabilities | 20 | (4 4 8) | (1,0 16)
Trade payables and other liabilities | 19 | (6 ,8 9 6) | (6,983)
Contract liabilities | 15 | (6,0 9 8) | (4 , 82 5)
Current tax liabilities |  | (14 3) | (1 04)
Provisions for liabilities and charges | 21 | (5 32) | (6 32)
Current liabilities |  | (14 , 926) | (1 3, 91 8)
Borrowings and lease liabilities | 17 | (4 , 9 50) | (5 ,597)
Other financial liabilities | 20 | (1,983) | (3 ,2 30)
Trade payables and other liabilities | 19 | (1,927) | (2 , 36 4)
Contract liabilities | 15 | (8 ,4 3 8) | (7, 3 3 7)
Deferred tax liabilities | 5 | (33 0) | (28 6)
Provisions for liabilities and charges | 21 | (1, 49 7) | (1 ,701)
Post-retirement scheme deficits | 22 | (1 ,0 35) | (1,033)
Non-current liabilities |  | (20 ,1 60) | (21, 548)
Liabilities associated with assets held for sale | 27 | (55) | –
TOTAL LIABILITIES |  | (35 ,1 41) | (35,466)
NET LIABILITIES |  | (3,629) | (6, 016)
EQUITY |  |  |
Called-up share capital | 23 | 1, 684 | 1 , 6 74
Share premium |  | 1,012 | 1,012
Capital redemption reserve |  | 167 | 1 66
Cash flow hedge reserve |  | 12 | 26
Translation reserve |  | 634 | 861
Accumulated losses |  | (7, 1 9 0) | (9,7 89)
Equity attributable to ordinary shareholders |  | (3, 681) | (6, 05 0)
Non-controlling interest (NCI) |  | 52 | 3 4
TOTAL EQUITY |  | (3,629) | (6, 016)

The Financial Statements on pages 114 to 184 were approved by the Board on 22 February 2024 and signed on its behalf by:
Tufan Erginbilgic Helen McCabe
Chief Executive Chief Financial Officer
116
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated cash flow statement
Year ended 31 December 2023
Notes

|  |  | Restated
|  | 2023 | 2022
|  | £m | £m
Reconciliation of cash flows from operating activities |  |  |
Operating profit from continuing operations |  | 1,944 | 837
Operating profit from discontinued operations | 27 | – | 86
Operating profit |  | 1,944 | 923
Loss on disposal of property, plant and equipment |  | 18 | 18
Share of results of joint ventures and associates | 12 | (17 3) | (4 8)
Dividends received from joint ventures and associates | 12 | 54 | 7 3
Amortisation and impairment of intangible assets | 9 | 272 | 2 87
Depreciation and impairment of property, plant and equipment | 10 | 423 | 4 30
Depreciation and impairment of right-of-use assets | 11 | 334 | 287
Adjustment of amounts payable under residual value guarantees within lease liabilities | 18 | (10) | (3)
Impairment of and other movements on investments | 12 | – | 75
Decrease in provisions |  | (3 2 5) | (19 7)
Increase in inventories |  | (20 0) | (8 87)
Movement in trade receivables/payables and other assets/liabilities |  | (1 ,3 4 6) | (56)
Movement in contract assets/liabilities |  | 2 ,70 3 | 1 ,75 3
Cash flows on other financial assets and liabilities held for operating purposes |  | (845) | (6 60)
Cash flows on settlement of excess derivative contracts |  | (38 9) | (326)
Interest received |  | 1 59 | 36
Net defined benefit post-retirement cost recognised in profit before financing | 22 | 41 | 27
Cash funding of defined benefit post-retirement schemes | 22 | (6 9) | (8 1)
Share-based payments | 24 | 66 | 47
Net cash inflow from operating activities before taxation |  | 2 ,6 57 | 1,698
Taxation paid |  | (17 2) | (1 74)
Net cash inflow from operating activities |  | 2, 48 5 | 1, 524
Cash flows from investing activities |  |  |
Movement in other investments | 12 | 1 | (5)
Additions of intangible assets |  | (28 4) | (23 7)
Disposals of intangible assets | 9 | 4 | 8
Purchases of property, plant and equipment |  | (4 2 9) | (3 59)
Disposals of property, plant and equipment |  | 10 | 4 8
Acquisition of businesses |  | (14) | –
Disposal of businesses (including cash flows on disposals in prior periods) | 27 | (4) | 1, 398
Movement in investments in joint ventures and associates | 12 | (9) | (2 4)
Movement in short-term investments |  | 11 | (3)
Cash flows on other financial assets and liabilities held for non-operating purposes |  | (12) | –
Net cash (outflow)/inflow from investing activities |  | (7 26) | 826
Cash flows from financing activities |  |  |
Repayment of loans |  | (1) | (2, 024)
Proceeds from increase in loans |  | 2 | 1
Capital element of lease payments |  | (29 1) | (2 18)
Net cash flow from decrease in borrowings and lease liabilities |  | (29 0) | (2 , 241)
Interest paid |  | (19 6) | (23 5)
Interest element of lease payments |  | (8 5) | (6 8)
Fees paid on undrawn facilities |  | (52) | (49)
Transactions with NCI |  | 77 | 57
Dividends to NCI |  | (2) | (3)
Redemption of C Shares |  | (1) | (1)
Net cash outflow from financing activities |  | (549) | (2,540)

1
2
1, 3
4
117
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated cash flow statement continued
Year ended 31 December 2023
Notes

|  | Restated
| 2023 | 2022
| £m | £m
Change in cash and cash equivalents | 1, 210 | (19 0)
Cash and cash equivalents at 1 January | 2, 605 | 2,639
Exchange (losses)/gains on cash and cash equivalents | (8 4) | 156
Cash and cash equivalents at 31 December 5 | 3,7 31 | 2 ,60 5

1
1 The cash flow statement to 31 December 2022 has been represented as a result of a change in accounting policy to disclose cash flows on settlement of excess derivative contracts as cash
flows from operating activities. As a result, there has been a decrease in cash flows from operating activities during the year to 31 December 2022 from £1 , 8 5 0 m to £1 , 5 2 4 m and a decrease
in cash outflow from financing activities from £(2 , 8 6 6)m to £(2 , 5 4 0)m. There is no impact to the total change in cash and cash equivalents or to any alternative performance measures. See
note 1 for further detail
2 Predominately relates to cash settled on derivative contracts held for operating purposes
3 In 2020, the Group experienced a significant decline in its medium-term outlook and consequently a significant deterioration to its forecast net USD cash inflows. The Group took action
to reduce the size of the USD hedge book by $11.8bn across 2020 to 2026 to reflect the fact that at that time, future operating cash flows were no longer forecast to materialise. To achieve
the necessary reduction in the hedge book, a separate and distinct set of foreign exchange derivative instruments were entered into to buy $11.8bn. The associated cash outflow of these
transactions is £1,674m and occurs over the period 2020 to 2026. This action had the impact of fixing the fair value of the over-hedged position and provided certainty over when the cash
flows to settle the position would occur in future periods. During the year, the Group incurred a cash outflow of £38 9 m (2022: £3 26 m) and estimates that future cash outflows of £146m will
be incurred in 2024 and £175m spread over 2025 and 2026
4 Relates to NCI investment received in the year, in respect of Rolls-Royce SMR Limited
5 The Group considers overdrafts (repayable on demand) and cash held for sale 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
In deriving the consolidated cash flow statement, movement in balance sheet items have been adjusted for non-cash items. The cash flow in the
year includes the sale of goods and services to joint ventures and associates – see note 26.
2023
£m
2022
£m
Reconciliation of movements in cash and cash equivalents to movements in net debt
Change in cash and cash equivalents 1,210 (190)
Cash flow from decrease in borrowings and lease liabilities 290 2,241
Cash flow from (decrease)/increase in short-term investments (11) 3
Change in net debt resulting from cash flows 1,489 2,054
Lease additions, modifications and other non-cash adjustments on borrowings and lease liabilities (191) (170)
Exchange gains/(losses) on net debt 57 (150)
Fair value adjustments 7 70
Debt disposed of on disposal of businesses – 53
Movement in net debt 1,362 1,857
Net debt at 1 January (3,337) (5,194)
Net debt at 31 December excluding the fair value of swaps (1,975) (3,337)
Fair value of swaps hedging fixed rate borrowings 23 86
Net debt at 31 December (1,952) (3,251)
118
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated cash flow statement continued
Year ended 31 December 2023
The movement in net debt (defined by the Group as including the items shown below) is as follows:
At 1 January
£m
Funds
flow
£m
Net debt on
disposal
£m
Exchange
differences
£m
Fair value
adjustments
£m
Reclassi-
fications
£m
Other
movements
£m
At
31 December
£m
2023
Cash at bank and in hand 847 (79) – (29) – – – 739
Money market funds 34 1,043 – – – – – 1,077
Short-term deposits 1,726 297 – (55) – – – 1,968
Cash and cash equivalents
(per balance sheet) 2,607 1,261 – (84) – – – 3,784
Overdrafts (2) (51) – – – – – (53)
Cash and cash equivalents
(per cash flow statement) 2,605 1,210 – (84) – – – 3,731
Short-term investments 11 (11) – – – – – –
Other current borrowings (1) (1) – – (13) (462) (1) (478)
Non-current borrowings (4,105) – – 59 20 462 (4) (3,568)
Lease liabilities (1,847) 291 – 82 – – (186) (1,660)
Financial liabilities (5,953) 290 – 141 7 – (191) (5,706)
Net debt excluding the fair value
of swaps (3,337) 1,489 – 57 7 – (191) (1,975)
Fair value of swaps hedging fixed rate
borrowings
1
86 – – (59) (4) – – 23
Net debt (3,251) 1,489 – (2) 3 – (191) (1,952)
2022
Cash at bank and in hand 795 17 – 35 – – – 847
Money market funds 49 (15) – – – – – 34
Short-term deposits 1,777 (171) – 120 – – – 1,726
Cash and cash equivalents
(per balance sheet) 2,621 (169) – 155 – – – 2,607
Cash and cash equivalents included within
assets held for sale 25 (26) – 1 – – – –
Overdrafts (7) 5 – – – – – (2)
Cash and cash equivalents
(per cash flow statement) 2,639 (190) – 156 – – – 2,605
Short-term investments 8 3 – – – – – 11
Other current borrowings (2) 2 – (1) – – – (1)
Non-current borrowings (6,023) 2,000 – (125) 72 – (29) (4,105)
Borrowings included within liabilities
held for sale (59) 21 40 – (2) – – –
Lease liabilities (1,744) 217 – (179) – – (141) (1,847)
Lease liabilities included within liabilities
held for sale (13) 1 13 (1) – – – –
Financial liabilities (7,841) 2,241 53 (306) 70 – (170) (5,953)
Net debt excluding the fair value
of swaps (5,194) 2,054 53 (150) 70 – (170) (3,337)
Fair value of swaps hedging fixed rate
borrowings
1
37 – – 125 (76) – – 86
Net debt (5,157) 2,054 53 (25) (6) – (170) (3,251)
1 Fair value of swaps hedging fixed rate borrowings reflects the impact of derivatives on repayments of the principal amount of debt. Net debt therefore includes the fair value of derivatives
included in fair value hedges (2023: £34m, 2022: £38m) and the element of fair value relating to exchange differences on the underlying principal of derivatives in cash flow hedges
(2023: £(11)m, 2022: £48m)
119
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of changes in equity
Year ended 31 December 2023
The following describes the nature and purpose of each reserve within equity:
Share capital – The nominal value of ordinary shares of 20p each in issue.
Share premium – Proceeds received in excess of the nominal value of ordinary shares issued, less the costs of issue.
Capital redemption reserve – Amounts transferred from accumulated losses on the repurchase of ordinary shares or the redemption of C Shares.
In Rolls-Royce Holdings plc’s own Financial Statements, C Shares are issued from the merger reserve. This reserve was created by a scheme of
arrangement in 2011. As this reserve is eliminated on consolidation in the Consolidated Financial Statements, the C Shares are shown as being
issued from the capital redemption reserve.
Hedging reserves – Cumulative gains and losses on hedging instruments deemed effective in cash flow hedges and cost of hedging reserve.
Merger reserve – The premium on issuing shares to acquire a business where merger relief in accordance with the Companies Act 2006 applies.
Translation reserve – Gains and losses arising on retranslating the net assets of overseas operations into sterling.
Accumulated losses – All other net gains and losses and transactions with owners not recognised elsewhere and ordinary shares held for the
purpose of share-based payment plans.
Non-controlling interests – The share of net assets or liabilities of subsidiaries held by third parties.

|  |  |  |  |  |  | Attributable to ordinary shareholders |  |  |  |
|  |  |  | Capital | Cash flow |  | Trans- | Accum- |  |  |
|  | Share | Share | redemption | hedging | Merger | lation | ulated |  |  | Total
|  | capital | premium | reserve | reserve | reserve | reserve | losses | Total | NCI | equity
| Notes | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m
At 1 January 2023 |  | 1 , 6 74 | 1,012 | 166 | 26 | – | 8 61 | (9,78 9) | (6, 05 0) | 34 | (6, 01 6)
Profit/(loss) for the year |  | – | – | – | – | – | – | 2 , 41 2 | 2 , 412 | (8) | 2 ,4 04
Foreign exchange translation |  |  |  |  |  |  |  |  |  |  |
differences on foreign |  |  |  |  |  |  |  |  |  |  |
operations |  | – | – | – | – | – | (226) | – | (226) | – | (226)
Foreign exchange translation |  |  |  |  |  |  |  |  |  |  |
differences reclassified to income statement on disposal |  |  |  |  |  |  |  |  |  |  |
of businesses | 27 | – | – | – | – | – | 1 | – | 1 | – | 1
Actuarial movements on post-retirement schemes | 22 | – | – | – | – | – | – | 116 | 116 | – | 116
Fair value movement on cash |  |  |  |  |  |  |  |  |  |  |
flow hedges |  | – | – | – | (8 2) | – | – | – | (82) | – | (8 2)
Reclassified to income |  |  |  |  |  |  |  |  |  |  |
statement from cash flow |  |  |  |  |  |  |  |  |  |  |
hedge reserve |  | – | – | – | 61 | – | – | – | 6 1 | – | 61
Revaluation to fair value of other investments | 12 | – | – | – | – | – | – | (4) | (4) | – | (4)
OCI of joint ventures and associates | 12 | – | – | – | 2 | – | (1) | 1 | 2 | – | 2
Related tax movements | 5 | – | – | – | 5 | – | (1) | (4 3) | (39) | – | (39)
Total comprehensive (expense)/ |  |  |  |  |  |  |  |  |  |  |
income for the year |  | – | – | – | (14) | – | (2 27) | 2 ,4 82 | 2 , 2 41 | (8) | 2 , 233
Issues of ordinary shares |  | 1 0 | – | – | – | – | – | – | 10 | – | 1 0
Redemption of C Shares | 20 | – | – | 1 | – | – | – | (1) | – | – | –
Shares issued to employee |  |  |  |  |  |  |  |  |  |  |
share trust |  | – | – | – | – | – | – | (1 0) | (1 0) | – | (1 0)
Share-based payments – |  |  |  |  |  |  |  |  |  |  |
direct to equity |  | – | – | – | – | – | – | 49 | 49 | – | 49
Dividends to NCI |  | – | – | – | – | – | – | – | – | (2) | (2)
Transactions with NCI |  | – | – | – | – | – | – | 57 | 57 | 28 | 85
Related tax movements |  | – | – | – | – | – | – | 22 | 22 | – | 22
Other changes in equity |  |  |  |  |  |  |  |  |  |  |
in the year |  | 10 | – | 1 | – | – | – | 117 | 128 | 26 | 154
At 31 December 2023 |  | 1 ,684 | 1,012 | 16 7 | 12 | – | 63 4 | (7, 1 9 0) | (3 ,6 81) | 52 | (3 ,629)

1
2
3
120
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of changes in equity continued
Year ended 31 December 2023

|  |  |  |  |  |  | Attributable to ordinary shareholders |  |  |  |
|  |  |  | Capital |  |  | Trans- | Accum- |  |  |
|  | Share | Share | redemption | Hedging | Merger | lation | ulated |  |  | Total
|  | capital | premium | reserve | reserves | reserve | reserve | losses | Total | NCI | equity
| Notes | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m
At 1 January 2022 |  | 1 , 6 74 | 1,0 12 | 1 65 | (4 5) | 650 | 3 42 | (9 ,18 9) | (5, 391) | 26 | (5, 365)
Loss for the year |  | – | – | – | – | – | – | (1 , 26 9) | (1 , 26 9) | (5) | (1 , 2 74)
Foreign exchange translation |  |  |  |  |  |  |  |  |  |  |
differences on foreign |  |  |  |  |  |  |  |  |  |  |
operations |  | – | – | – | – | – | 4 52 | – | 452 | – | 4 52
Foreign exchange translation |  |  |  |  |  |  |  |  |  |  |
differences reclassified to income statement on disposal |  |  |  |  |  |  |  |  |  |  |
of businesses |  | – | – | – | – | – | 65 | – | 65 | – | 65
Hedging reserves reclassified |  |  |  |  |  |  |  |  |  |  |
to income statement on disposal of businesses |  | – | – | – | 111 | – | – | – | 111 | – | 111
NCI disposed of on disposal |  |  |  |  |  |  |  |  |  |  |
of business |  | – | – | – | – | – | – | – | – | 1 | 1
Actuarial movements on post-retirement schemes | 22 | – | – | – | – | – | – | (156) | (1 56) | – | (1 56)
Fair value movement on cash |  |  |  |  |  |  |  |  |  |  |
flow hedges |  | – | – | – | (7) | – | – | – | (7) | – | (7)
Reclassified to income |  |  |  |  |  |  |  |  |  |  |
statement from cash flow |  |  |  |  |  |  |  |  |  |  |
hedge reserve |  | – | – | – | (55) | – | – | – | (5 5) | – | (5 5)
Costs of hedging |  | – | – | – | 10 | – | – | – | 10 | – | 10
Revaluation to fair value of other investments | 12 | – | – | – | – | – | – | (4) | (4) | – | (4)
OCI of joint ventures and associates | 12 | – | – | – | – | – | – | 2 | 2 | – | 2
Related tax movements | 5 | – | – | – | 12 | – | 2 | 89 | 103 | – | 1 03
Total comprehensive income/ |  |  |  |  |  |  |  |  |  |  |
(expense) for the year |  | – | – | – | 71 | – | 51 9 | (1 , 33 8) | (74 8) | (4) | (752)
Redemption of C Shares | 20 | – | – | 1 | – | – | – | (1) | – | – | –
Share-based payments – direct |  |  |  |  |  |  |  |  |  |  |
to equity |  | – | – | – | – | – | – | 46 | 4 6 | – | 46
Dividends to NCI |  | – | – | – | – | – | – | – | – | (3) | (3)
Transactions with NCI |  | – | – | – | – | – | – | 42 | 42 | 15 | 57
Transfer to realised profit |  | – | – | – | – | (650) | – | 6 50 | – | – | –
Related tax movements |  | – | – | – | – | – | – | 1 | 1 | – | 1
Other changes in equity |  |  |  |  |  |  |  |  |  |  |
in the year |  | – | – | 1 | – | (6 50) | – | 738 | 89 | 12 | 101
At 31 December 2022 |  | 1 , 6 74 | 1, 012 | 166 | 26 | – | 861 | (9,7 8 9) | (6 ,0 50) | 34 | (6, 016)

1
2
3
4
1 At 31 December 2023, 52,912,406 ordinary shares with a net book value of £2 2m (2022: 11,402,796 ordinary shares with a net book value of £2 7m) were held for the purpose of share-based
payment plans and included in accumulated losses. During the year:
– 7,875,240 ordinary shares with a net book value of £1 5m (2022: 18,488,558 ordinary shares with a net book value of £39 m) vested in share-based payment plans;
– the Company issued 49,100,000 (2022: none) new ordinary shares to the Group’s share trust for its employee share-based payment plans with a net book value of £10m (2022: £nil); and
– the Company acquired none (2022: none) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 284,850 (2022: 486,163) of its ordinary shares
through purchases on the London Stock Exchange
2 Share-based payments – direct to equity is the share-based payment charge for the year less actual cost of vesting excluding those vesting from own shares and cash received on
share-based schemes vesting
3 Relates to NCI investment received in the year in respect of Rolls-Royce SMR Limited
4 On disposal of ITP Aero on 15 September 2022, the premium recognised on issue of shares for the previous acquisition became realised on receipt of qualifying consideration. As such, the
total merger reserve has been transferred to accumulated losses
121
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies
The Company and the Group
Rolls-Royce Holdings plc (the ‘Company’) is a public company limited by shares incorporated under the Companies Act 2006 and domiciled in
England in the United Kingdom. The Consolidated Financial Statements of the Company for the year ended 31 December 2023 consist of the
audited consolidation of the Financial Statements of the Company and its subsidiaries (together referred to as the Group) together with the
Group’s interest in jointly controlled and associated entities.
Basis of preparation and statement of compliance
The Company has elected to prepare its individual Company Financial Statements under FRS 101 Reduced Disclosure Framework� They are set
out on pages 185 to 189 with the associated accounting policies from page 187.
The Consolidated Financial Statements have been prepared in accordance with UK adopted International Accounting Standards (IAS) in
conformity with the requirements of the Companies Act 2006 and interpretations issued by the IFRS Interpretations Committee (IFRS IC)
applicable to companies reporting under UK adopted IFRS.
The Consolidated Financial Statements have been prepared on a going concern basis as described on page 58. The historical cost basis has
been used except where IFRS require the revaluation of financial instruments to fair value and certain other assets and liabilities on an alternative
basis, most significantly post-retirement scheme obligations are valued on the basis required by IAS 19 Employee Benefits�
The Consolidated Financial Statements are presented in sterling, which is the Company’s functional currency.
The preparation of the Consolidated Financial Statements requires management to make judgements and estimates that affect the statutory
amounts of assets and liabilities at the date of the Consolidated Financial Statements and the statutory amounts of revenue and expenses during
the reporting period. Actual future outcomes could differ from those estimates.
Going concern
The Directors have undertaken a comprehensive going concern review. In adopting the going concern basis for preparing the Consolidated
and Company Financial Statements, the Directors have undertaken a review of the Group’s cash flow forecasts and available liquidity, along with
consideration of possible risks and uncertainties over an 18-month period from the date of this report to August 2025. The Directors have
determined that an 18-month period is an appropriate timeframe over which to assess going concern as it considers the Group’s short- to
medium-term cash flow forecasts and available liquidity.
Recognising the challenges of reliably estimating and forecasting the impact of external factors on the Group, the Directors have considered
the following two forecasts in their assessment of going concern, along with a likelihood assessment of these forecasts:
— the base case forecast, which reflects the Directors current expectations of future trading; and
—
a stressed downside forecast, which has also been modelled and envisages a ‘stressed’ or ‘downside’ situation that is considered severe
but plausible�
Further details are given in the going concern review on page 58. After reviewing the current liquidity position and the cash flow forecasts
modelled under both the base case and stressed downside, the Directors consider that the Group has sufficient liquidity to continue in
operational existence for a period of at least 18 months from the date of this report and are therefore satisfied that it is appropriate to adopt the
going concern basis of accounting in preparing the financial statements.
Climate change
In preparing the Consolidated Financial Statements the Directors have considered the potential impact of climate change, particularly in
the context of the disclosures included in the 2023 Strategic Report and the stated sustainability approach. The Group’s climate strategy sets
out how it is responding to the climate challenge by:
—
decarbonising its operations, facilities and business activities. This will be met through continued investment in onsite renewable energy
installations; the procurement of renewable energy; and continued investment in energy efficiency improvements to reduce the Group’s
overall energy demands and operating costs. An estimate of the investment required to meet these scope 1 + 2 emission improvements is
included in the forecasts that support these Consolidated Financial Statements;
— enabling customers to operate their products in a way that is compatible with low or net zero carbon emissions. To accelerate this, the Group
has demonstrated that all the commercial aero engines it produces, and the most popular reciprocating engines (that represent 80% of the
Power Systems product portfolio) are compatible for use on sustainable fuels. The Group is also working with its armed forces customers to
achieve the same for the engines they use from Defence;
—
delivering new products and solutions that can accelerate the global energy transition, including investment in battery energy storage
solutions in Power Systems, and in small modular reactors (SMRs). In the year, research and development (R&D) costs of £137m (2022: £108m)
within New Markets included investment to ready the SMR to progress through the Great British Nuclear SMR technology selection process
and the second stage of the design assessment process. Future investment required to deliver these technologies is included in the forecasts
that support the Consolidated Financial Statements; and by
—
creating the necessary enabling environment, with public and policy support, to achieve our collective climate goals, through actively
engaging with policy makers, regulators and others to advocate for the necessary policy and economic support we have identified.
122
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Climate change continued
The climate change scenarios previously prepared to assess the Group’s strategic planning and its approach to managing climate-related risk
have continued to develop over the last year, as set out in the Strategic Review. The scenarios are used to assess how each of them impacts: the
life of assets; future revenue projections; future profitability; and whether additional costs may occur. There remains inherent uncertainty around
how the scenarios will impact the Group. The Directors assess the assumptions on a regular basis to ensure that they are consistent with the risk
management activities and the commitments made to investors and other stakeholders.
Based on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations, the Group assesses the potential impact of
climate-related transition and physical risks and opportunities. The Group has identified four key transition risks (relating to customer demand,
cost due to carbon pricing, cost due to commodity pricing and changing investment needs) and three key physical risks (relating to facility
disruption, supply chain disruption and impact on product performance) which may arise from the energy transition. The transition risks are the
most likely to have an impact on the Consolidated Financial Statements, as exposure to physical risks will be greater in the longer-term.
The key sources of estimation uncertainty at the balance sheet date are set out on page 126 and the Directors have considered the impact of
climate change on those estimates. The key assumptions used in this assessment are consistent with those used in the climate scenarios presented
in the Strategic Review. A summary of the assessment is set out below.
Risk
How reflected in the
Financial Statements Impact on Civil Aerospace LTSAs
Impact on impairment of
non-financial assets
Impact on UK deferred tax asset
recoverability
Changing
customer demand
Overall forecast demand is
expected to be robust in
each scenario, although
product mix may change
with customer requirements.
Forecast EFH are based on
customer and market data
and therefore already
include the latest
expectation of the impact
of climate change on
demand. A sensitivity
disclosing the impact of a
1% change in EFH forecasts
over the remaining term of
Civil LTSA contracts is
disclosed on page 129.
Given the level of headroom
in the programme intangible
assets and Rolls-Royce
Power Systems and
Rolls-Royce Deutschland
goodwill, the potential
impact of a change in
customer demand does not
indicate any potential
impact�
Forecast EFH are based on
customer and market data
and therefore include the
latest expectation of the
impact of climate change on
demand. A sensitivity
disclosing the impact of a 5%
change in margin or shop
visits is disclosed on page
130�
Changes in costs
due to carbon
pricing
1
and
commodity price
changes
2
1 Based on the IEA
Net Zero by 2050
scenario ($60 per
tonne of carbon in
2023 to $250 in
2050)
2 Commodity prices
from the Oxford
Economics Global
Climate Service and
Databank
The potential impact of
carbon pricing has been
estimated by applying
carbon prices to the
forecast emissions
generated by the Group
and its supply chain. This
impact, together with that
from estimated commodity
prices under each
scenario, have been
added/deducted to
forecast costs in the base
forecasts.
The analysis reflects that:
decarbonisation activities
will occur in both the
Group and its supply chain;
and that some supplier
contracts offer protection
from cost increases in the
short to medium term
where pricing is fixed or
subject to capped
escalation clauses.
The increase in the cost
base of the current Civil
LTSA contracts due to
carbon and commodity
prices is estimated to be
around 1% (2022: 1%) with
the incremental cost
included in the cost to
complete estimates that
drive revenue recognition.
Changes in estimates have
not had a material impact
on revenue catch-ups or
contract loss provisions in
the year (2022: not
material).
A sensitivity disclosing the
impact of a 2% change in
shop visit costs over the
remaining term of Civil
LTSA contracts is disclosed
on page 129�
Given the level of headroom
in the programme intangible
assets and Rolls-Royce
Power Systems and
Rolls-Royce Deutschland
goodwill, the potential
impact of the cost increased
in the scenarios does not
indicate any potential
impact�
The assessment has
considered each of the
Group’s <1.5°C, 1.7°C and
3.5°C scenarios.
The forecast of probable
future taxable profits reflects
the increase in the cost base
that could arise from carbon
and commodity prices
consistent with the
methodology applied for Civil
Aerospace LTSA.
Disclosed on page 130 is the
impact of changing the
proportion of cost increases
that can be passed onto
customers following the
expiry of existing LTSAs.
Change in
investment
requirement
Changing investment
requirements may arise
due to the introduction/
acceleration of new
technologies�
Research is expensed and
development costs
capitalised as incurred.
No impact to existing
LTSAs.
Impairment tests are either:
performed on a value in use
basis and the investment
associated with new
products is required to
be excluded; or have
sufficient headroom
such that the estimated
investment requirement
is not significant.
Given the UK deferred tax
asset recoverability is largely
dependent on Civil and
Defence aerospace markets,
the increase in research and
development expenditure
required under this scenario
does not have a material
impact�
123
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Climate change continued
Items that may be impacted by climate-related risks, but which are not considered to be key areas of judgement or sources of estimation
uncertainty in the current financial year are outlined below.
Useful lives of assets – The useful lives of property, plant and equipment and right-of-use assets could be reduced by climate-related matters,
for example, as a result of physical risks, obsolescence or legal restrictions. The change in useful lives would have a direct impact on the amount
of depreciation or amortisation recognised each year from the date of reassessment. The Directors’ review of useful lives has taken into
consideration the impacts of the Group’s decarbonisation strategy (including the remaining useful life of assets that might be incompatible with
the Group’s commitment to decarbonise its facilities and considering the Group’s physical risk assessment) and has not had a material impact on
the results for the year. The Directors have also considered the remaining useful economic lives of material intangible assets, including the
£1,920m and £238m capitalised development spend associated with the Trent and business aviation programmes disclosed in note 9. Given the
measures the Group is taking, including demonstration that all the commercial aero-engines and 80% of the portfolio in Power Systems are
compatible with SAF, the Directors judge that no adjustment is required to the useful economic lives.
Inventory valuation – Climate-related matters may affect the value of inventories as a result of a decline in selling prices, or they could become
obsolete due to a reduction in demand. After consideration of the typical stock-turns of the inventory in relation to the rate of change in the
market, the Directors consider that inventory is appropriately valued.
Recoverability of trade receivables and contract assets – The impact of climate-related matters could have an impact on the Group’s customers
in the future, especially those customers in the Civil Aerospace division. No material climate-related issues have arisen during the year that have
impacted the assessment of the recoverability of receivables. The Group’s expected credit loss (ECL) provision uses credit ratings which
inherently will include the market’s assessment of the climate change impact on credit risk of the counter parties. Given the maturity time of trade
receivables and the majority of contract assets, climate change is unlikely to cause a material increase on counter party credit risk in that time.
Share-based payments – A number of remuneration packages have included sustainability metrics. The Group is committed to reaching net zero
carbon emissions by 2050, short-term targets were announced to help accelerate progress against this goal. These targets formed part of the
Groups remuneration policy and at the end of the 2023, these targets have been met. A new remuneration policy is to be considered by
shareholders at the AGM in May 2024. In addition, sustainability metrics are included as a performance condition in some of the long-term
incentive plans awarded to employees. The charge to the income statement reflects both where performance conditions have been met in 2023
and the expected outcome of future performance conditions.
Defined benefit pension plans – Climate-related risks could influence the performance of the invested assets and affect the financial position of
defined benefit pension plans. As a result, this could have implications on the expected return on plan assets and measurement of defined
benefit liabilities in future years. The Trustee of the Rolls-Royce UK Pension Fund (RRUKPF) meets the UK climate-related regulatory
requirements. When making decisions about the plan, its analysis is carried out in a way consistent with TCFD. The Trustee has set a target for
the plan asset portfolio to be net zero by 2050. Having assessed the risks and opportunities of climate change and considered the nature of the
assets of the fund, climate change is unlikely to have a material impact on the position in the Consolidated Financial Statements.
Going concern – Given the short-term nature of the Group’s going concern assessment, the impact of climate change does not have a significant
impact. The Directors have considered the level of liquidity available, and the potential impact of the climate change risks, in making their
assessment�
Presentation of underlying results
The Group measures financial performance on an underlying basis and discloses this information as an alternative performance measure (APM).
This is consistent with the way that financial performance is measured by the Directors and reported to the Board in accordance with IFRS 8
Operating Segments. The Group believes this is the most appropriate basis to measure the in-year performance, as underlying results reflect
the substance of trading activity, including the impact of the Group’s foreign exchange forward contracts, which economically hedge net foreign
currency cash flows at predetermined exchange rates. In addition, underlying results exclude the accounting impact of acquisition accounting
and business disposals, impairment charges where the reasons are outside of normal operating activities, exceptional items, and certain other
items which are market driven and outside of the control of management. Further details are given in note 2. A reconciliation of APMs to the
statutory equivalent is provided on pages 213 to 217.
124
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Revisions to IFRS applicable in 2023
IFRS 17 Insurance Contracts
IFRS 17, issued in May 2018, establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts
within the scope of the Standard. The Standard is effective for years beginning on or after 1 January 2023 with a requirement to restate
comparatives.
The Group has reviewed whether its arrangements meet the accounting definition of an insurance contract. While some contracts, including
Civil Aerospace LTSAs, may transfer an element of insurance risk, they relate to warranty and service type agreements that are issued in
connection with the Group’s sales of its goods or services and therefore will remain accounted for under the existing revenue and provisions
standards. The Directors have judged that such arrangements entered into after the original equipment sale remain sufficiently related to the
sale of the Group’s goods and services to allow the contracts to continue to be measured under IFRS 15 Revenue from Contracts with Customers
and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The Group has identified that the Standard will impact the results of its captive insurance company as it issues insurance contracts, however,
since the contracts insure other group companies, there is no impact on the Consolidated Financial Statements.
The Group has assessed that its parent company guarantee arrangements in the form of financial or performance guarantees, that meet the IFRS
17 definition of insurance contracts, have no impact on the Consolidated Financial Statements of the Group for the year to 31 December 2023,
however there could be an impact on individual sets of financial statements of companies within the Group.
The Directors are not aware of any other contracts where IFRS 17 would have an impact on the Consolidated Financial Statements.
Other
IAS 12 Income Taxes has been amended to incorporate the following revisions for ‘Deferred Tax related to Assets and Liabilities arising from a
Single Transaction’ and ‘International Tax Reform: Pillar Two Model Rules’. There is no material impact on the Group as a result of the amendments
relating to Deferred Tax related to Assets and Liabilities arising from a Single Transaction.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax) model rules. The legislation has been substantively enacted in some
of the material jurisdictions in which the Group operates, including the UK and Germany, where the rules will be effective from 1 January 2024.
Further information can be found in note 5.
There are no other new standards or interpretations issued by the IASB that had a significant impact on the Consolidated Financial Statements.
Change in accounting policy
At 31 December 2023, cash flows on settlement of excess derivatives have been reclassified from cash flows from financing activities to cash
flows from operating activities in the cash flow statement as a result of a change in accounting policy. In line with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, a change in accounting policy can be made either where it is required by an IFRS or results in the
financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s
financial position, performance or cash flows.
The previous classification as cash flows from financing activities was based on the Directors’ judgement of the economic nature of the activities
as the cash flows relate to cash payments deferred in connection with the Group’s action taken in 2020 to reduce the size of the USD hedge
book by $11.8bn across 2020 to 2026. The Directors have reassessed their judgement in line with IAS 7 Statement of Cash Flows and have
concluded that it would be more appropriate to classify these cash flows as cash flows from operating activities.
As a result of the above, cash flows from operating activities during the year to 31 December 2022 have reduced by £(326)m to £1,524m with a
corresponding decrease in cash outflow from financing activities from £(2,866)m to £(2,540)m. There is no impact to the total change in cash
and cash equivalents or to any alternative performance measures.
The above change resulted from a review which was prompted by an enquiry arising from a review of the Group’s 2022 Annual Report and
Accounts by the Corporate Reporting Review team of the Financial Reporting Council (FRC). The FRC review was part of a regular review and
assessment of the quality of corporate reporting in the UK undertaken by the FRC. Further information regarding the review of the Group’s 2022
Annual Report and Accounts is set out in the Audit Committee report on page 80. The Group agreed to make the above change within its 2023
Annual Report and Accounts.
The FRC review was limited to the published 2022 Annual Report; it did not benefit from a detailed understanding of underlying transactions
and provides no assurance that the 2022 Annual Report is correct in all material respects.
125
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Key areas of judgement and sources of estimation uncertainty
The determination of the Group’s accounting policies requires judgement. The subsequent application of these policies requires estimates, and
the actual outcome may differ from that calculated. The key judgements and key sources of estimation uncertainty at the balance sheet date,
that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year, are
summarised below. Further details, together with sensitivities for key sources of estimation uncertainty where appropriate and practicable, are
included within the significant accounting policies section of this note.
Area Key judgements Key sources of estimation uncertainty Page ref
Revenue
recognition and
contract assets
and liabilities
—
Whether Civil Aerospace OE and aftermarket contracts
should be combined.
— How performance on long-term aftermarket contracts
should be measured.
—
Whether long-term aftermarket contracts contain a
significant financing component.
— Whether any costs should be treated as wastage.
—
Whether the Civil Aerospace LTSA contracts are warranty
style contacts entered into in connection with OE sales
and therefore can be accounted for under IFRS 15.
— Whether sales of spare engines to joint ventures are at
fair value.
—
When revenue should be recognised in relation to spare
engine sales�
—
Estimates of future revenue, including customer
pricing, and costs of long-term contractual
arrangements, including the impact of climate
change�
128
Risk and revenue
sharing
arrangements
— Determination of the nature of entry fees received. 129
Taxation —
Estimates necessary to assess whether it is probable
that sufficient suitable taxable profits will arise in
the UK to utilise the deferred tax assets recognised.
130
Research and
development
—
Determination of the point in time where costs incurred
on an internal programme development meet the
criteria for capitalisation.
—
Determination of the basis for amortising capitalised
development costs.
132
Leases — Determination of the lease term. 133
Impairment of
non-current
assets
—
Determination of cash-generating units for assessing
impairment of goodwill.
—
Whether there are indicators of potential reversal of
previous impairments of programme-related intangible
assets�
134
Provisions — Whether any costs should be treated as wastage.
—
Whether the criteria to recognise transformation and
restructuring provisions have been met.
— Estimates of the time to incorporate a modified and
certified high-pressure turbine (HPT) blade into the
fleet to resolve technical issues on the Trent 1000,
and the implications of this on forecast future costs
when assessing onerous contracts.
— Estimates of the future revenues and costs to fulfil
onerous contracts.
—
Assumptions implicit within the calculation of
discount rates.
135
Post-retirement
benefits
—
Estimates of the assumptions for valuing the net
defined benefit obligation.
136
Material accounting policies
The Group’s material accounting policies are set out on pages 126 to 136. These accounting policies have been applied consistently to all periods
presented in these Consolidated Financial Statements.
Basis of consolidation
The Consolidated Financial Statements include the Company Financial Statements and its subsidiary undertakings, together with the Group’s
share of the results in joint arrangements and associates made up to 31 December.
A subsidiary is an entity controlled by the Company. Control exists when the Company has power over an entity, exposure to variable returns
from its involvement with an entity and the ability to use its power over an entity so as to affect the Company’s returns. Subsidiaries are
consolidated in accordance with IFRS 10 Consolidated Financial Statements�
126
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Basis of consolidation continued
A joint arrangement is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more other
investors under a contractual arrangement. Joint arrangements may be either joint ventures or joint operations. Joint ventures are accounted
for using the equity method of accounting and joint operations are accounted for using proportionate accounting.
An associate is an entity that is neither a subsidiary nor a joint arrangement, in which the Group holds a long-term interest and where the Group
has a significant influence. The results of associates are accounted for using the equity method of accounting.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Adjustments are made to eliminate the profit or
loss arising on transactions with joint arrangements and associates to the extent of the Group’s interest in the entity. Transactions with
non-controlling interests are recorded directly in equity.
Any subsidiary undertaking, joint arrangement or associate sold or acquired during the year are included up to, or from, the date of change of
control. Details of transactions in the year are set out in note 27.
Revenue recognition and contract assets and liabilities
Revenue recognised comprises sales to the Group’s customers after discounts and amounts payable to customers. Revenue excludes value added
taxes. The transaction price of a contract is typically clearly stated within the contract, although the absolute amount may be dependent on
escalation indices and long-term contracts that require the key estimates highlighted below to be made. Refund liabilities, where sales are made
to customers with a right of return, are not typical in the Group’s contracts. Where they do exist, and consideration has been received, a portion
based on an assessment of the expected refund liability is recognised within other payables. The Group has elected to use the practical
expedient not to adjust revenue for the effect of financing components where the expectation is that the period between the transfer of goods
and services to customers and the receipt of payment is less than a year. Consideration is received in the form of deposits and payments for
completion of milestones or performance obligations. LTSA cash receipts are typically received based on EFHs.
Sales of standard OE, spare parts and time and material (T&M) overhaul services are generally recognised on transfer of control to the customer.
This is generally on delivery to the customer, unless the specific contractual terms indicate a different point. The Directors consider whether
there is a need to constrain the amount of revenue to be recognised on delivery based on the contractual position and any relevant facts,
however, this is not typically required.
Sales of OE and services that are specifically designed for the contract (most significantly in the Defence division) are recognised by reference
to the progress towards completion of the performance obligation, using the cost method described in the key judgements, provided the outcome
of contracts can be assessed with reasonable certainty.
The Group generates a significant portion of its revenue on aftermarket arrangements arising from the installed OE fleet. As a consequence, in
particular in the Civil Aerospace large engine business, the Group will often agree contractual prices for OE deliveries that take into account
the anticipated aftermarket arrangements. Sometimes this may result in losses being incurred on OE. As described in the key judgements, these
contracts are not combined. The consideration in the OE contract is therefore allocated to OE performance obligations and the consideration
in the aftermarket contract to aftermarket performance obligations.
Key areas of the accounting policy are:
—
Future variable revenue from long-term contracts is constrained to take account of the risk of reduced utilisation e.g. EFHs, based on
historical forecasting experience and the risk of aircraft being parked by the customer.
—
A significant amount of revenue and cost related to long-term contract accounting is denominated in currencies other than that of the relevant
Group undertaking, most significantly USD transactions in sterling and euro denominated undertakings. These are translated at estimated
long-term exchange rates.
—
The assessment of stage of completion is generally measured for each contract. However, in certain cases, such as for CorporateCare
agreements, where there are many contracts covering aftermarket services each for a small number of engines, the Group accounts for a
portfolio of contracts together, as the effect on the Consolidated Financial Statements would not differ materially from applying the standard
to the individual contracts in the portfolio. When accounting for a portfolio of LTSAs, the Group uses estimates and assumptions that reflect
the size and composition of the portfolio.
—
A contract asset/liability is recognised where payment is received in arrears/advance of the revenue recognised in meeting
performance obligations.
—
Contract modifications of LTSAs can be accounted for as separate contracts, termination of the existing contract and the creation of a new
contract, or as part of the existing contract. The treatment is dependent on whether the change in scope is because of the addition of promised
goods or services that are distinct and whether the price increases by an amount that reflects their standalone selling prices.
— Where material, wastage costs (see key judgements on page 128) are recorded as an expense and excluded from the measure of progress of
LTSA contracts.
—
The Group recognises a liability for their obligation to repurchase parts it has sold to the maintenance, repair and overhaul bases who overhaul
the Group’s customers’ engines.
If the expected costs to fulfil a contract exceed the expected revenue, a contract loss provision is recognised for the excess costs.
The Group pays participation fees to airframe manufacturers, its customers for OE, on certain programmes. Amounts paid are initially treated as
contract assets and subsequently charged as a reduction to the OE revenue when the engines are transferred to the customer.
The Group has elected to use the practical expedient to expense as incurred any incremental costs of obtaining or fulfilling a contract if the
amortisation period of an asset created would have been one year or less. Where costs to obtain a contract are recognised in the balance sheet,
they are amortised over the performance of the related contract (eight to 23 years).
127
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Key judgement – Whether Civil Aerospace OE and aftermarket contracts should be combined
In the Civil Aerospace division, OE contracts for the sale of engines to be installed on new aircraft are with the airframers, while the contracts
to provide spare engines and aftermarket goods and services are with the aircraft operators, although there may be interdependencies
between them. IFRS 15 includes guidance on the combination of contracts, in particular that contracts with unrelated parties should not be
combined. Notwithstanding the interdependencies, the Directors consider that the engine contract should be considered separately from
the aftermarket contract. In making this judgement, they also took account of industry practice.
Key judgement – How performance on long-term aftermarket contracts should be measured
The Group generates a significant proportion of its revenue from aftermarket arrangements. These aftermarket contracts, such as TotalCare
and CorporateCare agreements in the Civil Aerospace division, cover a range of services and generally have contractual terms covering
more than one year. Under these contracts, the Group’s primary obligation is to maintain customers’ engines in an operational condition.
This is achieved by undertaking various activities, such as maintenance, repair and overhaul, and engine monitoring over the period of the
contract. Revenue on these contracts is recognised over the period of the contract and the basis for measuring progress is a matter of
judgement. The Directors consider that the stage of completion of the contract is best measured by using the actual costs incurred to date
compared to the estimated costs to complete the performance obligations, as this reflects the extent of completion of the activities to
be performed.
Key judgement – Whether long-term aftermarket contracts contain a significant financing component
Long-term aftermarket contracts typically cover a period of eight to 15 years. Their pricing is the subject of negotiation with individual
customers under competitive circumstances. It is the Directors’ judgement that the consideration received approximates to the cash selling
price and any timing difference between consideration being received and the supply of goods and services is typical of the industry and
arises for reasons other than to provide financing. The customers typically pay on an ‘as used’ basis (e.g. USD/EFH), which reflects the wear
and tear of the engine as it flies and aligns to the customer’s own revenue streams. An adjustment to the transaction price is therefore
not required.
Key judgement – Whether any costs should be treated as wastage
In rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a contract where the level of cost
was not reflected in the contract price. The identification of such costs is a matter of judgement and would only be expected to arise where
there has been a series of abnormal events which give rise to a significant level of cost of a nature that the Group would not expect to incur
and hence is not reflected in the contract price. Examples include technical issues that: require resolution to meet regulatory requirements;
have a wide-ranging impact across a product type; and cause significant operational disruption to customers. Similarly, in these rare
circumstances, significant disruption costs to support customers resulting from the actual performance of a delivered good or service may
be treated as a wastage cost. Provision is made for any costs identified as wastage when the obligation to incur them arises – see note 21.
Key judgement – Whether the Civil Aerospace LTSA contracts are warranty style contacts entered into in connection with OE sales and
therefore can be accounted for under IFRS 15
The Group has considered whether these arrangements are insurance contracts as defined in IFRS 17. While they may transfer an element
of insurance risk, they relate to warranty and service type agreements that are entered into in connection with the Group’s sales of its goods
or services and therefore continue to be accounted for under the existing revenue and provisions standards. The Directors have judged
that such arrangements entered into after the original equipment sale remain sufficiently related to the sale of the Group’s goods and
services to allow the contracts to continue to be measured under IFRS 15 and IAS 37.
Key judgement – Whether sales of spare engines to joint ventures are at fair value
The Civil Aerospace division maintains a pool of spare engines to support its customers. Some of these engines are sold to, and held by,
joint venture companies. The assessment of whether the sales price reflects fair value is a key judgement. The Group considers that based
upon the terms and conditions of the sales, and by comparison to the sales price of spare engines to other third parties, the sales made to
joint ventures reflect the fair value of the goods sold. See note 26 for the value of sales to joint ventures during the year.
Key judgement – When revenue should be recognised in relation to spare engine sales
Revenue is recognised at the point in time when a customer obtains control of a spare engine. The customer could be a related party, an
external operator or a spare engine service provider. Depending on the contractual arrangements, judgement is required on when the
Group relinquishes control of spare engines and, therefore, when the revenue is recognised. The point of control passing has been
concluded to correspond to the point of legal sale, even for instances where the customer is contracted to provide some future spare engine
capacity to the Group to support its installed engine base. In such cases, the customer has responsibility for generating revenue from the
engines and exposure to periods of non-utilisation, exposure to risk of damage or loss, risk from residual value movements, and will determine
if and when profits will be made from disposal. The spare engine capacity, that will be made available to the Group in the future, does not
consist of identified assets and the provider retains a substantive right to substitute the asset through the Group’s period of use. It is,
therefore, appropriate to recognise revenue from the sale of the spare engines at the point that title transfers. During 2023, of the total 53
(2022: 44) large spare engine sales delivered, 27 (2022: 20) engines were sold to customers where contractual arrangement allows for some
future spare engine capacity to be used by the Group. These sales contributed £578m (2022: £454m) to revenue for the year.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Key estimate – Estimates of future revenue, including customer pricing, and costs of long-term contractual arrangements, including the
impact of climate change
The Group has long-term contracts that fall into different accounting periods and which can extend over significant periods. The most
significant of these are LTSAs in the Civil Aerospace division, with contracts typically covering a period of 8 to 15 years. The estimated
revenue and costs are inherently imprecise and significant estimates are required to assess: EFHs, time-on-wing and other operating
parameters; the pattern of future maintenance activity and the costs to be incurred; lifecycle cost improvements over the term of the
contracts; and escalation of revenue and costs (that both include the impact of inflation). The impact of climate change on EFHs and costs
is also considered when making these estimates. Industry and customer data on expected levels of utilisation is included in the forecasts
used. Across the length of the current Civil Aerospace LTSA contracts, allowance has been made for around a 1% (2022: 1%) projected cost
increase resulting from carbon pricing and commodity price changes.
The sensitivities below demonstrate how changes in assumptions (including as a result of climate change) could impact the level of revenue
recognised were assumptions to change. The Directors believe that the estimates used to prepare the Consolidated Financial Statements
take account of the inherent uncertainties, constraining the expected level of revenue as appropriate.
Estimates of future LTSA revenue within Civil Aerospace are based upon future EFH forecasts, influenced by assumptions over the recovery
of the civil aviation industry. Finally, many of the revenues and costs are denominated in currencies other than that of the relevant group
undertaking. These are translated at an estimated long-term exchange rate, based on historical trends and economic forecasts.
During the year, changes to the estimate in relation to the Civil Aerospace LTSA contracts resulted in adverse catch-up adjustments to
revenue of £104m (2022: favourable catch up adjustment of £360m).
Based upon the stage of completion of all LTSA contracts within Civil Aerospace as at 31 December 2023, the following reasonably possible
changes in estimates would result in catch-up adjustments being recognised in the period in which the estimates change (at
underlying rates):
—
A change in forecast EFHs of 1% over the remaining term of the contracts would impact LTSA income and to a lesser extent costs,
resulting in an in-year impact of around £20m. This would be expected to be seen as a catch-up change in revenue or, to the extent it
impacts onerous contracts, within cost of sales.
— A 2% increase or decrease in our pricing to customers over the life of the contracts would lead to a revenue catch-up adjustment in the
next 12 months of around £280m.
—
A 2% increase or decrease in shop visit costs over the life of the contracts would lead to a revenue catch-up adjustment in the next
12 months of around £80m.
Risk and revenue sharing arrangements (RRSAs)
Cash entry fees received are initially deferred on the balance sheet as deferred receipts from RRSA workshare partners within trade payables
and other liabilities. The cash entry fee is a transaction with a supplier and is recognised as a reduction in cost of sales incurred. Individual
programme amounts are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is delivered
and then recognised on a 15-year straight-line basis.
The payments to suppliers of their shares of the programme cash flows for their production components are charged to cost of sales when OE
sales are recognised or as LTSA costs are incurred. These prepayments are initially recognised within trade receivables and other assets.
The Group also has arrangements with third parties who invest in a programme and receive a return based on its performance, but do not
undertake development work or supply parts. Such arrangements (financial RRSAs) are financial instruments as defined by IAS 32 Financial
Instruments: Presentation and are accounted for using the amortised cost method.
Key judgement – Determination of the nature of entry fees received
RRSAs with key suppliers (workshare partners) are a feature of the civil aviation industry. Under these contractual arrangements, the key
commercial objectives are that: (i) during the development phase, the workshare partner shares in the risks of developing an engine by
performing its own development work, providing development parts and paying a non-refundable cash entry fee; and (ii) during the
production phase, the workshare partner supplies components in return for a share of the programme cash flows as a ‘life of type’ supplier
(i.e. as long as the engine remains in service).
The non-refundable cash entry fee is considered to be one element of a long-term supply agreement. These receipts are deferred on the
balance sheet and recognised against the cost of sales over the estimated number of units to be delivered on a similar basis to the
amortisation of development costs.
Royalty payments
Royalty payments include payments to government bodies that have previously acquired an interest in a programme. These are recognised as
a charge in cost of sales in line with sales made.
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FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Government grants
Government grants received are varied in nature and are recognised in the income statement so as to match them with the related expenses that
they are intended to compensate. Where grants are received in advance of the related expenses, they are initially recognised as liabilities within
trade payables and other liabilities and released to match the related expenditure. Non-monetary grants are recognised at fair value.
Interest
Interest receivable/payable is credited/charged to the income statement using the effective interest method. Where borrowing costs are
attributable to the acquisition, construction or production of a qualifying asset, such costs would be capitalised as part of the specific asset.
Taxation
The tax charge/credit on the profit or loss for the year comprises current and deferred tax:
—
Current tax is the expected tax payable for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any
adjustment to tax payable in respect of previous years.
— Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the amounts used for tax purposes and is calculated using the enacted or
substantively enacted rates that are expected to apply when the asset or liability is settled. In the UK, the deferred tax liability on the pension
scheme surplus is recognised consistently with the basis for recognising the surplus i.e. at the rate applicable to refunds from a trust.
Tax is charged or credited to the income statement or OCI as appropriate, except when it relates to items credited or charged directly to equity
in which case the tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint arrangements, except
where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in
the foreseeable future. Deferred tax is not recognised on taxable temporary differences arising on the initial recognition of goodwill or for
temporary differences arising from the initial recognition of assets and liabilities in a transaction that is not a business combination and that
affects neither accounting nor taxable profit.
Deferred tax assets are recognised only to the extent that it is probable that future taxable profits, which include the reversal of taxable
temporary differences, will be available against which the assets can be utilised. Further details on the Group’s tax position can be found on
pages 147 and 148.
Key estimate – Estimates necessary to assess whether it is probable that sufficient suitable taxable profits will arise in the UK to utilise the
deferred tax assets recognised
Deferred tax assets are only recognised to the extent it is probable that future taxable profits will be available, against which the deductible
temporary difference can be utilised. On this basis, as at 31 December 2023, a deferred tax asset of £1,635m (2022: £2,040m) is not
recognised in respect of UK tax losses. Further details are included in note 5.
In addition to taking into account a severe but plausible downside forecast (see below), the climate-related estimates and assumptions (set
out on pages 122 to 124) have also been considered when assessing the recoverability of the deferred tax assets. Recognising the longer
term over which these assets will be recovered, the Group has considered the risk that regulatory changes could materially impact demand
for our products and shifting investment focus towards more sustainable products and solutions. The climate scenarios prepared do not
indicate a significant deterioration in demand or profitability for Civil Aerospace programmes, given that all in production engines are now
compatible with sustainable fuels.
While carbon and commodity pricing may put pressure on costs, decarbonisation and new supplier and customer contracts offer the
opportunity to receive value for more efficient and sustainable products.
As explained in note 5, a 25% probability of there being a severe but plausible downside forecast in relation to the civil aviation industry
has been taken into account in the assessment of the recoverability of deferred tax assets.
The estimates take account of the inherent uncertainties constraining the expected level of profit as appropriate. Changes in these estimates
will affect future profits and, therefore, the recoverability of the deferred tax assets. The following sensitivities have been modelled to
demonstrate the impact of changes in assumptions on the recoverability of deferred tax assets.
— A 5% change in margin of the main Civil Aerospace large engine programmes;
— A 5% change in the number of shop visits; and
— Assumed future cost increases from climate change expected to pass through to customers at 100% are restricted to 90% pass through.
All of these could be driven by a number of factors, including the impact of climate change (as explained on pages 122 to 124) and
macroeconomic factors.
A 5% change in margin or shop visits (which could be driven by EFHs) would result in an increase/decrease in the deferred tax asset of
around £90m.
If only 90% of assumed future cost increases from climate change are passed on to customers, this would result in a decrease in the deferred
tax asset of around £10m, and if carbon prices were to double this would be £50m.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Foreign currency translation
Transactions denominated in currencies other than the functional currency of the transacting group undertaking are translated into the functional
currency at the average monthly exchange rate when the transaction occurs. Monetary assets and liabilities denominated in foreign currencies
are translated into the relevant functional currency at the rate prevailing at the year end. Exchange differences arising on foreign exchange
transactions and the retranslation of monetary assets and liabilities into functional currencies at the rate prevailing at the year end are included
in profit/(loss) before taxation.
The trading results of Group undertakings are translated into sterling at the average exchange rates for the year. The assets and liabilities of
overseas undertakings, including goodwill and fair value adjustments arising on acquisition, are translated at the exchange rates prevailing at
the year end. Exchange adjustments arising from the retranslation of the opening net assets, and from the translation of the profits or losses at
average rates, are recognised in OCI.
Discontinued operations, held for sale and business disposals
A discontinued operation is defined in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations as a component of an entity that
has been disposed of or is classified as held for sale, represents a separate major line of business or geographical area of operations, is part of
a single coordinated plan to dispose of such a line of business or is a subsidiary acquired exclusively with a view to resale. The results of
discontinued operations are required to be presented separately in the income statement.
Assets and businesses are classified as held for sale when their carrying amounts will be recovered through sale rather than through continuing use.
Financial instruments – Classification and measurement
Financial assets primarily include trade receivables and other non-derivative financial assets, cash and cash equivalents, short-term investments,
derivatives (foreign exchange, commodity and interest rate contracts), and listed and unlisted investments.
— Trade receivables and other assets are classified either as held to collect and measured at amortised cost, or as held to collect and sell and
measured at fair value, with movements in fair value recognised through other comprehensive income (FVOCI). The Group may sell trade
receivables due from certain customers before the due date. Any trade receivables from such customers that are not sold at the reporting
date are classified as ‘held to collect and sell’.
— Cash and cash equivalents (consisting of balances with banks and other financial institutions, money-market funds, short-term deposits) and
short-term investments are subject to low market risk. Cash balances, short-term deposits (with a maturity of primarily three months or less)
and short-term investments are measured at amortised cost. Money market funds are measured at fair value, with movements in fair value
recognised in the income statement as a profit or loss (FVPL).
— Derivatives and unlisted investments are measured at FVPL. The Company has elected to measure its listed investments at FVOCI.
Financial liabilities primarily consist of trade payables and other non-derivative financial liabilities, borrowings, derivatives, financial RRSAs and C Shares.
— Derivatives are classified and measured at FVPL.
— All other financial liabilities are classified and measured at amortised cost.
Financial instruments – Impairment of financial assets and contract assets
IFRS 9 Financial Instruments sets out the basis for the accounting of ECLs on financial assets and contract assets resulting from transactions within
the scope of IFRS 15. The Group has adopted the simplified approach to provide for ECLs, measuring the loss allowance at a probability weighted
amount that considers reasonable and supportable information about past events, current conditions and forecasts of future economic conditions
of customers. These are incorporated in the simplified model adopted by using credit ratings which are publicly available, or through internal risk
assessments derived using the customer’s latest available financial information. The ECLs are updated at each reporting date to reflect changes in
credit risk since initial recognition. ECLs are calculated for all financial assets in scope, regardless of whether or not they are overdue.
Financial instruments – Hedge accounting
Forward foreign exchange contracts and commodity swaps (derivative financial instruments) are held to manage the cash flow exposures of
forecast transactions denominated in foreign currencies or in commodities, respectively. Derivative financial instruments qualify for hedge
accounting when: (i) there is a formal designation and documentation of the hedging relationship and the Group’s risk management objective
and strategy for undertaking the hedge at the inception of the hedge; and (ii) the hedge is expected to be effective. In general, the Group has
chosen to not apply hedge accounting in respect of these exposures.
The Group economically hedges the fair value and cash flow exposures of its borrowings. Cross-currency interest rate swaps are held to manage
the fair value or cash flow exposures of borrowings denominated in foreign currencies and are designated as fair value hedges or cash flow
hedges as appropriate. Interest rate swaps are held to manage the interest rate exposures of fixed and floating rate borrowings and may be
designated as fair value hedges or cash flow hedges as appropriate. If the swaps are not designated as fair value or cash flow hedges, the
economic effect is included in the underlying results – see note 2.
Changes in the fair values of derivatives that are designated as fair value hedges are recognised directly in the income statement. The fair value
changes of effective cash flow hedge derivatives are recognised in OCI and subsequently recycled to the income statement in the same period or
periods during which the hedged cash flows affect profit or loss. Any ineffectiveness in the hedging relationship is included in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge
accounting. At that time, for cash flow hedges and, if the forecast transaction remains probable, any net cumulative gain or loss on the hedging
instrument recognised in the SOCIE is retained until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the
net cumulative gain or loss is recycled to the income statement.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Business combinations and goodwill
Goodwill recognised represents the excess of the fair value of the purchase consideration over the fair value to the Group of the net of the
identifiable assets acquired and the liabilities assumed. On transition to IFRS on 1 January 2004, business combinations were not retrospectively
adjusted to comply with UK-adopted International Accounting Standards and goodwill was recognised based on the carrying value under the
previous accounting policies. Goodwill, in respect of the acquisition of a subsidiary, is recognised as an intangible asset. Goodwill arising on the
acquisition of joint arrangements and associates is included in the carrying value of the investment.
Customer relationships
The fair value of customer relationships recognised as a result of a business combination relate to the acquired company’s established
relationships with its existing customers that result in repeat purchases and customer loyalty. Amortisation is charged on a straight-line basis
over its useful economic life, up to a maximum of 15 years.
Certification costs
Costs incurred, in respect of meeting regulatory certification requirements for new Civil Aerospace aero-engine/aircraft combinations,
including payments made to airframe manufacturers for this, are recognised as intangible assets to the extent that they can be recovered out of
future sales. They are charged to the income statement over the programme life. Individual programme assets are allocated pro rata to the
estimated number of units to be produced. Amortisation commences as each unit is delivered and then charged on a 15-year straight-line basis.
Research and development
Expenditure incurred on research and development is distinguished as relating either to a research phase or to a development phase. All research
phase expenditure is charged to the income statement. Development expenditure is recognised as an internally generated intangible asset
(programme asset) only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits. More
specifically, development costs are capitalised from the point at which the following conditions have been met:
— the technical feasibility of completing the programme and the intention and ability (availability of technical, financial and other resources) to
complete the programme asset and use or sell it;
— the probability that future economic benefits will flow from the programme asset; and
— the ability to measure reliably the expenditure attributable to the programme asset during its development.
Capitalisation continues until the point at which the programme asset meets its originally contracted technical specification (defined internally
as the point at which the asset is capable of operating in the manner intended by the Directors).
Subsequent expenditure is capitalised where it enhances the functionality of the programme asset and demonstrably generates an enhanced
economic benefit to the Group. All other subsequent expenditure on programme assets is expensed as incurred.
Individual programme assets are allocated pro rata to the estimated number of units to be produced. Amortisation commences as each unit is
delivered and then charged on a straight-line basis over a maximum of 15-years. In accordance with IAS 38 Intangible Assets, the basis on which
programme assets are amortised is assessed annually.
Key judgement – Determination of the point in time where costs incurred on an internal programme development meet the criteria
for capitalisation
The Group incurs significant research and development expenditure in respect of various development programmes. Determining when
capitalisation should commence and cease is a key judgement, as is the determination of when subsequent expenditure on the programme
assets should be capitalised. During the year, £192m (2022: £131m) of development expenditure was capitalised.
Within the Group, there are established processes in place, e.g. the Product Introduction and Lifecycle Management process (PILM). Within
these processes, the technical feasibility, the commercial viability and financial assessment of the programme is assessed at certain
milestones. When these are met, development expenditure is capitalised. Prior to this, expenditure is expensed as incurred.
The Group continues to invest in new technologies as a result of its decarbonisation commitments. As these are new technologies, there is
a higher level of uncertainty over potential outcomes and, therefore, this could impact the level of expenditure that is capitalised or
recognised in the income statement in future years. During 2023, no development costs incurred within New Markets were capitalised.
Subsequent expenditure after entry into service which enhances the performance of the engine and the economic benefits to the Group
is capitalised. This expenditure is referred to as enhanced performance and is governed by the PILM process referred to above. All other
development costs are expensed as incurred.
Key judgement – Determination of the basis for amortising capitalised development costs
The economic benefits of the development costs are primarily those cash inflows arising from LTSAs, which are expected to be relatively
consistent for each engine within a programme. Amortisation of development costs is recognised on a straight-line basis over the estimated
period of operation of the engine by its initial operator.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Software
Software that is not specific to an item of property, plant and equipment is classified as an intangible asset, recognised at its acquisition cost and
amortised on a straight-line basis over its useful economic life, up to a maximum of 10 years. The amortisation period of software assets is reviewed
annually. The cost of internally developed software includes direct labour and an appropriate proportion of overheads.
Other intangible assets
These include intangible assets arising on acquisition of businesses, such as technology and which is amortised on a straight-line basis over a
maximum of 15 years, and trademarks which are not amortised. They also include the costs incurred testing and analysing engines with the
longest time in service (fleet leader engines) to gather technical knowledge on engine endurance, which are amortised on a straight-line basis
over a maximum of 15 years.
Property, plant and equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation and any provision for impairment in value. The cost
of self-constructed assets includes the cost of materials, direct labour, an appropriate proportion of overheads and, where appropriate, interest.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over
their estimated useful lives. No depreciation is recorded on assets in the course of construction. Estimated useful lives are reassessed annually
and are as follows:
— Land and buildings, as advised by the Group’s professional advisers:
• freehold buildings – three to 50 years (average 23 years); and
• no depreciation is provided on freehold land.
— Plant and equipment – two to 27 years (average 11 years).
— Aircraft and engines – five to 20 years (average 16 years).
Leases
Assets and liabilities arising from a lease are initially measured on a present value basis.
Lease liabilities include the net present value of the following lease payments:
— fixed payments less any lease incentive receivable;
— variable lease payments that are based on an index or a rate;
— amounts expected to be payable by the Group under residual value guarantees;
— the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and
— payments of penalties for termination of the lease, if the lease term reflects the Group exercising that option.
Where leases commenced after the initial IFRS 16 Leases transition date, the lease payments are discounted using the interest rate implicit in the
lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to
borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Where
appropriate, lease liabilities are revalued at each reporting date using the spot exchange rate.
Right-of-use assets are measured at cost comprising the following:
— the amount of the initial measurement of lease liability or a revaluation of the liability;
— any lease payments made at or before the commencement date less any lease incentives received;
— any initial direct costs; and
— restoration costs.
Each right-of-use asset is depreciated over the shorter of its useful economic life and the lease term on a straight-line basis unless the lease is
expected to transfer ownership of the underlying asset to the Group, in which case the asset is depreciated to the end of the useful life of the asset.
Short-term leases are leases with a lease term of 12 months or less. Payments associated with short-term leases and low-value leases are
recognised on a straight-line basis as an expense in the income statement.
Key judgement – Determination of lease term
In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension
option, or not exercise a termination option. Extension options (or periods after termination) are only included in the lease term if the lease
is reasonably certain to be extended (or not terminated). Certain land and building leases have renewal options although there are no
renewal dates for any of the most significant property leases in the next 12 months. Other renewals are evenly spread between 2025 to 2032
and then post 2038. The Group reviews its judgements on lease terms annually, including the operational significance of the site, especially
where utilised for manufacturing activities.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Impairment of non-current assets
Impairment of non-current assets is considered in accordance with IAS 36 Impairment of Assets. Where the asset does not generate cash flows
that are independent of other assets, impairment is considered for the cash-generating unit (CGU) to which the asset belongs. Goodwill,
indefinite life intangible assets and intangible assets not yet available for use are tested for impairment annually. Other intangible assets
(including programme-related intangible assets), property, plant and equipment, right-of-use assets and investments are assessed for any
indications of impairment annually. If any indication of impairment is identified, an impairment test is performed to estimate the
recoverable amount.
If the recoverable amount of an asset (or CGU) is estimated to be below the carrying value, the carrying value is reduced to the recoverable
amount and the impairment loss is recognised as an expense. The recoverable amount is the higher of value in use or fair value less costs of
disposal. The value in use is the present value of future cash flows using a pre-tax discount rate that reflects the time value of money and the risk
specific to the asset (or CGU). Fair value less costs of disposal (FVLCOD) reflects market inputs or inputs based on market evidence if readily
available. If these inputs are not readily available, the fair value is estimated by discounting future cash flows modified for market participants’
views. The relevant local statutory tax rates have been applied in calculating post-tax to pre-tax discount rates.
Key judgement – Determination of CGUs for assessing impairment of goodwill
The Group conducts impairment reviews at the CGU level. As permitted by IAS 36, impairment reviews for goodwill are performed at the
groups of CGUs level, representing the lowest level at which the Group monitors goodwill for internal management purposes and no higher
than the Group’s operating segments. The main CGUs for which goodwill impairment reviews have been performed are Rolls-Royce
Deutschland Ltd & Co KG and at an aggregated Rolls-Royce Power Systems AG level.
Key judgement – Whether there are indicators of potential reversal of previous impairments of programme-related intangible assets
Previously impaired intangible assets (including programme intangible assets but excluding goodwill) have been reviewed to ensure that
no impairment reversal is required in accordance with IAS 36. In determining whether there was an indication that an impairment loss
recognised in a prior period may no longer exist or may have decreased, the Directors considered whether the estimated service potential
from the use of impaired assets had increased, other than by amounts generated through the passage of time (which would not represent
an economic change in the value of the asset). An impairment of £573m was recorded in previous periods in relation to Business Aviation
programme-related intangible assets. No indicator of reversal was present at 31 December 2023. Small changes to assumptions, including
those related to discount rates which would be impacted by changes in market interest rates, could result in an increase in the asset’s
recoverable amount requiring a reversal in the future.
Inventories
Inventories are valued on a first-in, first-out basis, at the lower of cost and net realisable value. Cost comprises direct materials and, where
applicable, direct labour costs and those direct and indirect overheads, including depreciation of property, plant and equipment, that have been
incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling prices less all
estimated costs of completion and costs to be incurred in marketing, selling and distribution. All inventories are classified as current, as it is
expected that they will be used in the Group’s operating cycle, regardless of whether this is expected to be within 12 months of the balance
sheet date.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, investments in money-market funds and short-term deposits with a maturity of three
months or less on inception. 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. Where the Group operates pooled banking
arrangements across multiple accounts, these are presented on a net basis when it has both a legal right and intention to settle the balances on
a net basis�
The Group’s suppliers have access to a supply chain financing (SCF) programme through partnership with banks. This enables smaller suppliers,
who are on standard 75 day or more payment terms, and joint ventures (90-day standard payment terms) to receive their payment sooner. The
election to utilise the programme is at the sole decision of the supplier. As the Group continues to have a contractual obligation to pay its
suppliers under commercial terms, which are unaffected by any utilisation of the programme, and it does not retain any ongoing involvement in
the SCF, the related payables are retained on the Group’s balance sheet and classified as trade payables. Further details are disclosed in
note 19�
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required
to settle that obligation. Provisions are discounted to present value where the effect is material.
The principal provisions are recognised as follows:
— contract losses based on an assessment of whether the direct costs to fulfil a contract are greater than the expected revenue;
— warranty and guarantees based on an assessment of future claims with reference to past experience and recognised at the earlier of when the
underlying products and services are sold and when the likelihood of a future cost is identified;
— Trent 1000 in-service issues when wastage costs are identified as described on page 128; and
— transformation and restructuring (included in other provisions) when the Group has approved a detailed and formal restructuring plan, and
the restructuring has either commenced or has created a valid expectation to those affected.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Key judgement – Whether any costs should be treated as wastage
As described further on page 128, in rare circumstances, the Group may incur costs of wasted material, labour or other resources to fulfil a
contract where the level of cost was not reflected in the contract price. The identification of such costs is a matter of judgement and would
only be expected to arise where there has been a series of abnormal events which give rise to a significant level of cost of a nature that the
Group would not expect to incur and hence is not reflected in the contract price. Provision is made for any costs identified as wastage when
the obligation to incur them arises.
Specifically for the Trent 1000 wastage costs, provision has been made as the Group is an owner of an engine Type Certificate under which
it has a present obligation to develop appropriate design changes to address certain engine conditions that have been noted in issued
Airworthiness Directives. The Group is also required to ensure engine operators can continue to safely operate engines within the terms of
their LTSAs, and this requires the engines to be compliant with the requirements of those issued Airworthiness Directives. These
requirements cannot be met without the Group incurring significant costs in the form of replacement parts and customer claims. Given the
significant activities of the Group in designing and overhauling aero engines, it is very experienced in making the required estimates in
relation to the number and timing of shop visits, parts costs, overhaul labour costs and customer claims.
Key judgement – Whether the criteria to recognise a transformation and restructuring provision have been met
On 17 October 2023, the Group announced plans for a simpler, more streamlined, organisation as part of its multi-year transformation. It is
estimated that 2,000 to 2,500 roles will be removed globally.
IAS 19 requires that a liability and expense for termination benefits should be recognised at the earlier of: (a) when an offer of those benefits
can no longer be withdrawn; and (b) when the cost for a restructuring that is within the scope of IAS 37 that involves the payment of
termination benefits is recognised.
The Directors have considered whether the Group’s communications to employees during 2023 have led to an offer of benefits that could
no longer be withdrawn. In a small number of situations this has been the case and a charge of £6m has been recognised in the year. For
the significant majority of the 2,000 to 2,500 roles, the Directors do not consider that the plan of termination met the requirement for a
provision to be recognised on the basis that communications as at 31 December 2023 had not yet been in sufficient detail to identify the
functions or locations of the roles, the expected completion date, or the type and amount of benefits that would be received should
employees employment be terminated.
Key estimates – Estimates of the time to incorporate a modified and certified high-pressure turbine (HPT) blade into the fleet to resolve
technical issues on the Trent 1000, and the implications of this on forecast future costs when assessing onerous contracts
The Group has provisions for Trent 1000 wastage costs at 31 December 2023 of £116m (2022: £179m). These represent the Directors’ best
estimate of the expenditure required to settle the obligations at the balance sheet date. These estimates take account of information
available and different possible outcomes.
The Group considers that at 31 December 2023 the Trent 1000 contract loss provisions and the Trent 1000 wastage cost provision are most
sensitive to changes in estimates. A 12-month delay in the availability of the modified HPT blade could lead to around a £30m-£50m charge
in relation to the Trent 1000 programme.
Key estimates – Estimates of the future revenues and costs to fulfil onerous contracts
The Group has provisions for onerous contracts at 31 December 2023 of £1,472m (2022: £1,592m).
An increase in Civil Aerospace large engine estimates of LTSA costs of 1% over the remaining term of the contracts could lead to around
a £90m-£120m increase in the provision for contract losses across all programmes.
Key estimates – Assumptions implicit within the calculation of discount rates
The contract loss provisions for onerous contracts are sensitive to changes in the discount rate used to value the provisions. The rate used
for each contract is derived from bond yields (i.e. risk-free rates) with a similar duration and currency to the contract that they are applied
to. The rate is adjusted to reflect the specific inflation characteristics of the contracts. The forecast rates are determined from third-party
market analysis and average 4%. A 1% change in the discount rates used could lead to around a £70m-£80m change in the provision.
Customer financing support
In connection with the sale of its products, the Group will, on occasion, provide financing support for its customers. Credit-based guarantees
are disclosed as commitments or contingent liabilities dependent on whether aircraft have been delivered or not. As described on page 181, the
Directors consider the likelihood of crystallisation in assessing whether provision is required for any liabilities.
The Group’s contingent liabilities relating to financing arrangements are spread over many years and relate to a number of customers and a broad
product portfolio and are reported on a discounted basis.
135
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 Accounting policies continued
Post-retirement benefits
Pensions and similar benefits (principally healthcare) are accounted for under IAS 19.
For defined benefit plans, obligations are measured at discounted present value, using a discount rate derived from high-quality corporate bonds
denominated in the currency of the plan, whilst plan assets are recorded at fair value. Surpluses in schemes are recognised as assets only if they
represent economic benefits available to the Group in the future. Actuarial gains and losses are recognised immediately in OCI. The service and
financing costs of such plans are recognised separately in the income statement:
— current service costs are spread systematically over the lives of employees;
— past-service costs and settlements are recognised immediately; and
— financing costs are recognised in the periods in which they arise.
UK pension obligations include the estimated impact of the obligation to equalise defined benefit pensions and transfer values for men and women.
Payments to defined contribution schemes are charged as an expense as they fall due.
Key estimate – Estimates of the assumptions for valuing the net defined benefit obligation
The Group’s defined benefit pension schemes and similar arrangements are assessed annually in accordance with IAS 19. The valuations,
which are based on assumptions determined with independent actuarial advice, resulted in a net deficit of £253m before deferred taxation
being recognised on the balance sheet at 31 December 2023 (2022: deficit of £420m). The size of the net surplus/deficit is sensitive to the
actuarial assumptions, which include the discount rate, price inflation, pension and salary increases, longevity and, in the UK, the number
of plan members who take the option to transfer their pension to a lump sum on retirement or who choose to take the Bridging Pension
Option. Following consultation, the UK scheme closed to future accrual on 31 December 2020.
A reduction in the discount rate of 0.25% from 4.50% could lead to an increase in the defined benefit obligations of the RR UK Pension
Fund (RRUKPF) of approximately £185m. This would be expected to be broadly offset by changes in the value of scheme assets, as the
scheme’s investment policies are designed to mitigate this risk.
An increase in the assumed rate of inflation of 0.25% (RPI of 3.30% and CPI of 2.85%) could lead to an increase in the defined benefit
obligations of the RRUKPF of approximately £75m.
A one-year increase in life expectancy from 20.8 years (male aged 65) and from 21.5 years (male aged 45) would increase the defined
benefit obligations of the RRUKPF by approximately £155m.
Further details and sensitivities are included in note 22.
Share-based payments
The Group provides share-based payment arrangements to certain employees. These are principally equity-settled arrangements and are
measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value is expensed on a
straight-line basis over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of shares or options
that will vest based on expected performance, except where additional shares vest as a result market-based performance conditions where no
adjustment is required as allowance for these performance conditions are included in the initial fair value.
Cash-settled share options (grants in the International ShareSave plan) are measured at fair value at the balance sheet date. The Group recognises
a liability at the balance sheet date based on these fair values, taking into account the estimated number of options that are expected to vest
and the relative completion of the vesting period. Changes in the value of this liability are recognised in the income statement for the year.
The cost of shares of Rolls-Royce Holdings plc held by the Group for the purpose of fulfilling obligations in respect of employee share plans is
deducted from equity in the consolidated balance sheet. See note 24 for a further description of the share-based payment plans.
Revisions to IFRS not applicable in 2023
Standards and interpretations issued by the IASB are only applicable if endorsed by the UK. The Group does not consider that any standards,
amendments or interpretations issued by the IASB, but not yet applicable will have a significant impact on the Consolidated Financial Statements.
Other
IBOR reform transition
A number of the Group’s lease liabilities have been based on a USD LIBOR index. The majority of contracts in which the Group is a lessee have
been amended. These have been amended to Secured Overnight Financing Rate (USD Term SOFR) plus credit adjustment spread (CAS), and the
impact to the Financial Statements is not material. There are a number of lease contracts which currently have fixed rentals which will move to
floating rentals based on USD LIBOR after the end of the fixed rental period. These will be amended before the end of the fixed rental period to
USD Term SOFR plus CAS. The Group has taken the practical expedient available to account for the lease modification required by the IBOR
reform by applying IFRS 16 paragraph 42.
Post balance sheet events
The Group has taken the latest legal position in relation to any ongoing legal proceedings and reflected these in the 2023 results
as appropriate.
136
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis
The analysis by segment is presented in accordance with IFRS 8, on the basis of those segments whose operating results are regularly reviewed
by the Board (who acts as the Chief Operating Decision Maker as defined by IFRS 8). The Group’s four divisions are set out below.
Civil Aerospace development, manufacture, marketing and sales of commercial aero engines and aftermarket services
Defence development, manufacture, marketing and sales of military aero engines, naval engines, submarine nuclear power plants
and aftermarket services
Power Systems development, manufacture, marketing and sales of integrated solutions for onsite power and propulsion
New Markets development, manufacture and sales of small modular reactor (SMR) and new electrical power solutions
Other businesses include the trading results of the UK Civil Nuclear business.
Underlying results
The Group presents the financial performance of the divisions in accordance with IFRS 8 and consistently with the basis on which performance
is communicated to the Board each month.
Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on
effective settled derivative contracts in the period that the cash flow occurs. The impact of the revaluation of monetary assets and liabilities
(other than lease liabilities) using the exchange rate that is expected to be achieved by the use of the effective hedge book is recorded within
underlying cost of sales. Underlying financing excludes the impact of revaluing monetary assets and liabilities to period end exchange rates.
Lease liabilities are not revalued to reflect the expected exchange rates due to their multi-year remaining term, the Directors believe that doing
so would not be the most appropriate basis to measure the in-year performance. Transactions between segments are presented on the same
basis as underlying results and eliminated on consolidation. Unrealised fair value gains/(losses) on foreign exchange contracts, which are
recognised as they arise in the statutory results, are excluded from underlying results. To the extent that the previously forecast transactions
are no longer expected to occur, an appropriate portion of the unrealised fair value gain/(loss) on foreign exchange contracts is recorded
immediately in the underlying results.
Amounts receivable/(payable) on interest rate swaps which are not designated as hedge relationships for accounting purposes are reclassified
from fair value movement on a statutory basis to interest receivable/(payable) on an underlying basis, as if they were in an effective
hedge relationship.
In the year to 31 December 2023, the Group was a net seller of USD at an achieved exchange rate GBP:USD of 1.50 (2022: 1.50) based on the USD
hedge book.
In 2020, the Group experienced a significant decline in its medium-term outlook and consequently a significant deterioration to its forecast net
USD cash inflows. The Group took action to reduce the size of the USD hedge book by $11.8bn across 2020 to 2026 to reflect the fact that, at
that time, future operating cash flows were no longer forecast to materialise. An underlying charge of £1.7bn was recognised within the
underlying finance costs in 2020 and the associated cash settlement costs occur over the period 2020 to 2026. The derivatives relating to this
underlying charge have been subsequently excluded from the hedge book, and therefore are also excluded from the calculation of the average
exchange rate achieved in the current and future periods.
Underlying performance also excludes the following:
— the effect of acquisition accounting and business disposals;
— impairment of goodwill, other non-current and current assets where the reasons for the impairment are outside of normal operating activities;
— exceptional items; and
— certain other items which are market driven and outside of the control of management.
Subsequent changes in items excluded from underlying performance in a prior period will also be excluded from underlying performance.
All other changes will be recognised within underlying performance.
Acquisition accounting, business disposals and impairment
The Group exclude these from underlying results so that the current year and comparative results are directly comparable.
137
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Exceptional items
Items are classified as exceptional where the Directors believe that presentation of the results in this way is useful in providing an understanding
of the Group’s financial performance. Exceptional items are identified by virtue of their size, nature or incidence.
In determining whether an event or transaction is exceptional, the Directors consider quantitative as well as qualitative factors such as the
frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes,
costs of exceptional transformation and restructuring programmes and one-time past service charges and credits on post-retirement schemes.
Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.
Other items
The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as
a reconciling difference between underlying and statutory performance.
The tax effects of adjustments above are excluded from the underlying tax charge. Changes in tax rates are excluded from the underlying tax
charge. In addition, changes in the amount of recoverable deferred tax recognised are excluded from the underlying results to the extent that
their recognition or derecognition was not originally recorded within the underlying results.
The following analysis sets out the results of the Group’s divisions on the basis described above and also includes a reconciliation of the
underlying results to those reported in the consolidated income statement.

|  |  |  |  |  | Corporate |
| Civil |  | Power | New | Other | and Inter- | Total
| Aerospace | Defence | Systems | Markets | businesses | segment 1 | Underlying
| £m | £m | £m | £m | £m | £m | £m
Year ended 31 December 2023 |  |  |  |  |  |  |
Underlying revenue from sale of original equipment | 2,703 | 1,766 | 2,661 | 2 | 12 | – | 7,144
Underlying revenue from aftermarket services | 4,645 | 2,311 | 1,307 | 2 | – | – | 8,265
Total underlying revenue | 7,348 | 4,077 | 3,968 | 4 | 12 | – | 15,409
Gross profit/(loss) | 1,394 | 804 | 1,050 | 1 | (15) | (3) | 3,231
Commercial and administrative costs | (354) | (173) | (456) | (24) | – | (57) | (1,064)
Research and development costs | (343) | (72) | (187) | (137) | – | – | (739)
Share of results of joint ventures and associates | 153 | 3 | 6 | – | – | – | 162
Underlying operating profit/(loss) | 850 | 562 | 413 | (160) | (15) | (60) | 1,590
Year ended 31 December 2022 |  |  |  |  |  |  |
Underlying revenue from sale of original equipment | 1,982 | 1,634 | 2,187 | 1 | – | (5) | 5,799
Underlying revenue from aftermarket services | 3,704 | 2,026 | 1,160 | 2 | – | – | 6,892
Total underlying revenue | 5,686 | 3,660 | 3,347 | 3 | – | (5) | 12,691
Gross profit/(loss) | 853 | 726 | 918 | (1) | (29) | 10 | 2,477
Commercial and administrative costs | (371) | (174) | (441) | (23) | (2) | (51) | (1,062)
Research and development costs | (452) | (122) | (204) | (108) | – | – | (886)
Share of results of joint ventures and associates | 113 | 2 | 8 | – | – | – | 123
Underlying operating profit/(loss) | 143 | 432 | 281 | (132) | (31) | (41) | 652

1 Corporate and Inter-segment consists of costs that are not attributable to a specific segment and consolidation adjustments
138
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Reconciliation to statutory results

|  | Underlying |
|  | adjustments and |
|  | adjustments to | Group
| Total underlying | foreign exchange | statutory results
| £m | £m | £m
Year ended 31 December 2023 |  |  |
Continuing operations |  |  |
Revenue from sale of original equipment | 7,144 | 491 | 7,635
Revenue from aftermarket services | 8,265 | 586 | 8,851
Total revenue | 15,409 | 1,077 | 16,486
Gross profit | 3,231 | 389 | 3,620
Commercial and administrative costs | (1,064) | (46) | (1,110)
Research and development costs | (739) | – | (739)
Share of results of joint ventures and associates | 162 | 11 | 173
Operating profit | 1,590 | 354 | 1,944
Gain arising on the disposal of businesses | – | 1 | 1
Profit before financing and taxation | 1,590 | 355 | 1,945
Net financing | (328) | 810 | 482
Profit before taxation | 1,262 | 1,165 | 2,427
Taxation | (120) | 97 | (23)
Profit for the year | 1,142 | 1,262 | 2,404
Attributable to: |  |  |
Ordinary shareholders | 1,150 | 1,262 | 2,412
NCI | (8) | – | (8)
Year ended 31 December 2022 |  |  |
Continuing operations |  |  |
Revenue from sale of original equipment | 5,799 | 474 | 6,273
Revenue from aftermarket services | 6,892 | 355 | 7,247
Total revenue | 12,691 | 829 | 13,520
Gross profit | 2,477 | 280 | 2,757
Commercial and administrative costs | (1,062) | (15) | (1,077)
Research and development costs | (886) | (5) | (891)
Share of results of joint ventures and associates | 123 | (75) | 48
Operating profit | 652 | 185 | 837
Gain arising on the disposal of businesses | – | 81 | 81
Profit before financing and taxation | 652 | 266 | 918
Net financing | (446) | (1,974) | (2,420)
Profit/(loss) before taxation | 206 | (1,708) | (1,502)
Taxation | (48) | 356 | 308
Profit/(loss) for the year from continuing operations | 158 | (1,352) | (1,194)
Discontinued operations | 67 | (147) | (80)
Profit/(loss) for the year | 225 | (1,499) | (1,274)
Attributable to: |  |  |
Ordinary shareholders | 230 | (1,499) | (1,269)
NCI | (5) | – | (5)

1
1 Discontinued operations relate to the results of ITP Aero and are presented net of intercompany trading eliminations and related consolidation adjustments
139
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Disaggregation of revenue from contracts with customers
Analysis by type and basis of recognition

|  |  |  |  |  | Corporate |
| Civil |  | Power | New | Other | and Inter- | Total
| Aerospace | Defence | Systems | Markets | businesses | segment | Underlying
| £m | £m | £m | £m | £m | £m | £m
Year ended 31 December 2023 |  |  |  |  |  |  |
Original equipment recognised at a point in time | 2,703 | 632 | 2,611 | 2 | – | – | 5,948
Original equipment recognised over time | – | 1,134 | 50 | – | 12 | – | 1,196
Aftermarket services recognised at a point in time | 1,227 | 854 | 1,206 | 2 | – | – | 3,289
Aftermarket services recognised over time | 3,335 | 1,457 | 101 | – | – | – | 4,893
Total underlying customer contract revenue | 7,265 | 4,077 | 3,968 | 4 | 12 | – | 15,326
Other underlying revenue | 83 | – | – | – | – | – | 83
Total underlying revenue | 7,348 | 4,077 | 3,968 | 4 | 12 | – | 15,409
Year ended 31 December 2022 |  |  |  |  |  |  |
Original equipment recognised at a point in time | 1,982 | 689 | 2,155 | 1 | – | (5) | 4,822
Original equipment recognised over time | – | 945 | 32 | – | – | – | 977
Aftermarket services recognised at a point in time | 865 | 769 | 1,076 | 2 | – | – | 2,712
Aftermarket services recognised over time | 2,772 | 1,257 | 84 | – | – | – | 4,113
Total underlying customer contract revenue | 5,619 | 3,660 | 3,347 | 3 | – | (5) | 12,624
Other underlying revenue | 67 | – | – | – | – | – | 67
Total underlying revenue | 5,686 | 3,660 | 3,347 | 3 | – | (5) | 12,691

1
2
1
2
1 Includes leasing revenue
2 Includes £(136)m, of which £(104)m relates to Civil LTSA contracts, (2022: £367m, of which £360m relates to Civil LTSA contracts) of revenue recognised in the year relating to performance
obligations satisfied in previous years

|  | Underlying |
|  | adjustments and |
|  | adjustments to | Group
| Total underlying | foreign exchange | statutory results
| £m | £m | £m
Year ended 31 December 2023 |  |  |
Original equipment recognised at a point in time | 5,948 | 491 | 6,439
Original equipment recognised over time | 1,196 | – | 1,196
Aftermarket services recognised at a point in time | 3,289 | 186 | 3,475
Aftermarket services recognised over time | 4,893 | 382 | 5,275
Total customer contract revenue | 15,326 | 1,059 | 16,385
Other revenue | 83 | 18 | 101
Total revenue | 15,409 | 1,077 | 16,486
Year ended 31 December 2022 |  |  |
Original equipment recognised at a point in time | 4,822 | 474 | 5,296
Original equipment recognised over time | 977 | – | 977
Aftermarket services recognised at a point in time | 2,712 | 164 | 2,876
Aftermarket services recognised over time | 4,113 | 176 | 4,289
Total customer contract revenue | 12,624 | 814 | 13,438
Other revenue | 67 | 15 | 82
Total revenue | 12,691 | 829 | 13,520

1
1 During the year to 31 December 2023, revenue recognised within Civil Aerospace, Defence and Power Systems of £1,766m (2022: £1,788m) was received from a single customer
140
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Analysis by geographical destination
The Group’s revenue by destination of the ultimate operator is as follows:

| 2023 | 2022
| £m | £m
United Kingdom | 2,230 | 1,669
Germany | 1,035 | 855
Ireland | 504 | 328
Turkey | 399 | 220
Switzerland | 379 | 334
France | 351 | 255
Spain | 290 | 188
Italy | 282 | 238
Netherlands | 149 | 95
Portugal | 110 | 43
Norway | 71 | 61
Rest of Europe | 308 | 463
Europe | 6,108 | 4,749
United States | 4,668 | 4,334
Canada | 430 | 267
North America | 5,098 | 4,601
South America | 230 | 168
Central America | 106 | 91
Saudi Arabia | 394 | 322
United Arab Emirates | 148 | 180
Qatar | 128 | 231
Rest of Middle East | 200 | 164
Middle East | 870 | 897
China | 1,263 | 1,246
Japan | 586 | 276
Singapore | 437 | 317
South Korea | 303 | 164
India | 221 | 119
Thailand | 132 | –
Rest of Asia | 529 | 381
Asia | 3,471 | 2,503
Africa | 313 | 282
Australasia | 290 | 229
| 16,486 | 13,520

Order backlog
Contracted consideration, translated at the estimated long-term exchange rates, that is expected to be recognised as revenue when performance
obligations are satisfied in the future (referred to as order backlog) is as follows:

|  | 2023 |  |  | 2022 |
| Within | After |  | Within | After |
| five years | five years | Total | five years | five years | Total
| £bn | £bn | £bn | £bn | £bn | £bn
Civil Aerospace | 28.4 | 26.8 | 55.2 | 25�7 | 22�0 | 47�7
Defence | 8.3 | 0.9 | 9.2 | 7�8 | 0�7 | 8�5
Power Systems | 3.9 | 0.2 | 4.1 | 3�7 | 0�3 | 4�0
New Markets | – | – | – | – | – | –
Other businesses | – | – | – | – | – | –
| 40.6 | 27.9 | 68.5 | 37�2 | 23�0 | 60�2

The parties to these contracts have approved the contract and customers do not have a unilateral enforceable right to terminate the contract
without compensation. The Group excludes Civil Aerospace OE orders (for deliveries beyond the next seven-12 months) that customers have
placed where they retain a right to cancel. The Group’s expectation based on historical experience is that these orders will be fulfilled. Within
the five years category, contracted revenue in Defence will largely be recognised in the next three years and Power Systems will be recognised
over the next two years, as it is a short cycle business.
141
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Underlying adjustments

|  |  | 2023 |  |  |  | 2022 |  |
|  |  | Profit |  |  |  | Profit |  |
|  |  | before | Net |  |  | before | Net |
|  | Revenue | financing | financing | Taxation | Revenue | financing | financing | Taxation
|  | £m | £m | £m | £m | £m | £m | £m | £m
Underlying performance |  | 15,409 | 1,590 | (328) | (120) | 12,691 | 652 | (446) | (48)
Impact of foreign exchange differences |  |  |  |  |  |  |  |  |
as a result of hedging activities on trading transactions | A | 1,077 | 469 | 394 | (210) | 829 | 267 | (358) | (81)
Unrealised fair value changes on derivative contracts held for trading | A | – | 6 | 514 | (130) | – | (3) | (1,768) | 451
Unrealised fair value changes on derivative contracts held for financing | A | – | – | 7 | (2) | – | – | 191 | (47)
Exceptional programme credits/(charges) | B | – | 21 | – | (5) | – | 69 | (3) | –
Exceptional transformation and restructuring (charges)/credits | B | – | (102) |  | 25 | – | (47) | – | 4
Impairment reversals/(charges) 6 | C | – | 8 | – | (2) | – | (65) | – | –
Effect of acquisition accounting | C | – | (50) | – | 12 | – | (58) | – | 9
Other | D | – | 2 | (105) | 24 | – | 22 | (36) | (71)
Gains arising on the disposals of businesses | C | – | 1 | – | – | – | 81 | – | (2)
Recognition of deferred tax assets | D | – | – | – | 385 | – | – | – | 93
Total underlying adjustments |  | 1,077 | 355 | 810 | 97 | 829 | 266 | (1,974) | 356
Statutory performance per consolidated |  |  |  |  |  |  |  |  |
income statement |  | 16,486 | 1,945 | 482 | (23) | 13,520 | 918 | (2,420) | 308

1
2
3
4
5
7
8
9
A – FX, B – Exceptional, C – M&A and impairment, D – Other
1 The impact of measuring revenues and costs at the average exchange rate during the year and the impact of valuation of assets and liabilities using the year end exchange rate rather than
the achieved rate or the exchange rate that is expected to be achieved by the use of the hedge book increased statutory revenues by £1,077m (2022: £829m) and increased profit before
financing and taxation by £469m (2022: £267m). Underlying financing excludes the impact of revaluing monetary assets and liabilities at the year end exchange rate
2 The underlying results exclude the fair value changes on derivative contracts held for trading. These fair value changes are subsequently recognised in the underlying results when the
contracts are settled
3 Includes net fair value gains of £1m (2022: £190m) on any interest rate swaps not designated into hedging relationships for accounting purposes
4 During the year to 31 December 2023, £21m of Trent 1000 wastage costs provision previously recognised in respect of estimated costs to settle obligations have been reversed to reflect
the current status of claims in respect of the Trent 1000 technical issues which were identified in 2019
5 During the year to 31 December 2023, the Group incurred total transformation and restructuring related charges of £102m (2022: £47m). In 2023, the Group announced a major multi-year
transformation programme which consists of seven workstreams that were set out in the 2022 Annual Report. During the year, £88m was incurred in relation to this multi-year programme,
comprising £45m for advisory fees and transformation office costs, £37m related to impairments and write-offs and £6m related to severance costs. In the year to 31 December 2023, a £14m
(2022: £47m) charge related to initiatives to enable restructuring under a previous programme
6 The Group has assessed the carrying value of its assets. Further details are provided in notes 9, 10, 11 and 12
7 The effect of acquisition accounting includes the amortisation of intangible assets arising on previous acquisitions
8 Includes interest received of £83m (2022: interest received of £14m) on interest rate swaps which are not designated into hedge relationships for statutory purposes from interest payable
on an underlying basis to fair value movement and £2m (2022: credit of £22m) of past-service credit on defined benefit schemes
9 Relates to the recognition of deferred tax assets on UK tax losses of £328m and foreign exchange derivatives of £57m. The £93m recognised in 2022 relates to foreign exchange derivatives
142
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2 Segmental analysis continued
Balance sheet analysis
At 31 December 2023

|  |  |  |  | Total
|  |  | Power | New | reportable
| Civil Aerospace | Defence | Systems | Markets | segments
| £m | £m | £m | £m | £m
Segment assets | 17,718 | 3,517 | 3,814 | 115 | 25,164
Interests in joint ventures and associates | 444 | 7 | 28 | – | 479
Segment liabilities | (24,447) | (3,376) | (1,765) | (88) | (29,676)
Net (liabilities)/assets | (6,285) | 148 | 2,077 | 27 | (4,033)
Investment in intangible assets, property, plant and equipment, right-of-use |  |  |  |  |
assets and joint ventures and associates | 562 | 176 | 160 | 17 | 915
Depreciation, amortisation and impairment | 719 | 105 | 194 | 9 | 1,027
At 31 December 2022 |  |  |  |  |
Segment assets | 17,537 | 3,430 | 4,084 | 135 | 25,186
Interests in joint ventures and associates | 387 | 4 | 31 | – | 422
Segment liabilities | (25,357) | (3,146) | (1,802) | (97) | (30,402)
Net (liabilities)/assets | (7,433) | 288 | 2,313 | 38 | (4,794)
Investment in intangible assets, property, plant and equipment, right-of-use |  |  |  |  |
assets and joint ventures and associates | 415 | 146 | 177 | 16 | 754
Depreciation, amortisation and impairment | 755 | 128 | 193 | 6 | 1,082

Reconciliation to the balance sheet

| 2023 | 2022
| £m | £m
Total reportable segment assets (excluding held for sale) | 25,164 | 25,186
Other businesses | 8 | 19
Corporate and Inter-segment | (2,010) | (2,460)
Interests in joint ventures and associates | 479 | 422
Assets held for sale | 109 | –
Cash and cash equivalents and short-term investments | 3,784 | 2,618
Fair value of swaps hedging fixed rate borrowings | 118 | 194
Deferred and income tax assets | 3,078 | 2,858
Post-retirement scheme surpluses | 782 | 613
Total assets | 31,512 | 29,450
Total reportable segment liabilities (excluding held for sale) | (29,676) | (30,402)
Other businesses | (58) | (34)
Corporate and Inter-segment | 2,010 | 2,456
Liabilities associated with assets held for sale | (55) | –
Borrowings and lease liabilities | (5,759) | (5,955)
Fair value of swaps hedging fixed rate borrowings | (95) | (108)
Deferred and income tax liabilities | (473) | (390)
Post-retirement scheme deficits | (1,035) | (1,033)
Total liabilities | (35,141) | (35,466)
Net liabilities | (3,629) | (6,016)

The carrying amounts of the Group’s non-current assets including investments but excluding financial instruments, deferred tax assets and
post-retirement scheme surpluses/(deficits), by the geographical area in which the assets are located, are as follows:

| 2023 | 2022
| £m | £m
United Kingdom | 4,981 | 5,202
Germany | 2,052 | 2,151
United States | 1,414 | 1,465
Other | 705 | 735
| 9,152 | 9,553

143
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3 Research and development

| 2023 | 2022
| £m | £m
Gross research and development costs | (1,390) | (1,287)
Contributions and fees | 548 | 359
Expenditure in the year | (842) | (928)
Capitalised as intangible assets | 192 | 131
Amortisation and impairment of capitalised costs | (89) | (94)
Net cost recognised in the income statement | (739) | (891)
Underlying adjustments relating to effects of acquisition accounting and foreign exchange | – | 5
Net underlying cost recognised in the income statement | (739) | (886)

1
2
1 Includes £531m (2022: £350m) of government funding
2 See note 9 for analysis of amortisation and impairment
4 Net financing

| 2023 |  | 2022 |
| Statutory | Underlying | Statutory | Underlying
| £m | £m | £m | £m
Interest receivable and similar income | 164 | 164 | 35 | 35
Net fair value gains on foreign currency contracts | 574 | – | – | –
Net fair value gains on non-hedge accounted interest rate swaps | 1 | – | 190 | –
Net fair value gains on commodity contracts | – | – | 106 | –
Financing on post-retirement scheme surpluses | 30 | – | 24 | –
Net foreign exchange gains | 394 | – | – | –
Financing income | 1,163 | 164 | 355 | 35
Interest payable | (369) | (275) | (343) | (320)
Net fair value losses on foreign currency contracts | – | – | (1,875) | –
Foreign exchange differences and changes in forecast payments relating |  |  |  |
to financial RRSAs | (1) | – | (7) | –
Net fair value losses on commodity contracts | (60) | – | – | –
Financing on post-retirement scheme deficits | (42) | – | (26) | –
Net foreign exchange losses | – | – | (358) | –
Cost of undrawn facilities | (57) | (57) | (61) | (61)
Other financing charges | (152) | (160) | (105) | (100)
Financing costs | (681) | (492) | (2,775) | (481)
Net financing income/(costs) | 482 | (328) | (2,420) | (446)
Analysed as: |  |  |  |
Net interest payable | (205) | (111) | (308) | (285)
Net fair value gains/(losses) on derivative contracts | 515 | – | (1,579) | –
Net post-retirement scheme financing | (12) | – | (2) | –
Net foreign exchange gains/(losses) | 394 | – | (358) | –
Net other financing | (210) | (217) | (173) | (161)
Net financing income/(costs) | 482 | (328) | (2,420) | (446)

1
1
2
3
1 See note 2 for definition of underlying results
2 Includes interest income on cash balances and short-term deposits of £117m (2022: £28m) and similar income of £47m (2022: £7m) on money market funds
3 The consolidated income statement shows the net fair value gain/(loss) on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing
reclassifies the realised fair value movements on these interest rate swaps to net interest payable
144
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5 Taxation

| UK |  | Overseas |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Current tax charge for the year | 19 | 18 | 256 | 159 | 275 | 177
Adjustments in respect of prior years | – | (5) | 2 | (8) | 2 | (13)
Current tax | 19 | 13 | 258 | 151 | 277 | 164
Deferred tax charge/(credit) for the year | 224 | (427) | (69) | (61) | 155 | (488)
Adjustments in respect of prior years | (5) | 4 | 2 | 12 | (3) | 16
Recognition of deferred tax | (406) | – | – | – | (406) | –
Deferred tax | (187) | (423) | (67) | (49) | (254) | (472)
(Credited)/charged in the income statement | (168) | (410) | 191 | 102 | 23 | (308)

Other tax (charges)/credits

|  | OCI |  |  | Equity |
|  | Items that will not be reclassified |  | Items that will be reclassified |  |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Deferred tax: |  |  |  |  |  |
Movement in post-retirement schemes | (43) | 89 | – | – | – | –
Cash flow hedge | – | – | 5 | 12 | – | –
Net investment hedge | – | – | (1) | 2 | – | –
Share-based payments – direct to equity | – | – | – | – | 22 | 1
Other tax (charges)/credits | (43) | 89 | 4 | 14 | 22 | 1

Tax reconciliation on continuing operations

| 2023 | 2022
| £m | £m
Profit/(loss) before taxation from continuing operations | 2,427 | (1,502)
Less: share of results of joint ventures and associates (note 12) | (139) | (9)
Profit/(loss) before taxation from continuing operations excluding joint ventures and associates | 2,288 | (1,511)
Nominal tax charge/(credit) at UK corporation tax rate 23.5% (2022: 19%) | 538 | (287)
UK tax rate differential | 16 | (69)
Overseas rate differences 2 | 9 | 18
Exempt gain on disposal of businesses | – | (14)
R&D credits | (16) | (7)
Other permanent differences | 16 | 23
Benefit to deferred tax from previously unrecognised tax losses and temporary differences | (57) | (134)
Tax losses and other temporary differences not recognised in deferred tax | 9 | 159
Benefit arising from previously unrecognised tax losses | (85) | –
Recognition of deferred tax assets | (406) | –
Adjustments in respect of prior years | (1) | 3
| 23 | (308)
Underlying items (note 2) | 120 | 48
Non-underlying items | (97) | (356)
| 23 | (308)

1
3
4
5
6
7
Tax on discontinued operations

| 2023 | 2022
| £m | £m
Tax charge on loss before taxation from discontinued operations | – | 10
Tax credit on disposal of discontinued operations | – | (31)
| – | (21)

1 The UK tax rate differential arises on the difference between the deferred tax rate and the statutory tax rate
2 Overseas rate differences mainly relate to tax on profits or losses in countries such as the US and Germany
3 The exempt gain in 2022 relates to the disposal of Airtanker Holdings Ltd
4 Benefit to deferred tax from previously unrecognised tax losses and temporary differences mainly relate to foreign exchange derivatives
5 Movement on tax losses not recognised relate to foreign exchange derivatives
6 Relates to foreign exchange derivatives
7 The recognition of deferred tax relates to UK tax losses
145
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5 Taxation continued
Deferred taxation assets and liabilities

| 2023 | 2022
| £m | £m
At 1 January | 2,445 | 1,792
Amount credited to income statement | 254 | 495
Amount (charged)/credited to OCI | (44) | 91
Amount credited to hedging reserves | 5 | 12
Amount credited to equity | 22 | 1
On acquisition/disposal of businesses | (1) | 28
Exchange differences | (13) | 26
At 31 December | 2,668 | 2,445
Deferred tax assets | 2,998 | 2,731
Deferred tax liabilities | (330) | (286)
| 2,668 | 2,445

1
1 The 2023 deferred tax relates to the acquisition of Team Italia Marine S.R.L. The 2022 deferred tax relates to the disposal of ITP Aero
The analysis of the deferred tax position is as follows:

|  |  |  |  | Disposals and |  |
|  | Recognised |  |  | acquisition |  |
|  | in income | Recognised | Recognised | related | Exchange |
| At 1 January | statement | in OCI | in equity | activity | differences | At 31 December
| £m | £m | £m | £m | £m | £m | £m
2023 |  |  |  |  |  |  |
Intangible assets | (436) | 6 | – | – | (1) | – | (431)
Property, plant and equipment | 230 | (7) | – | – | – | 6 | 229
Other temporary differences 1 | 650 | 88 | 4 | 22 | – | (12) | 752
Net contract liabilities | 64 | (4) | – | – | – | – | 60
Pensions and other post-retirement |  |  |  |  |  |  |
scheme benefits | (57) | (15) | (43) | – | – | (8) | (123)
Foreign exchange and commodity financial assets |  |  |  |  |  |  |
and liabilities | 693 | (243) | – | – | – | 1 | 451
Losses | 1,072 | 417 | – | – | – | – | 1,489
R&D credit | 67 | 12 | – | – | – | – | 79
Advance corporation tax | 162 | – | – | – | – | – | 162
| 2,445 | 254 | (39) | 22 | (1) | (13) | 2,668
Recognised in: |  |  |  |  |  |  |
Continuing operations |  | 254 |  |  |  |  |
2022 |  |  |  |  |  |  |
Intangible assets | (464) | 29 | – | – | – | (1) | (436)
Property, plant and equipment | 193 | 33 | – | – | 6 | (2) | 230
Other temporary differences 1 | 465 | 133 | (1) | 1 | 44 | 8 | 650
Net contract liabilities | 73 | (9) | – | – | – | – | 64
Pensions and other post-retirement |  |  |  |  |  |  |
scheme benefits | (140) | (19) | 89 | – | – | 13 | (57)
Foreign exchange and commodity financial assets |  |  |  |  |  |  |
and liabilities | 362 | 329 | 15 | – | (22) | 9 | 693
Losses | 1,085 | (12) | – | – | – | (1) | 1,072
R&D credit | 56 | 11 | – | – | – | – | 67
Advance corporation tax | 162 | – | – | – | – | – | 162
| 1,792 | 495 | 103 | 1 | 28 | 26 | 2,445
Recognised in: |  |  |  |  |  |  |
Continuing operations |  | 472 |  |  |  |  |
Discontinued operations |  | 23 |  |  |  |  |

2
2
1 Other temporary differences mainly relate to the deferral of relief for interest expenses in the UK and revenue recognised earlier under local GAAP compared to IFRS in Germany
2 Prior to 1999 advance corporation tax was paid to the UK Tax Authority when cash dividends were paid by the Group. This was a payment on account which was available to offset against
UK corporation tax liabilities. Any unused balance remaining after 1999 can be carried forward indefinitely and utilised against future UK corporation tax liabilities
146
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5 Taxation continued
Unrecognised deferred tax assets

| 2023 | 2022
| £m | £m
Advance corporation tax | 19 | 19
UK losses | 1,635 | 2,040
Foreign exchange and commodity financial assets and liabilities | 69 | 218
Losses and other unrecognised deferred tax assets | 34 | 33
Deferred tax not recognised on unused tax losses and other items on the basis that future economic benefit |  |
is uncertain | 1,757 | 2,310

Gross amount and expiry of losses and other deductible temporary differences for which no deferred tax asset has been recognised.

|  |  | 2023 |  |  |  |  | 2022 |  |
|  |  | Foreign |  |  |  |  | Foreign |  |
|  |  | exchange |  |  |  |  | exchange |  |
| Total gross |  | and |  |  | Total gross |  | and |  |
| losses and |  | commodity |  | Other | losses and |  | commodity |  | Other
| deductible |  | financial |  | deductible | deductible |  | financial |  | deductible
| temporary | UK | assets and | Other | temporary | temporary | UK | assets and | Other | temporary
| differences | losses | liabilities | losses | differences | differences | losses | liabilities | losses | differences
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m
Expiry within |  |  |  |  |  |  |  |  |  |
five years | 81 | – | – | 81 | – | 83 | – | – | 83 | –
Expiry within |  |  |  |  |  |  |  |  |  |
six to 30 years | 216 | – | – | 216 | – | 265 | – | – | 265 | –
No expiry | 6,891 | 6,537 | 275 | 79 | – | 9,057 | 8,157 | 871 | 27 | 2
| 7,188 | 6,537 | 275 | 376 | – | 9,405 | 8,157 | 871 | 375 | 2
In addition to the gross balances shown above, advance corporation tax of £19m (2022: £19m) has not been recognised. Advance corporation |  |  |  |  |  |  |  |  |  |

tax has no expiry.
Of the total deferred tax asset of £2,998m, £2,399m (2022: £2,183m) relates to the UK and is made up as follows:
— £1,476m (2022: £1,054m) relating to tax losses;
— £412m (2022: £668m) arising on unrealised losses on derivative contracts;
— £162m (2022: £162m) of advance corporation tax; and
— £349m (2022: £299m) relating to other deductible temporary differences, in particular tax depreciation and relief for interest expenses.
The UK deferred tax assets primarily arise in Rolls-Royce plc and have been recognised based on the expectation that the business will generate
taxable profits and tax liabilities in the future against which the losses and deductible temporary differences can be utilised.
Most of the UK tax losses relate to the Civil Aerospace large engine business which makes initial losses through the investment period of
a programme and then makes a profit through its contracts for services. The programme lifecycles are typically in excess of 30 years.
Deferred tax assets are recognised only to the extent it is probable that future taxable profits will be available against which the assets can be
utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset and
using latest UK forecasts, which are mainly driven by the Civil Aerospace large engine business, to assess the level of future taxable profits.
The recoverability of deferred tax assets has been assessed on the following basis:
— using the most recent UK profit forecasts, covering the next five years which are consistent with external sources on market conditions;
— the long-term forecast profit profile of existing large engine programmes which are typically in excess of 30 years from initial investment to
retirement of the fleet, including the aftermarket revenues earned from airline customers;
— the long-term forecast is adjusted to exclude engine programmes which are in the development stage with no confirmed orders;
— taking into account the risk that regulatory changes could materially impact demand for our products;
— consideration that although all Civil Aerospace large engines are now compatible with sustainable fuels, there is a risk that in the longer term
demand will shift towards more sustainable products and solutions;
— the long-term forecast profit and cost profile of the other parts of the UK business;
—
taking into consideration past performance and experience as well as a 25% probability of a severe but plausible downside forecast
materialising in relation to the civil aviation industry; and
— consideration that, whilst profitable in 2023, the UK business has historically been loss making.
147
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5 Taxation continued
The assessment takes into account UK tax laws that, in broad terms, restrict the offset of carried forward tax losses to 50% of current year
profits. In addition, the amounts and timing of future taxable profits incorporate:
— the impact of new contracts signed in 2023. These include the trilateral AUKUS agreement involving the UK Defence business;
— the outcomes of strategic initiatives including cost and commercial optimisation;
— the growth in Civil Aerospace engine flying hours; and
— management’s assumptions on the impact of macroeconomic factors and climate change on the UK business.
The climate change scenarios previously prepared to assess the viability of our business strategy, decarbonisation plans and approach to
managing climate-related risks have continued to develop over the last year. The scale up of sustainable aviation fuel is expected to play a
crucial role in reaching net zero carbon emissions by 2050 and the Group has demonstrated that all Civil Aerospace production engines are
compatible with sustainable aviation fuels. The impact that this could have on our costs and customer pricing is factored into the deferred tax
assessment. However, benefits that may arise in the future from the development of breakthrough new technologies are not taken into account.
Based on the assessment, the Group has recognised a total UK deferred tax asset of £2,399m, which includes the re-recognition of a £57m
deferred tax asset on unrealised losses on foreign exchange derivative contracts and recognition of a further £406m (of which £328m is
non-underlying and £78m is underlying) deferred tax asset relating to UK tax losses. This reflects the conclusions that:
— Based on current financial results and an improved outlook it is probable that the UK business will generate taxable income and tax liabilities
in the future against which these losses can be utilised.
— Using current forecasts and various scenarios these losses and other deductible temporary differences will be used in full within 30-40 years,
which is within the expected programme lifecycles. An explanation of the potential impact of climate change on forecast profits and
sensitivity analysis can be found in note 1.
Any future changes in tax law or the structure of the Group could have a significant effect on the use of losses and other deductible temporary
differences, including the period over which they can be used. In view of this and the significant judgement involved the Board continuously
reassesses this area.
The other significant deferred tax asset arises in Rolls-Royce Deutschland Ltd & Co KG, where the main activity is business aviation. The total
net deferred tax asset is £328m (2022: £284m), which has been recognised in full. The deferred tax asset relates to revenue being recognised
and taxed earlier under local tax rules resulting in a benefit when revenue is recognised in the accounts.
The Group is within the scope of the OECD Pillar Two (Global Minimum Tax) model rules. The legislation has been substantively enacted in some
of the main jurisdictions in which the Group operates including the UK and Germany where the rules will be effective from 1 January 2024. Initial
assessments indicate that Pillar Two income taxes will not be material to the Group and a majority of the jurisdictions in which the Group operates
will meet one of the transitional safe harbours. For those jurisdictions which are material or where the statutory tax rate is close to 15%, the
assessment is based on 2023 data. Elsewhere prior year data has been used.
For the year to 31 December 2023, the Group has applied the mandatory exception to recognising and disclosing information about deferred
tax assets and liabilities related to Pillar Two income taxes.
The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not
been recognised, aggregate to £1,230m (2022: £1,062m). No deferred tax liability has been recognised on the potential withholding tax due on
the remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will not be
given in the foreseeable future.
148
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6 Earnings per ordinary share
Basic earnings per ordinary share (EPS) is calculated by dividing the profit/(loss) attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had
been cancelled.
Where there is a continuing loss during the year, the effect of potentially dilutive ordinary shares is anti-dilutive.

|  | 2023 |  |  | 2022 |
|  | Potentially |  |  | Potentially |
|  | dilutive share |  |  | dilutive share |
| Basic | options | Diluted | Basic | options | Diluted
Profit/(loss) attributable to ordinary shareholders (£m): |  |  |  |  |  |
Continuing operations | 2,412 |  | 2,412 | (1,189) |  | (1,189)
Discontinued operations | – |  | – | (80) |  | (80)
| 2,412 |  | 2,412 | (1,269) |  | (1,269)
Weighted average number of ordinary shares (millions) | 8,361 | 44 | 8,405 | 8,349 | – | 8,349
EPS (pence): |  |  |  |  |  |
Continuing operations | 28.85 | (0.15) | 28.70 | (14.24) | – | (14.24)
Discontinued operations | – | – | – | (0.96) | – | (0.96)
| 28.85 | (0.15) | 28.70 | (15.20) | – | (15.20)

The reconciliation between underlying EPS and basic EPS is as follows:

| 2023 |  | 2022 |
| Pence | £m | Pence | £m
Underlying EPS/Underlying profit from continuing operations attributable to ordinary shareholders | 13.75 | 1,150 | 1�95 | 163
Total underlying adjustments to profit/(loss) before taxation (note 2) | 13.94 | 1,165 | (20.45) | (1,708)
Related tax effects | 1.16 | 97 | 4�26 | 356
EPS/Profit/(loss) from continuing operations attributable to ordinary shareholders | 28.85 | 2,412 | (14.24) | (1,189)
Diluted underlying EPS from continuing operations attributable to ordinary |  |  |  |
shareholders | 13.68 |  | 1�95 |

7 Auditors’ remuneration

| 2023 | 2022
| £m | £m
Fees payable to the Company’s auditor for the audit of the Company’s annual Financial Statements | 3.6 | 3�5
Fees payable to the Company’s auditor and its associates for the audit of the Company’s subsidiaries |  |
pursuant to legislation | 8.6 | 8�5
Total fees payable for audit services | 12.2 | 12�0
Fees payable to the Company’s auditor and its associates for other services: |  |
Audit related assurance services | 0.7 | 1�3
Other assurance services | 0.2 | 0�2
Total fees payable to the Company’s auditor and its associates | 13.1 | 13�5
Fees payable in respect of the Group’s pension schemes: |  |
Audit | 0.1 | 0�1

1
2
3
1 This includes £0.7m (2022: £0.7m) for the review of the half-year report and £nil (2022: £0.6m) in respect of assurance procedures over certain grant claims
2 This includes £0.1m (2022: £0.1m) in respect of agreed upon procedures in respect of levies payable and £0.1m for sustainability assurance work (2022: £0.1m)
3 Audit fees for overseas entities are reported at the average exchange rate for the year
149
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8 Employee information

| 2023 | 2022
| Number | Number
United Kingdom | 20,900 | 19,900
Germany | 10,000 | 9,700
United States | 5,300 | 5,000
Italy | 900 | 900
Singapore | 700 | 700
Canada | 700 | 700
India | 600 | 500
Spain | 100 | 1,800
Rest of world | 2,200 | 2,600
Monthly average number of employees | 41,400 | 41,800
Civil Aerospace | 18,300 | 17,700
Defence | 12,000 | 11,000
Power Systems | 9,800 | 9,400
New Markets | 1,200 | 800
Corporate | 100 | 100
Monthly average number of employees excluding discontinued operations | 41,400 | 39,000
ITP Aero (classified as discontinued operation) | – | 2,800
Monthly average number of employees | 41,400 | 41,800

1

| 2023 |  | 2022 |
|  | Continuing | Discontinued |
| Total | operations | operations | Total
| £m | £m | £m | £m
Wages, salaries and benefits | 2,940 | 2,629 | 117 | 2,746
Social security costs | 416 | 378 | 27 | 405
Share-based payments (note 24) | 66 | 47 | – | 47
Pensions and other post-retirement scheme benefits |  |  |  |
(note 22) | 346 | 268 | 2 | 270
Group employment costs | 3,768 | 3,322 | 146 | 3,468

2
1 Corporate consists of employees who do not provide a shared service to the segments. Where corporate functions provide such a service, employees have been allocated to the segments
on an appropriate basis
2 Remuneration of key management personnel is shown in note 26
150
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9 Intangible assets

|  | Certification | Development | Customer |  |  |
| Goodwill | costs | expenditure | relationships | Software | Other | Total
| £m | £m | £m | £m | £m | £m | £m
Cost: |  |  |  |  |  |  |
At 1 January 2022 | 1,060 | 933 | 3,393 | 475 | 978 | 833 | 7,672
Additions | – | – | 131 | – | 78 | 21 | 230
Disposals | – | – | – | – | (90) | (1) | (91)
Exchange differences | 75 | 2 | 80 | 37 | 12 | 33 | 239
At 31 December 2022 | 1,135 | 935 | 3,604 | 512 | 978 | 886 | 8,050
Additions | – | – | 192 | – | 79 | 13 | 284
Acquisition of businesses (see note 27) | 8 | – | – | 2 | – | – | 10
Transferred to held for sale | (10) | – | – | – | – | (185) | (195)
Transferred to current assets | – | – | – | – | (23) | – | (23)
Disposals | – | (4) | – | – | (27) | (2) | (33)
Reclassifications | – | – | (1) | – | 3 | (1) | 1
Exchange differences | (32) | (1) | (32) | (16) | (6) | (12) | (99)
At 31 December 2023 | 1,101 | 930 | 3,763 | 498 | 1,004 | 699 | 7,995
Accumulated amortisation and impairment: |  |  |  |  |  |  |
At 1 January 2022 | 34 | 425 | 1,760 | 342 | 650 | 420 | 3,631
Charge for the year | – | 21 | 77 | 35 | 86 | 33 | 252
Impairment | – | – | 17 | – | 13 | 5 | 35
Disposals | – | – | – | – | (82) | (1) | (83)
Exchange differences | 2 | 1 | 58 | 29 | 8 | 19 | 117
At 31 December 2022 | 36 | 447 | 1,912 | 406 | 675 | 476 | 3,952
Charge for the year | – | 24 | 89 | 41 | 84 | 41 | 279
Impairment | – | – | – | – | – | (7) | (7)
Transferred to held for sale | – | – | – | – | – | (144) | (144)
Transferred to current assets | – | – | – | – | (14) | – | (14)
Disposals | – | (4) | – | – | (23) | (2) | (29)
Reclassifications | – | – | – | – | 1 | (1) | –
Exchange differences | (1) | – | (25) | (14) | (5) | (6) | (51)
At 31 December 2023 | 35 | 467 | 1,976 | 433 | 718 | 357 | 3,986
Net book value at: |  |  |  |  |  |  |
At 31 December 2023 | 1,066 | 463 | 1,787 | 65 | 286 | 342 | 4,009
At 31 December 2022 | 1,099 | 488 | 1,692 | 106 | 303 | 410 | 4,098

1
2
3
4
5
6
6
3
4
5
1 Includes £97m (2022: £93m) of software under course of construction which is not amortised
2 Other intangibles includes trademarks, brands and the costs incurred testing and analysing engines with the longest time in service (fleet leader engines) to gather technical knowledge
on engine endurance, which will improve reliability and enable the Group to reduce the costs of meeting LTSA obligations
3 At 31 December 2023, the Group held for sale the assets and liabilities of the off-highway engines business in the lower power range based in Power Systems. See note 27 for further detail
4 During the year, the Group signed a service concession arrangement with a customer effective from 1 January 2024. Accordingly, assets that will be derecognised have been transferred
to trade receivables and other assets to reflect the nature of these assets as current assets
5 Includes reclassifications within intangible assets or from property, plant and equipment when available for use
6 Charged to cost of sales and commercial and administrative costs except development costs, which are charged to research and development costs
At 31 December 2023, the Group had expenditure commitments for software of £30m (2022: £37m).
The carrying amount of goodwill or intangible assets allocated across multiple CGUs is not significant in comparison with the Group’s total
carrying amount of goodwill or intangible assets with indefinite useful lives.
151
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9 Intangible assets continued
Goodwill
In accordance with the requirements of IAS 36, goodwill is allocated to the Group’s CGUs, or groups of CGUs, that are expected to benefit from
the synergies of the business combination that gave rise to the goodwill as follows:
Cash-generating unit (CGU) or group of CGUs

| Primary |  |
| operating | 2023 | 2022
| segment | £m | £m
Rolls-Royce Power Systems AG | Power Systems | 798 | 818
Rolls-Royce Deutschland Ltd & Co KG | Civil Aerospace | 237 | 241
Other | Various | 31 | 40
|  | 1,066 | 1,099

Goodwill has been tested for impairment during 2023 on the following basis:
— The carrying values of goodwill have been assessed by reference to the recoverable amount, being the higher of value in use or fair value less
costs of disposal (FVLCOD).
— The recoverable amount has been estimated using cash flows from the most recent forecasts prepared by the Directors, which are consistent
with past experience and external sources of information on market conditions. These forecasts generally cover the next five years. Growth
rates for the period not covered by the forecasts are based on growth rates of 2% which reflects the products, industries and countries in
which the relevant CGU or group of CGUs operate. Inflation has been included based on contractual commitments where relevant. Where
general inflation assumptions have been required, these have been estimated based on externally sourced data. General inflation assumptions
of 2% to 4% have been included in the forecasts, depending on the nature and geography of the flows.
—
The key forecast assumptions for the impairment tests are the discount rate and the cash flow projections, in particular the programme
assumptions (such as sales volumes and product costs), the impact of foreign exchange rates on the relationship between selling prices and
costs, and growth rates. Impairment tests are performed using prevailing exchange rates.
— The Group believes there are significant business growth opportunities to come from Rolls-Royce playing a leading role in the transition to
net zero, whilst at the same time climate change poses potentially significant risks. The assumptions used by the Directors are based on past
experience and external sources of information. Based on the climate scenarios prepared, the forecasts do not assume a significant
deterioration of demand for Civil Aerospace (including Rolls-Royce Deutschland) programmes given that all commercial aero-engines were
compatible with sustainable fuels by the end of 2023. Similarly, 80% of the engines in Power Systems are compatible with sustainable fuels.
The investment required to ensure our new products will be compatible with net zero operation, and to achieve net zero scope 1 + 2 GHG
emissions is reflected in the forecasts used.
A 1.5°C scenario has been prepared using key data points from external sources, including Oxford Economics, Global Climate Service and
Databank and the International Energy Agency. This scenario has been used as the basis of a sensitivity. It is assumed that governments adopt
stricter product and behavioural standards and measures that result in higher carbon pricing. Under these conditions, it is assumed that markets
are willing to pay for low carbon solutions and that there is an economic return from strategic investments in low carbon alternatives. The
sensitivity has considered the likelihood of demand changes for our products based on their relative fuel efficiency in the marketplace and the
probability of alternatives being introduced earlier than currently expected. The sensitivity also reflects the impact of a broad range of potential
costs imposed by policy or regulatory interventions (through carbon pricing). This sensitivity does not indicate the need for an impairment
charge�
The principal assumptions for goodwill balances considered to be individually significant are:
Rolls-Royce Power Systems AG
—
Recoverable amount represents FVLCOD to reflect the future strategy of the business. The Directors consider that disclosing information
prepared on a FVLCOD basis here is a more useful representation of the recoverable amount when considering the future strategy of the
business, including the impact of climate-related risks and opportunities. Due to the unavailability of observable market inputs or inputs based
on market evidence, the fair value is estimated by discounting future cash flows (Level 3 as defined by IFRS 13 Fair Value Measurement)
modified for market participants views;
— Trading assumptions (e.g. volume of equipment deliveries, pricing achieved and cost escalation) that are based on current and known future
programmes, estimates of market share and long-term economic forecasts;
— Plausible downside scenario in relation to macro-economic factors included with a 25% weighting;
— Cash flows beyond the five-year forecasts are assumed to grow at 2.0% (2022: 1.0%); and
— Nominal post-tax discount rate 9.2% (2022: 10.0%).
The Directors do not consider that any reasonably possible changes in the key assumptions (including taking consideration of the climate-related
risks above) would cause the FVLCOD of the business to fall below its carrying value of goodwill.
152
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9 Intangible assets continued
Rolls-Royce Deutschland Ltd & Co KG
— Recoverable amount represents the value in use of the assets in their current condition;
— Trading assumptions (e.g. volume of engine deliveries, flying hours of installed fleet, including assumptions on the recovery of the aerospace
industry, and cost escalation) that are based on current and known future programmes, estimates of market share and long-term economic
forecasts;
— Plausible downside scenario in relation to macro-economic factors included with a 25% weighting;
— Cash flows beyond the five-year forecasts are assumed to grow at 2.0% (2022: 2.0%); and
— Nominal pre-tax discount rate 14.4% (2022: 13.2%).
The Directors do not consider that any reasonably possible changes in the key assumptions (including taking consideration of the climate-related
risks above) would cause the value in use of the goodwill to fall below its carrying value.
Other CGUs
Goodwill balances across the Group that are not considered to be individually significant were also tested for impairment, resulting in no
impairment charge (2022: £nil) being recognised at 31 December 2023.
Material intangible assets (excluding goodwill)
The carrying amount and the residual life of the material intangible assets (excluding goodwill) for the Group is as follows:

| Residual life | Net book value |
|  | 2023 | 2022
|  | £m | £m
Trent programme intangible assets | 2-15 years | 1,920 | 1,826
Business aviation programme intangible assets | 11-15 years | 238 | 250
Intangible assets related to Power Systems |  | 370 | 466
|  | 2,528 | 2,542

1
2
3
4
1 Residual life reflects the remaining amortisation period of those assets where amortisation has commenced. As per page 133, the amortisation period of 15 years will commence on those
assets which are not being amortised as the units are delivered
2 Included within the Trent programmes are the Trent 1000, Trent 7000 and Trent XWB
3 Included within business aviation are the Pearl 700 and Pearl 15
4 Includes £112m (2022: £114m) in respect of a brand intangible asset which is not amortised. Remaining assets are amortised over a range of three to 15 years
Intangible assets (including programme intangible assets) have been reviewed for impairment in accordance with IAS 36. Assessments have
considered potential triggers of impairment such as external factors including climate change, significant changes with an adverse effect on a
programme and by analysing latest management forecasts against those prepared in 2022 to identify any deterioration in performance. Where
a trigger event has been identified, an impairment test has been carried out. Where an impairment was required, the test was performed on the
following basis:
—
The carrying values have been assessed by reference to value in use. These have been estimated using cash flows from the most recent
forecasts prepared by the Directors, which are consistent with past experience and external sources of information on market conditions over
the lives of the respective programmes; and
—
The key assumptions underpinning cash flow projections are based on estimates of product performance related estimates, future market
share and pricing and cost for uncontracted business. Climate-related risks are considered when making these estimates consistent with the
assumptions above.
There have been no (2022: none) individually material impairment charges or reversals recognised during the year.
153
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10 Property, plant and equipment

| Land and | Plant and | Aircraft and | In course of |
| buildings | equipment | engines | construction | Total
| £m | £m | £m | £m | £m
Cost: |  |  |  |  |
At 1 January 2022 | 1,865 | 4,986 | 1,046 | 300 | 8,197
Additions | 34 | 127 | 26 | 162 | 349
Disposals/write-offs | (38) | (142) | (81) | (1) | (262)
Reclassifications | 3 | 82 | (3) | (82) | –
Exchange differences | 72 | 172 | 11 | 21 | 276
At 31 December 2022 | 1,936 | 5,225 | 999 | 400 | 8,560
Additions | 19 | 147 | 34 | 223 | 423
Transferred to current assets | (90) | (93) | – | (43) | (226)
Disposals/write-offs | (19) | (309) | (33) | (9) | (370)
Reclassifications | 69 | 78 | 13 | (146) | 14
Exchange differences | (32) | (86) | (7) | (13) | (138)
At 31 December 2023 | 1,883 | 4,962 | 1,006 | 412 | 8,263
Accumulated depreciation and impairment: |  |  |  |  |
At 1 January 2022 | 614 | 3,244 | 414 | 8 | 4,280
Charge for the year | 79 | 296 | 55 | – | 430
Impairment | 5 | (5) | – | – | –
Disposals/write-offs | (24) | (142) | (57) | – | (223)
Reclassifications | (2) | 5 | (3) | – | –
Exchange differences | 23 | 109 | 4 | 1 | 137
At 31 December 2022 | 695 | 3,507 | 413 | 9 | 4,624
Charge for the year | 70 | 296 | 40 | – | 406
Impairment 4 | 4 | 6 | 1 | 6 | 17
Transferred to current assets | (48) | (61) | – | – | (109)
Disposals/write-offs | (18) | (299) | (25) | – | (342)
Reclassifications | 17 | (9) | 8 | (7) | 9
Exchange differences | (11) | (56) | (3) | – | (70)
At 31 December 2023 | 709 | 3,384 | 434 | 8 | 4,535
Net book value at: |  |  |  |  |
At 31 December 2023 | 1,174 | 1,578 | 572 | 404 | 3,728
At 31 December 2022 | 1,241 | 1,718 | 586 | 391 | 3,936

1
2
1
3
1
3
2
1
1 Includes reclassifications of assets under construction to the relevant classification in property, plant and equipment, right-of-use assets or intangible assets when available for use
2 During the year, the Group signed a service concession arrangement with a customer effective from 1 January 2024. Accordingly, assets that will be derecognised have been transferred
to trade receivables and other assets to reflect the nature of these assets as current assets
3 Depreciation is charged to cost of sales and commercial and administrative costs or included in the cost of inventory as appropriate
4 The carrying values of property, plant and equipment have been assessed during the year in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed
for impairment together with other assets used in individual programmes – see potential triggers considered in note 9. Land and buildings are generally used across multiple programmes
and are considered based on future expectations of the use of the site, which includes any implications from climate-related risks. As a result of this assessment, there are no (2022: none)
individually material impairment charges or reversals in the year
Property, plant and equipment includes:

|  | 2023 |  |  | 2022 |
| Land and | Plant and | Aircraft and | Land and | Plant and | Aircraft and
| buildings | equipment | engines | buildings | equipment | engines
| £m | £m | £m | £m | £m | £m
Assets held for use in leases where the Group |  |  |  |  |  |
is the lessor: |  |  |  |  |  |
Cost | 6 | 38 | 760 | 6 | 41 | 732
Depreciation | (4) | (21) | (348) | (4) | (22) | (317)
Net book value | 2 | 17 | 412 | 2 | 19 | 415
|  |  |  |  | 2023 | 2022
|  |  |  |  | £m | £m
Capital expenditure commitments |  |  |  |  | 222 | 221
Cost of fully depreciated assets |  |  |  |  | 2,084 | 2,184

The Group’s share of equity accounted entities’ capital commitments is £16m (2022: £34m).
154
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11 Right-of-use assets

| Land and | Plant and | Aircraft and |
| buildings | equipment | engines | Total
| £m | £m | £m | £m
Cost: |  |  |  |
At 1 January 2022 | 456 | 143 | 1,785 | 2,384
Additions/modification of leases | 52 | 34 | 59 | 145
Disposals | (30) | (19) | (22) | (71)
Exchange differences | 28 | 4 | 5 | 37
At 31 December 2022 | 506 | 162 | 1,827 | 2,495
Additions/modification of leases | 38 | 56 | 104 | 198
Acquisition of business (see note 27) | 2 | – | – | 2
Disposals | (6) | (22) | (54) | (82)
Transferred to current assets | (4) | – | – | (4)
Reclassifications to PPE | (5) | – | (10) | (15)
Exchange differences | (18) | (2) | (3) | (23)
At 31 December 2023 | 513 | 194 | 1,864 | 2,571
Accumulated depreciation and impairment: |  |  |  |
At 1 January 2022 | 186 | 66 | 929 | 1,181
Charge for the year | 43 | 37 | 190 | 270
Impairment 3 | (2) | (1) | 20 | 17
Disposals | (13) | (19) | (22) | (54)
Exchange differences | 16 | 1 | 3 | 20
At 31 December 2022 | 230 | 84 | 1,120 | 1,434
Charge for the year | 42 | 42 | 179 | 263
Impairment 3 | 3 | 6 | 62 | 71
Disposals | (6) | (22) | (54) | (82)
Transferred to current assets | – | – | – | –
Reclassifications from PPE | (1) | – | (8) | (9)
Exchange differences | (9) | (1) | (1) | (11)
At 31 December 2023 | 259 | 109 | 1,298 | 1,666
Net book value: |  |  |  |
At 31 December 2023 | 254 | 85 | 566 | 905
At 31 December 2022 | 276 | 78 | 707 | 1,061
Right-of-use assets held for use in operating leases where the Group is the lessor: |  |  |  |
Cost | 6 | – | 1,864 | 1,870
Depreciation | (3) | – | (1,298) | (1,301)
Net book value at 31 December 2023 | 3 | – | 566 | 569
Cost | 6 | – | 1,827 | 1,833
Depreciation | (3) | – | (1,120) | (1,123)
Net book value at 31 December 2022 | 3 | – | 707 | 710

1
2
2
1
1 During the year, the Group signed a service concession arrangement with a customer effective from 1 January 2024. Accordingly, assets that will be derecognised have been transferred
to trade receivables and other assets to reflect the nature of these assets as current assets
2 Depreciation is charged to cost of sales and commercial and administrative costs as appropriate
3 The carrying values of right-of-use assets have been assessed during the year in line with IAS 36. Material items of plant and equipment and aircraft and engines are assessed for
impairment together with other assets used in individual programmes – see potential triggers considered in note 9. Land and buildings are generally used across multiple programmes and
are considered based on future expectations of the use of the site (which includes any implications from climate-related risks). As a result of this assessment, the carrying values of assets,
where a trigger was identified, have been assessed by reference to value in use considering assumptions such as estimated future cash flows, product performance related estimates and
climate-related risks. An impairment charge of £71m has been recognised, which includes £27m in relation to lease engines that have been returned following the termination of the lease
by the lessee. In addition, during the year, a number of existing leases were extended as a result of renegotiations. An assessment was performed in reference to value in use to
support the increase in asset value over the extended lease term, and as a result, an impairment of £26m has been recognised in Civil Aerospace (2022: no individually material impairment
charges or reversals)
155
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12 Investments
Composition of the Group
The entities contributing to the Group’s financial results are listed on pages 190 to 195.
Where the Group does not own 100% of the shares of a group undertaking, there are a number of arrangements with the other shareholder(s)
that give the Group the option or potential obligation to acquire the third parties’ shares. These arrangements have been assessed and are not
considered to have a significant value, individually or in aggregate.
The Group does not have any non-wholly owned subsidiaries that have a material non-controlling interest.
Equity accounted and other investments

|  | Equity accounted |  | Other
| Joint ventures | Associates | Total |
| £m | £m | £m | £m
At 1 January 2022 | 403 | 1 | 404 | 36
Additions | 29 | – | 29 | 7
Disposals | – | (1) | (1) | (2)
Impairment | (74) | – | (74) | (1)
Share of retained loss | (25) | – | (25) | –
Reclassification of deferred profit to deferred income | (4) | – | (4) | –
Repayment of loans | (5) | – | (5) | –
Revaluation of other investments accounted for as FVOCI | – | – | – | (4)
Exchange differences | 96 | – | 96 | –
Share of OCI | 2 | – | 2 | –
At 1 January 2023 | 422 | – | 422 | 36
Additions | 9 | – | 9 | –
Disposals | (5) | – | (5) | (1)
Share of retained profit 2 | 119 | – | 119 | –
Reclassification of deferred profit to deferred income | (18) | – | (18) | –
Revaluation of other investments accounted for as FVOCI | – | – | – | (4)
Exchange differences | (50) | – | (50) | –
Share of OCI | 2 | – | 2 | –
At 31 December 2023 | 479 | – | 479 | 31

1
2
3
4
3
1 Other investments includes unlisted investments of £24m (2022: £26m) and listed investments of £7m (2022: £10m)
2 See table below
3 The Group’s share of unrealised profit on sales to joint ventures is eliminated against the carrying value of the investment in the entity. Any excess amount, once the carrying value is
reduced to £nil, is recorded as deferred income
4 During the year, additions to investments of £9m includes the second instalment of investment related to the joint venture, Beijing Aero Engine Services Company Limited of £6m
Reconciliation of share of retained profit/(loss) to the income statement and cash flow statement:

| 2023 | 2022
| £m | £m
Share of results of joint ventures and associates | 139 | 9
Adjustments for intercompany trading | 34 | 39
Share of results of joint ventures and associates to the Group | 173 | 48
Dividends paid by joint ventures and associates to the Group (cash flow statement) | (54) | (73)
Share of retained profit/(loss) above | 119 | (25)

1
1 During the year, the Group sold spare engines to Rolls-Royce & Partners Finance, a joint venture and subsidiary of Alpha Partners Leasing Limited. The Group’s share of the profit on these
sales is deferred and released to match the depreciation of the engines in the joint venture’s financial statements. In 2023 and 2022, profit deferred on the sale of engines was lower than
the release of that deferred in prior years
156
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12 Investments continued
The following joint ventures are considered to be individually material to the Group:

| Principal location | Activity | Ownership interest
Alpha Partners Leasing Limited (APL) | UK | Aero-engine leasing | 50.0%
Hong Kong Aero Engine Services Limited (HAESL) | Hong Kong | Aero-engine repair and overhaul | 50.0%
Singapore Aero Engine Services Pte Limited (SAESL) | Singapore | Aero-engine repair and overhaul | 50.0%

Summarised financial information of the Group’s individually material joint ventures is as follows:

| APL |  | HAESL |  | SAESL |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Revenue | 371 | 310 | 3,214 | 2,388 | 2,224 | 2,012
Profit and total comprehensive income |  |  |  |  |  |
for the year | 106 | 55 | 73 | 72 | 29 | 31
Dividends paid during the year | (5) | (22) | (67) | (66) | – | –
Profit for the year included the following: |  |  |  |  |  |
Depreciation and amortisation | (166) | (190) | (11) | (13) | (20) | (21)
Interest income | 15 | – | – | – | 7 | 1
Interest expense | (122) | (89) | (4) | (2) | (2) | (3)
Income tax expense | (37) | (13) | (14) | (14) | (2) | (2)
Current assets | 336 | 375 | 1,103 | 886 | 954 | 865
Non-current assets | 3,048 | 3,199 | 93 | 98 | 130 | 154
Current liabilities | (261) | (480) | (886) | (716) | (790) | (687)
Non-current liabilities | (2,358) | (2,389) | (73) | (26) | (8) | (60)
Net assets | 765 | 705 | 237 | 242 | 286 | 272
Included in the above: |  |  |  |  |  |
Cash and cash equivalents | 223 | 239 | 12 | 6 | 99 | 61
Current financial liabilities | (165) | (411) | – | (135) | – | –
Non-current financial liabilities | (1,914) | (2,003) | (66) | (17) | (8) | (60)
Reconciliation to the carrying amount recognised in the Consolidated Financial Statements |  |  |  |  |  |
Ownership interest | 50.0% | 50.0% | 50.0% | 50.0% | 50.0% | 50.0%
Group share of net assets above | 383 | 353 | 119 | 121 | 143 | 136
Goodwill | – | – | 36 | 38 | 11 | 11
Adjustments for intercompany trading | (383) | (353) | – | (2) | (4) | –
Included in the balance sheet | – | – | 155 | 157 | 150 | 147

1
1
1 Excluding trade payables and other liabilities
The summarised aggregated results of the Group’s share of equity accounted investments is as follows:

|  | Individually material joint |  |  |  |  |  |  |
|  | ventures (above) |  | Other joint ventures |  | Associates |  | Total |
|  | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022
|  | £m | £m | £m | £m | £m | £m | £m | £m
Profit/(loss) and total |  |  |  |  |  |  |  |  |
comprehensive income for the year |  | 104 | 79 | 37 | (68) | – | – | 141 | 11
Assets: | Non-current assets | 1,637 | 1,726 | 159 | 199 | – | – | 1,796 | 1,925
| Current assets | 1,197 | 1,063 | 359 | 327 | – | – | 1,556 | 1,390
Liabilities: | Current liabilities | (969) | (942) | (264) | (245) | – | – | (1,233) | (1,187)
| Non-current liabilities | (1,220) | (1,237) | (43) | (58) | – | – | (1,263) | (1,295)
Group adjustment |  |  |  |  |  |  |  |
for goodwill | 47 | 49 | – | – | – | – | 47 | 49
Adjustment for intercompany trading |  | (387) | (355) | (37) | (105) | – | – | (424) | (460)
Included in the balance sheet |  | 305 | 304 | 174 | 118 | – | – | 479 | 422
1 | Liabilities include borrowings of: | (1,076) | (1,313) | (60) | (84) | – | – | (1,136) | (1,397)

1
157
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13 Inventories

| 2023 | 2022
| £m | £m
Raw materials | 516 | 479
Work in progress | 1,679 | 1,633
Finished goods | 2,653 | 2,593
Payments on account | – | 3
| 4,848 | 4,708
Inventories stated at net realisable value | 187 | 209
Amount of inventory write-down | 79 | 85
Reversal of inventory write-down | 21 | 27

14 Trade receivables and other assets

| Current |  | Non-current |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Trade receivables | 2,724 | 2,376 | 40 | 43 | 2,764 | 2,419
Prepayments 2 | 1,032 | 737 | 102 | 37 | 1,134 | 774
RRSA prepayment for LTSA parts | 236 | 149 | 1,084 | 856 | 1,320 | 1,005
Receivables due on RRSAs | 1,159 | 928 | 193 | 255 | 1,352 | 1,183
Amounts owed by joint ventures and associates | 731 | 632 | 10 | 16 | 741 | 648
Other taxation and social security receivable | 160 | 147 | 13 | 9 | 173 | 156
Costs to obtain contracts with customers | 7 | 12 | 109 | 67 | 116 | 79
Other receivables and similar assets | 478 | 617 | 45 | 55 | 523 | 672
| 6,527 | 5,598 | 1,596 | 1,338 | 8,123 | 6,936
Trade receivables and other assets are analysed as follows: |  |  |  |  |  |
Financial instruments (note 20): |  |  |  |  |  |
Trade receivables and similar items |  |  |  |  | 4,857 | 4,147
Other non-derivative financial assets |  |  |  |  | 332 | 775
Non-financial instruments |  |  |  |  | 2,934 | 2,014
|  |  |  |  | 8,123 | 6,936

1
2
3
4
1 Trade receivables and other assets have been presented on the face of the balance sheet, in line with the operating cycle of the business. Further disclosure is included in the table above
and relate to amounts not expected to be received in the next 12 months, in line with specific customer payment arrangements, including customers on payment plans
2 At 31 December 2023, prepayments to RRSA partners for LTSA parts have been shown separately to provide additional detail for the reader. These amounts reflect the contractual share
of EFH flows from customers paid to RRSA partners in return for the supply of parts in future periods under long-term supply contracts. In the prior year, these amounts were included
within prepayments. There is no change to the total amount of trade receivables and other assets
3 These are amortised over the term of the related contract in line with engine deliveries, resulting in amortisation of £9m (2022: £11m) in the year. There were no impairment losses
4 Other receivables includes unbilled recoveries relating to completed overhaul activity where the right to consideration is unconditional
The Group has adopted the simplified approach to provide for ECLs, measuring the loss allowance at a probability weighted amount incorporated
by using credit ratings which are publicly available, or through internal risk assessments derived using the customer’s latest available financial
information.
The ECLs for trade receivables and other assets has decreased by £104m to £242m (2022: increased by £87m to £346m). This movement is mainly
driven by the Civil Aerospace division of £(100)m, of which £(82)m relates to specific customers and £(18)m relates to updates to the
recoverability of other receivables.
The assumptions and inputs used for the estimation of the ECLs are disclosed in the table below:

|  | 2023 |  |  | 2022 |
| Trade receivables |  |  | Trade receivables |  |
| and other | Loss | Average | and other | Loss | Average
| financial assets | allowance | ECL rate | financial assets | allowance | ECL rate
| £m | £m | % | £m | £m | %
Credit rating C and above | 1,744 | (102) | 6% | 1,637 | (177) | 11%
Credit rating below C | 80 | (6) | 8% | 124 | (16) | 13%
Without credit rating | 3,607 | (134) | 4% | 3,507 | (153) | 4%
| 5,431 | (242) | 4% | 5,268 | (346) | 7%

158
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14 Trade receivables and other assets continued
The movements of the Group ECLs provision are as follows:

| 2023 | 2022
| £m | £m
At 1 January | (346) | (259)
Increases in loss allowance recognised in the income statement during the year | (80) | (118)
Loss allowance utilised | 34 | 22
Releases of loss allowance previously provided | 128 | 45
Exchange differences | 22 | (36)
At 31 December | (242) | (346)

15 Contract assets and liabilities

| Current |  | Non-current |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Contract assets |  |  |  |  |  |
Contract assets with customers | 534 | 621 | 481 | 617 | 1,015 | 1,238
Participation fee contract assets | 26 | 28 | 201 | 215 | 227 | 243
| 560 | 649 | 682 | 832 | 1,242 | 1,481

1
2
1 Contract assets and contract liabilities have been presented on the face of the balance sheet, in line with the operating cycle of the business. Contract liabilities are further split according
to when the related performance obligation is expected to be satisfied and, therefore, when revenue is estimated to be recognised in the income statement. Further disclosure of contract
assets is provided in the table above, which shows within current the element of consideration that will become unconditional in the next year
2 Contract assets are classified as non-financial instruments
The balance includes £494m (2022: £885m) of Civil Aerospace LTSA assets and £410m (2022: £263m) Defence LTSA assets.
The decrease in the Civil Aerospace balance is due to higher invoicing than revenue recognised in relation to the completion of performance
obligations on those contracts with a contract asset balance. Revenue recognised relating to performance obligations satisfied in previous years
was £64m (2022: £26m) in Civil Aerospace.
The increase in the Defence balance is due to revenue recognition in relation to performance obligations completed being higher than the
payments received from the customer.
No impairment losses in relation to these contract assets (2022: none) have arisen during the year.
Participation fee contract assets have reduced by £16m (2022: £3m) due to amortisation of £15m and foreign exchange on consolidation of £1m.
The absolute value of ECLs for contract assets has decreased by £15m to £6m (2022: £21m).

| Current |  | Non-current |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Contract liabilities | 6,098 | 4,825 | 8,438 | 7,337 | 14,536 | 12,162
Contract liabilities are analysed as follows 1 : |  |  |  |  |  |
Financial instruments (note 20) |  |  |  |  | 1,358 | 1,006
Non-financial instruments |  |  |  |  | 13,178 | 11,156
|  |  |  |  | 14,536 | 12,162

1 Amounts within contract liabilities as at 31 December 2022 have been represented to better reflect the nature of the balance between financial and non-financial instruments. This resulted
in an increase in financial instruments of £586m and a corresponding decrease in non-financial instruments. There is no impact to total contract liabilities
During the year, £3,813m (2022: £3,321m) of the opening contract liability was recognised as revenue.
Contract liabilities have increased by £2,374m. The movement in the Group balance is primarily as a result of increases in Civil Aerospace of
£1,865m and Defence of £381m. The Civil Aerospace increase is primarily a result of growth in LTSA liabilities of £1,317m to £9,574m (2022: £8,257m)
driven by price escalation, the continued rise in EFHs and the associated customer receipts, as well as commercial discipline driving more timely
invoicing and recovery of contractual fees. In 2023 contract liabilities increased by £168m as a result of revenue recognised in relation to
performance obligations satisfied in previous years (2022: £334m decrease). The increase in Defence is from the receipt of deposits in advance
of performance obligations being completed.
159
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16 Cash and cash equivalents

| 2023 | 2022
| £m | £m
Cash at bank and in hand | 739 | 847
Money-market funds | 1,077 | 34
Short-term deposits | 1,968 | 1,726
Cash and cash equivalents per the balance sheet | 3,784 | 2,607
Overdrafts (note 17) | (53) | (2)
Cash and cash equivalents per cash flow statement (page 118) | 3,731 | 2,605

Cash and cash equivalents at 31 December 2023 includes £279m (2022: £235m) that is not available for general use by the Group. This balance
includes £40m (2022: £40m), which is held in an account that is exclusively for the general use of Rolls-Royce Submarines Limited and £195m
(2022: £138m), which is held exclusively for the use of Rolls-Royce Saudi Arabia Limited. This cash is not available for use by other entities within
the Group. The remaining balance relates to cash held in non-wholly owned subsidiaries and joint arrangements.
Balances are presented on a net basis, when the Group has both a legal right of offset and the intention to either settle on a net basis or realise
the asset and settle the liability simultaneously.
17 Borrowings and lease liabilities

| Current |  | Non-current |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Unsecured |  |  |  |  |  |
Overdrafts | 53 | 2 | – | – | 53 | 2
Bank loans | 3 | 1 | – | – | 3 | 1
0.875% Notes 2024 €550m | 475 | – | – | 472 | 475 | 472
3.625% Notes 2025 $1,000m | – | – | 770 | 801 | 770 | 801
3.375% Notes 2026 £375m | – | – | 361 | 351 | 361 | 351
4.625% Notes 2026 €750m | – | – | 649 | 661 | 649 | 661
5.75% Notes 2027 $1,000m | – | – | 782 | 825 | 782 | 825
5.75% Notes 2027 £545m | – | – | 542 | 541 | 542 | 541
1.625% Notes 2028 €550m | – | – | 455 | 444 | 455 | 444
Other loans | – | – | 9 | 10 | 9 | 10
Total unsecured | 531 | 3 | 3,568 | 4,105 | 4,099 | 4,108
Lease liability – Land and buildings | 42 | 46 | 382 | 400 | 424 | 446
Lease liability – Aircraft and engines | 203 | 278 | 949 | 1,047 | 1,152 | 1,325
Lease liability – Plant and equipment | 33 | 31 | 51 | 45 | 84 | 76
Total lease liabilities | 278 | 355 | 1,382 | 1,492 | 1,660 | 1,847
Total borrowings and lease liabilities | 809 | 358 | 4,950 | 5,597 | 5,759 | 5,955

1
1
2
3
3
1
All outstanding items described as loan notes above are listed on the London Stock Exchange
1 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay floating rates of GBP interest, which form a fair value hedge.
They are also subject to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss
2 These notes are the subject of interest rate swap agreements under which the Group has undertaken to pay floating rates of interest, which form a fair value hedge. They are also subject
to interest rate swap agreements under which the Group has undertaken to pay fixed rates of interest, which are classified as fair value through profit and loss
3 These notes are the subject of cross-currency interest rate swap agreements under which the Group has undertaken to pay fixed rates of GBP interest, which form a cash flow hedge
160
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17 Borrowings and lease liabilities continued
The Group has access to the following undrawn committed borrowing facilities at the end of the year:

| Total |
| 2023 | 2022
| £m | £m
Expiring within one year | – | –
Expiring after one year | 3,500 | 5,500
Total undrawn facilities | 3,500 | 5,500

Further details can be found in the going concern and liquidity statements on page 58.
During the year to 31 December 2023, the Group cancelled its undrawn £1bn bank loan facility which was due to mature in January 2024 and its
undrawn UK Export Finance (UKEF) £1bn facility which was due to mature in March 2026. These facilities had remained undrawn during the year.
In addition, the Group replaced the £2,500m committed bank borrowing facility with a new £2,500m facility with a maturity date of November 2026
with the banks having the option to extend with two one-year extension options (3+1+1).
Under the terms of the £1bn UKEF loan facility, the Company is restricted from declaring, making or paying distributions to shareholders unless
certain conditions are satisfied. The conditions are linked to free cash flow performance in the prior year, and actual and forecast minimum
liquidity levels. At 31 December 2023, these conditions were met but the Group is not making shareholder distributions. Once the Group is
comfortably within an investment grade profile and the strength of the balance sheet is assured, the Group is committed to reinstating and
growing shareholder distributions. This loan facility expires in 2027. The restrictions on distributions do not prevent the Company from
redeeming any unredeemed C Shares issued prior to March 2021.
18 Leases
Leases as lessee
The net book value of right-of-use assets at 31 December 2023 was £905m (2022: £1,061m), with a lease liability of £1,660m (2022: £1,847m), per
notes 11 and 17, respectively. Leases that have not yet commenced to which the Group is committed have a future liability of £5m and consist of
mainly plant and equipment and properties. The consolidated income statement shows the following amounts relating to leases:

| 2023 | 2022
| £m | £m
Land and buildings depreciation and impairment | (45) | (41)
Plant and equipment depreciation and impairment | (48) | (36)
Aircraft and engines depreciation and impairment | (241) | (210)
Total depreciation and impairment charge for right-of-use assets | (334) | (287)
Adjustment of amounts payable under residual value guarantees within lease liabilities | 10 | 3
Expense relating to short-term leases of 12 months or less recognised as an expense on a straight line basis | (49) | (28)
Expense relating to variable lease payments not included in lease liabilities | (5) | (2)
Total operating costs | (378) | (314)
Interest expense | (85) | (68)
Total lease expense | (463) | (382)
Income from sub-leasing right-of-use assets | 31 | 32
Total amount recognised in the income statement | (432) | (350)

1
2
3
3, 4
2
3, 5
6
1 Included in cost of sales and commercial and administration costs depending on the nature and the use of the right-of-use asset
2 Included in cost of sales, commercial and administration costs, or research and development depending on the nature and use of the right-of-use asset
3 Included in cost of sales
4 Where the cost of meeting residual value guarantees is less than that previously estimated, as costs have been mitigated or liabilities waived by the lessor, the lease liability has been
remeasured. Where the value of this remeasurement exceeds the value of the right-of-use asset, the reduction in the lease liability is credited to cost of sales
5 Variable lease payments primarily arise on a small number of contracts where engine lease payments are dependent upon utilisation rather than a periodic charge
6 Included in financing costs
The total cash outflow for leases in 2023 was £429m (2022: £316m). Of this, £375m related to leases reflected in the lease liability, £49m to
short-term leases where lease payments are expensed on a straight-line basis and £5m for variable lease payments where obligations are only
due when the assets are used. The timing difference between income statement charge and cash flow relates to costs incurred at the end of
leases for residual value guarantees and restoration costs that are recognised within depreciation over the term of the lease, the most significant
amounts relate to engine leases�
Engine leases in the Civil Aerospace division often include clauses that require the engines to be returned to the lessor with specific levels of
usable life remaining or cash payments to the lessor. The costs of meeting these requirements are included in the lease payments. The amounts
payable are calculated based upon an estimate of the utilisation of the engines over the lease term, whether the engine is restored to the required
condition by performing an overhaul at our own cost or through the payments of amounts specified in the contract and any new contractual
arrangements arising when the current lease contracts end. Amounts due can vary depending on the level of utilisation of the engines, overhaul
activity prior to the end of the contract, and decisions taken on whether ongoing access to the assets is required at the end of the lease term.
During the year, adjustments to return conditions at the end of leases resulted in a credit of £10m to the income statement. The lease liability at
31 December 2023 included £354m relating to the cost of meeting these residual value guarantees in the Civil Aerospace division. Up to £76m
is payable in the next 12 months, £185m is due over the following four years and the remaining balance after five years.
161
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18 Leases continued
Leases as lessor
The Group acts as lessor for engines to Civil Aerospace customers when they require engines to support their fleets. Lease agreements with the
lessees provide protection over the assets. Usage in excess of specified limits and damage to the engine while on lease are covered by variable
lease payment structures. Lessee bankruptcy risk is managed through the Cape Town Convention on International Interests in Mobile Equipment
(including a specific protocol relating to aircraft equipment); an international treaty that creates common standards for the registration of lease
contracts and establishes various legal remedies for default in financing agreements, including repossession and the effect of particular states’
bankruptcy laws. Engines are only leased once the Group confirm that appropriate insurance documentation is established that covers the engine
assets to pre-agreed amounts. All such contracts are operating leases. The Group also leases out a small number of properties, or parts of
properties, where there is excess capacity under operating leases.

| 2023 | 2022
| £m | £m
Operating lease income | 104 | 84

1, 2
1 Includes variable lease payments received of £87m (2022: £73m) that do not depend on an index or a rate
2 Items of property, plant and equipment subject to an operating lease are disclosed in note 10
Total non-cancellable future operating lease rentals (undiscounted) of £91m (2022: £95m) are receivable over the next 12 years. £12m (2022: £12m)
is due within one year, £43m (2022: £45m) between one to five years and £36m (2022: £38m) after five years.
In a limited number of circumstances, the Group sublets properties that are treated as a finance lease when the arrangement transfers
substantially all the risks and rewards of ownership of the asset. At 31 December 2023, the total undiscounted lease payments receivable is £35m
(2022: £39m) on annual lease income of £4m (2022: £4m). The discounted finance lease receivable at 31 December 2023 is £28m (2022: £32m).
There was no (2022: £nil) finance income recognised during the year.
19 Trade payables and other liabilities

| Current |  | Non-current |  | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Trade payables | 1,608 | 1,735 | – | – | 1,608 | 1,735
Accruals | 1,134 | 1,477 | 96 | 199 | 1,230 | 1,676
Customer discounts | 1,018 | 828 | 773 | 1,016 | 1,791 | 1,844
Payables due on RRSAs | 1,713 | 1,392 | – | – | 1,713 | 1,392
Deferred receipts from RRSA workshare partners | 56 | 32 | 774 | 829 | 830 | 861
Amounts owed to joint ventures and associates | 542 | 567 | – | – | 542 | 567
Government grants | 30 | 21 | 54 | 41 | 84 | 62
Other taxation and social security | 92 | 88 | – | – | 92 | 88
Other payables | 703 | 843 | 230 | 279 | 933 | 1,122
| 6,896 | 6,983 | 1,927 | 2,364 | 8,823 | 9,347
Trade payables and other liabilities are analysed as follows: |  |  |  |  |  |
Financial instruments (note 20): |  |  |  |  |  |
Trade payables and similar items |  |  |  |  | 5,091 | 5,376
Other non-derivative financial liabilities |  |  |  |  | 2,521 | 2,748
Non-financial instruments |  |  |  |  | 1,211 | 1,223
|  |  |  |  | 8,823 | 9,347

1
2
3
4
1 Customer discounts include customer concession credits. Revenue recognised comprises sales to the Group’s customers after such items. Customer concession credits are discounts given
to a customer upon the sale of goods or services. A liability is recognised to correspond with the recognition of revenue when the performance obligation is met as set out on page 127.
The largest element of the balance, approximately £1.2bn, arises when the Civil Aerospace division delivers its engines to an airframer. A concession is often payable to the end customer
(e.g. an airline) on delivery of the aircraft from the airframer. The concession amounts are known and the payment date is reasonably certain, hence there is no significant judgement or
uncertainty associated with the timing of these amounts. Warranty credits of £364m and customer concessions of £1,480m have been represented at 31 December 2023 to be included
within customer discounts to better reflect the nature of these balances
2 During the year, £74m, (2022: £20m) of government grants were released to the income statement
3 Other payables includes payroll liabilities and HM Government UK levies
4 Amounts within financial instruments classified as trade payables and similar items and other non-derivative financial liabilities as at 31 December 2022 have been represented to better
reflect the nature of the balance. This resulted in a decrease in trade payables and similar items of £363m and a corresponding increase in other non-derivative financial instruments. There
is no impact to total trade payables and other liabilities
The Group’s payment terms with suppliers vary on the products and services being sourced, the competitive global markets the Group operates
in and other commercial aspects of suppliers’ relationships. Industry average payment terms vary between 90 to 120 days. The Group offers
reduced payment terms for smaller suppliers, who are typically on 75-day payment terms, so that they are paid in 30 days. In line with civil
aviation industry practice, the Group offers a SCF programme in partnership with banks to enable suppliers, including joint ventures who are
on 90-day standard payment terms, to receive their payments sooner. The SCF programme is available to suppliers at their discretion and does
not change rights and obligations with suppliers or the timing of payment of suppliers. At 31 December 2023, suppliers had drawn £418m under
the SCF scheme (2022: £422m) of which £154m (2022: £180m) is drawn by joint ventures. The Group, in some cases, settles the costs incurred by
joint venture as a result of them utilising either the Group offered SCF arrangement, or an alternative SCF arrangement. During the year to
31 December 2023, the Group incurred costs of £28m (2022: £12m) to settle the costs incurred by joint ventures as a result of them utilising the
Group offered SCF arrangement. These costs are included within other financing charges.
162
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments
Carrying values and fair values of financial instruments

|  |  |  | Assets |  | Liabilities |  | Total
|  | Basis for |  |  | Amortised |  |  |
|  | determining | FVPL | FVOCI | cost | FVPL | Other |
| Notes | fair value | £m | £m | £m | £m | £m | £m
2023 |  |  |  |  |  |  |  |
Other non-current asset investments | 12 | A | 24 | 7 | – | – | – | 31
Trade receivables and similar items | 14 | B/C | – | 9 | 4,848 | – | – | 4,857
Other non-derivative financial assets | 14 | B | – | – | 332 | – | – | 332
Other assets |  | D/F | 32 | – | 12 | – | – | 44
Derivative financial assets |  | C | 350 | – | – | – | – | 350
Cash and cash equivalents | 16 | B | 1,077 | – | 2,707 | – | – | 3,784
Borrowings | 17 | E/F | – | – | – | – | (4,099) | (4,099)
Lease liabilities | 17 | G | – | – | – | – | (1,660) | (1,660)
Derivative financial liabilities |  | C | – | – | – | (2,228) | – | (2,228)
Financial RRSAs |  | H | – | – | – | – | (17) | (17)
Other liabilities |  | H | – | – | – | – | (163) | (163)
C Shares |  | B | – | – | – | – | (23) | (23)
Trade payables and similar items | 19 | B | – | – | – | – | (5,091) | (5,091)
Other non-derivative financial liabilities | 19 | B | – | – | – | – | (2,521) | (2,521)
Contract liabilities | 15 | B | – | – | – | – | (1,358) | (1,358)
|  |  | 1,483 | 16 | 7,899 | (2,228) | (14,932) | (7,762)
2022 |  |  |  |  |  |  |  |
Other non-current asset investments | 12 | A | 26 | 10 | – | – | – | 36
Trade receivables and similar items | 14 | B/C | – | 10 | 4,137 | – | – | 4,147
Other non-derivative financial assets | 14 | B |  | – | 775 | – | – | 775
Other assets |  | D | 35 | – | – | – | – | 35
Derivative financial assets |  | C | 648 | – | – | – | – | 648
Short-term investments |  | B | – | – | 11 | – | – | 11
Cash and cash equivalents | 16 | B | 34 | – | 2,573 | – | – | 2,607
Borrowings | 17 | E/F | – | – | – | – | (4,108) | (4,108)
Lease liabilities | 17 | G | – | – | – | – | (1,847) | (1,847)
Derivative financial liabilities |  | C | – | – | – | (4,099) | – | (4,099)
Financial RRSAs |  | H | – | – | – | – | (22) | (22)
Other liabilities |  | H | – | – | – | – | (101) | (101)
C Shares |  | B | – | – | – | – | (24) | (24)
Trade payables and similar items | 19 | B | – | – | – | – | (5,376) | (5,376)
Other non-derivative financial liabilities | 19 | B | – | – | – | – | (2,748) | (2,748)
Contract liabilities | 15 | B | – | – | – | – | (1,006) | (1,006)
|  |  | 743 | 20 | 7,496 | (4,099) | (15,232) | (11,072)

1
1
1
1
2
2
3
1 In the event of counterparty default relating to derivative financial assets and derivative financial liabilities, offsetting would apply and financial assets and liabilities held with the same
counterparty would net off. If this occurred with every counterparty, total financial assets would be £3m (2022: £8m) and liabilities £1,881m (2022: £3,459m)
2 As described in note 19, trade payables and similar items at 31 December 2022 has decreased by £363m with a respective increase in other non-derivative financial liabilities
3 As described in note 15, contract liabilities at 31 December 2022 has increased by £586m
163
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Fair values equate to book values for both 2023 and 2022, with the following exceptions:

|  | 2023 |  | 2022 |
| Basis for |  |  |  |
| determining | Book value | Fair value | Book value | Fair value
| fair value | £m | £m | £m | £m
Other assets | F | 12 | 12 | – | –
Borrowings | E | (4,034) | (3,977) | (4,095) | (3,812)
Borrowings | F | (65) | (67) | (13) | (15)
Financial RRSAs | H | (17) | (16) | (22) | (22)

The fair value of a financial instrument is the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing
parties in an arm’s-length transaction. There have been no transfers during the year from or to Level 3 valuation. Fair values have been determined
with reference to available market information at the balance sheet date, using the methodologies described below.
A These primarily comprise unconsolidated companies where fair value approximates to the book value. Listed investments are valued using Level 1 methodology
B Fair values are assumed to approximate to cost either due to the short-term maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding
six months. Money market funds are valued using Level 1 methodology
C Fair values of derivative financial assets and liabilities and trade receivables held to collect or sell are estimated by discounting expected future contractual cash flows using prevailing
interest rate curves. For commodity derivatives, forward commodity prices are used to determine expected future cash flows. Amounts denominated in foreign currencies are valued at
the exchange rate prevailing at the balance sheet date. These financial instruments are included on the balance sheet at fair value, derived from observable market prices (Level 2)
D Other assets are included on the balance sheet at fair value, derived from observable market prices or latest forecast (Level 2/Level 3). At 31 December 2023, Level 3 assets totalled £25m
(2022: £25m)
E Borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value of borrowings
is estimated using quoted prices (Level 1)
F Other assets and borrowings are carried at amortised cost. Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the balance sheet date. The fair value
of borrowings is estimated by discounting contractual future cash flows (Level 2)
G The fair value of lease liabilities are estimated by discounting future contractual cash flows using either the interest rate implicit in the lease or the Group’s incremental cost of borrowing
(Level 2)
H The fair value of RRSAs and other liabilities are estimated by discounting expected future cash flows. The contractual cash flows are based on future trading activity, which is estimated
based on latest forecasts (Level 3)
IFRS 13 Fair Value Measurement defines a three level valuation hierarchy:
Level 1 – quoted prices for similar instruments
Level 2 – directly observable market inputs other than Level 1 inputs
Level 3 – inputs not based on observable market data
Carrying values of other financial assets and liabilities

| Foreign |  |  |  |  |  |  |
| exchange | Commodity | Interest rate | Total | Financial |  |  |
| contracts | contracts | contracts | derivatives | RRSAs | Other | C Shares | Total
| £m | £m | £m | £m | £m | £m | £m | £m
2023 |  |  |  |  |  |  |  |
Non-current assets | 72 | – | 254 | 326 | – | 34 | – | 360
Current assets | 10 | 6 | 8 | 24 | – | 10 | – | 34
Assets | 82 | 6 | 262 | 350 | – | 44 | – | 394
Current liabilities | (351) | (10) | (13) | (374) | (10) | (41) | (23) | (448)
Non-current liabilities | (1,766) | (15) | (73) | (1,854) | (7) | (122) | – | (1,983)
Liabilities | (2,117) | (25) | (86) | (2,228) | (17) | (163) | (23) | (2,431)
| (2,035) | (19) | 176 | (1,878) | (17) | (119) | (23) | (2,037)
2022 |  |  |  |  |  |  |  |
Non-current assets | 58 | 25 | 436 | 519 | – | 23 | – | 542
Current assets | 87 | 40 | 2 | 129 | – | 12 | – | 141
Assets | 145 | 65 | 438 | 648 | – | 35 | – | 683
Current liabilities | (966) | (1) | (2) | (969) | (8) | (15) | (24) | (1,016)
Non-current liabilities | (3,030) | (2) | (98) | (3,130) | (14) | (86) | – | (3,230)
Liabilities | (3,996) | (3) | (100) | (4,099) | (22) | (101) | (24) | (4,246)
| (3,851) | 62 | 338 | (3,451) | (22) | (66) | (24) | (3,563)

1
1 Includes the foreign exchange impact of cross-currency interest rate swaps
164
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Derivative financial instruments
The Group uses various financial instruments to manage its exposure to movements in foreign exchange rates. The Group uses commodity swaps
to manage its exposure to movements in the price of commodities (jet fuel and base metals). To hedge the currency risk associated with a
borrowing denominated in a foreign currency, the Group has currency derivatives designated as part of fair value or cash flow hedges.
The Group uses interest rate swaps and forward rate agreements to manage its exposure to movements in interest rates.
Movements in the fair values of derivative financial assets and liabilities were as follows:

| Foreign exchange |  | Commodity |  |  | Interest rate instruments |  | Interest rate instruments |  |
| instruments |  | instruments |  |  | – hedge accounted |  | – non-hedge accounted | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m
At 1 January | (3,851) | (3,039) | 62 | 32 | 125 | 57 | 213 | 37 | (3,451) | (2,913)
Movements in fair value hedges | – | – | – | – | (71) | (74) | – | – | (71) | (74)
Movements in cash |  |  |  |  |  |  |  |  |  |
flow hedges | – | (56) | – | – | (78) | 142 | – | – | (78) | 86
Movements in other derivative contracts | 574 | (1,875) | (60) | 106 | – | – | 1 | 190 | 515 | (1,579)
Contracts settled | 1,242 | 1,119 | (21) | (76) | 69 | – | (83) | (14) | 1,207 | 1,029
At 31 December | (2,035) | (3,851) | (19) | 62 | 45 | 125 | 131 | 213 | (1,878) | (3,451)

1
2
1 Includes the foreign exchange impact of cross-currency interest rate swaps
2 Included in net financing
Financial risk and RRSAs and other financial assets and liabilities
The Group has financial liabilities arising from financial RRSAs that are valued at each reporting date using the amortised cost method. This
involves calculating the present value of the forecast cash flows of the arrangements using the internal rate of return at the inception of the
arrangements as an appropriate discount rate. Other liabilities includes royalties payable to airframers where the present value of the liability is
calculated using the Group’s average borrowing rate as that reflects the nature of the balance in line with the effective interest method. In each
case below, the fair value of the assets and liabilities reflect a level 3 valuation.
Movements in the carrying values were as follows:

| Financial RRSAs |  | Other – assets |  | Other – liabilities |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
At 1 January | (22) | (12) | 25 | 15 | (101) | (75)
Exchange adjustments included in OCI | 1 | (2) | – | 2 | 2 | (4)
Additions | – | (6) | – | 11 | (80) | (35)
Financing charge 1 | – | – | – | – | (8) | (4)
Excluded from underlying profit/(loss): |  |  |  |  |  |
Changes in forecast payments | (1) | (7) | – | – | – | –
Cash paid | 5 | 5 | – | (3) | 11 | 8
Other | – | – | – | – | 13 | 9
At 31 December | (17) | (22) | 25 | 25 | (163) | (101)

1
1 Included in financing
165
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Effect of hedging instruments on the financial position and performance
To manage the risk of changes in the fair values of fixed rate borrowings (the hedged items), the Group has entered into fixed-to-floating interest
rate swaps (the hedging instruments), which, for accounting purposes, are designated as fair value hedges. The impact of fair value hedges on
the financial position and performance of the Group is as follows:

|  | Hedged item |  |  |  |  |  | Hedging instrument |  |  |
|  |  |  |  |  |  |  |  | Hedge |  |
|  | FV | FV |  |  |  |  | FV | ineffect- |  |
|  | adjustment | adjustment |  |  | Carrying | Carrying | movement | iveness |  | Weighted
|  | in the | since | Carrying |  | amount | amount | in the | in the | Weighted | average
| Nominal | period | inception | amount | Nominal | asset | liability | period | period 3 | average | interest
| £m | £m | £m | £m | £m | £m | £m | £m | £m | FX rate | rate
At 31 December 2023 |  |  |  |  |  |  |  |  |  |  |
Sterling | (375) | (10) | 14 | (361) | 375 | – | (14) | 10 | – | 1.00 | SONIA +
|  |  |  |  |  |  |  |  |  |  | 0.89
USD | (658) | 31 | (112) | (770) | 658 | 104 | – | (30) | 1 | 1.52 | SONIA +
|  |  |  |  |  |  |  |  |  |  | 1.47
Euro | (968) | (14) | 37 | (931) | 968 | – | (56) | 16 | 2 | 1.14 | SONIA +
|  |  |  |  |  |  |  |  |  |  | 0.92
At 31 December 2022 |  |  |  |  |  |  |  |  |  |  |
Sterling | (375) | 43 | 24 | (351) | 375 | – | (24) | (43) | – | 1�00 SONIA +
|  |  |  |  |  |  |  |  |  |  | 0�89
USD | (658) | (20) | (143) | (801) | 658 | 134 | – | 18 | (2) | 1�52 | SONIA +
|  |  |  |  |  |  |  |  |  |  | 1�47
Euro | (968) | 49 | 52 | (916) | 968 | – | (72) | (51) | (2) |  | 1�14 SONIA +
|  |  |  |  |  |  |  |  |  |  | 0�92

1
2
1 Hedged items are included in borrowings in the balance sheet
2 Hedging instruments are included in other financial assets or liabilities in the balance sheet
3 Hedge ineffectiveness is included in net financing in the income statement
To manage the foreign exchange rate risk in cash flows on fixed rate non-GBP borrowings (the hedged items), the Group has entered into
fixed-to-fixed cross-currency interest rate swaps (the hedging instruments) to hedge the cash flows into GBP, which, for accounting purposes,
are designated as cash flow hedges.
The impact of cash flow hedges on the financial position and performance of the Group is as follows:

| Hedged item |  |  |  |  | Hedging instrument |  |  | Hedging reserves |  |
|  |  |  |  |  | Hedge |  |  |  |  |
|  | FV |  | Carrying | FV | ineffect- |  |  |  |  | Closing
| movement |  | amount | movement | iveness |  | Weighted | Amount | Recycled | cash flow
|  | in the |  | asset/ | in the | in the | Weighted | average | recognised | to net | hedge
| Nominal | period | Nominal | (liability) | period | period | average | interest | in OCI | financing | reserve
| £m | £m | £m | £m | £m | £m | FX rate | rate | £m | £m | £m
At 31 December 2023 |  |  |  |  |  |  |  |  |  |  |
USD | (772) | 65 | 772 | 28 | (62) | 3 | 1.29 | 5.33 | 61 | (41) | (5)
Euro | (677) | 14 | 677 | (17) | (14) | – | 1.11 | 5.45 | 21 | (20) | (8)
At 31 December 2022 |  |  |  |  |  |  |  |  |  |  |
USD | (772) | (104) | 772 | 89 | 109 | 5 | 1�29 | 5�33 | (111) | 96 | (25)
Euro | (677) | (35) | 677 | (2) | 35 | – | 1�11 | 5�45 | (27) | 28 | (9)

1
2
1 Hedging instruments are included in other financial assets or liabilities in the balance sheet
2 Hedge ineffectiveness is included in net financing in the income statement
166
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Risk management policies and hedging activities
The principal financial risks to which the Group is exposed are: foreign currency exchange rate risk; liquidity risk; credit risk; interest rate risk;
and commodity price risk. The Board has approved policies for the management of these risks.
Foreign currency exchange rate risk – The Group has significant cash flows (most significantly USD, followed by the euro) denominated in
currencies other than the functional currency of the relevant trading entity. To manage its exposures to changes in values of future foreign
currency cash flows, so as to maintain relatively stable long-term foreign exchange rates on settled transactions, the Group enters into derivative
forward foreign currency transactions. In addition, the Group enters in to fixed-to-floating cross-currency interest rate swaps to manage its
exposure to changes in fair value as a result of foreign exchange risk. See below.
The Group economically hedges its GBP/USD exposure by forecasting highly probable net USD receipts up to five years forward. Hedges are
taken out within prescribed maximum and minimum hedge positions set out in the Group FX Policy. The maximum and minimum policy bands
decline gradually over the five-year horizon and are calculated as a percentage of forecast net income. A similar policy is operated for the Group’s
EUR/USD exposure. For accounting purposes, these derivative contracts are not designated in hedging relationships.
The Group also has exposures to cash flows on EUR and USD denominated fixed rate borrowings. To manage its exposures to changes in values
of future foreign currency cash flows, the Group has entered into fixed-to-fixed cross-currency interest rate swaps, which, for accounting
purposes, are designated as cash flow hedges. The swaps have similar critical terms to the hedged items, such as the initial exchange amounts,
payment dates and maturities. Therefore, there is an economic relationship and the hedge ratio is established as 1:1. Possible sources of
ineffectiveness in the cash flow hedge relationship are changes in the credit risk of either party to the interest rate swap. Another possible source
of ineffectiveness would be if the notional of the borrowings is less than the notional of the derivative, for example, in the event of a partial
repayment of hedged debt prior to its maturity.
The Group regards its interests in overseas subsidiary companies as long-term investments. The Group aims to match its translational exposures
by matching the currencies of assets and liabilities.
Liquidity risk – The Group’s policy is to hold financial investments and maintain undrawn committed facilities at a level sufficient to ensure that
the Group has available funds to meet its medium-term capital and funding obligations and to meet any unforeseen obligations and
opportunities. The Group holds cash and short-term investments, which, together with the undrawn committed facilities, enable the Group to
manage its liquidity risk.
Credit risk – The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial
instruments. The effective monitoring and controlling of credit risk is a key component of the Group’s risk management activities. The Group has
credit policies covering both trading and financial exposures. Credit risks arising from treasury activities are managed by a central treasury
function, in accordance with the Group credit policy. The objective of the policy is to diversify and minimise the Group’s exposure to credit risk
from its treasury activities by ensuring the Group transacts strictly with ‘BBB’ or higher rated financial institutions based on pre-established
limits per financial institution. At the balance sheet date, there were no significant concentrations of credit risk to individual customers or
counterparties. The Group’s revenue is generated from customers located across multiple geographical locations (see note 2). These customers
are typically: airframers and airline operators relating to Civil Aerospace; government defence departments for the UK and US; and multiple
smaller entities for Power Systems. Whilst there are a limited number of customers related to Civil Aerospace and Defence, they are spread across
various geographical locations. The maximum exposure to credit risk at the balance sheet date is represented by the carrying value of each
financial asset, including derivative financial instruments.
Interest rate risk – The Group’s interest rate risk is primarily in relation to its fixed rate borrowings (fair value risk), floating rate borrowings and
cash and cash equivalents (cash flow risk). Interest rate derivatives are used to manage the overall interest rate profile of the Group. The fixed
or floating rate interest rate decision on long-term borrowings is determined for each new agreement at the point it is entered into. The
aggregate interest rate position of the Group is reviewed regularly and can be revised at any time in order to react to changes in market
conditions or circumstances.
The Group also has exposures to the fair values of non-derivative financial instruments such as EUR, GBP and USD fixed rate borrowings. To
manage the risk of changes in these fair values, the Group has entered into fixed-to-floating interest rate swaps and cross-currency interest rate
swaps, which, for accounting purposes, are designated as fair value hedges. The swaps have similar critical terms to the hedged items, such as
the reference rate, reset dates, notional amounts, payment dates and maturities. Therefore, there is an economic relationship and the hedge
ratio is established as 1:1. Possible sources of ineffectiveness in the fair value hedge relationship are changes in the credit risk of either party to
the interest rate swap and, for cross-currency interest rate swaps, the cross-currency basis risk as this risk is present in the hedging instrument
only. Another possible source of ineffectiveness would be if the notional of the borrowings is less than the notional of the derivative, for example,
in the event of a partial repayment of hedged debt prior to its maturity.
The Group has exposure to changes in cash flows due to changes in interest rates. To manage this risk, the Group has entered into
floating-to-fixed interest rate swaps to hedge a proportion of its floating rate exposure to fixed rates. The swaps have similar critical terms to the
floating leg of swaps that form part of the fair value hedges, such as the reference rate, reset dates, notional amounts, payment dates and
maturities. For accounting purposes, these derivative contracts are generally not designated as hedging instruments.
Commodity price risk – The Group has exposures to the price of jet fuel and base metals arising from business operations. To minimise its cash
flow exposures to changes in commodity prices, the Group enters into derivative commodity transactions. The commodity hedging policy is
similar to the Group FX policy, in that the Group forecasts highly probable exposures to commodities, and takes out hedges within prescribed
maximum and minimum levels as set out in the policy. The maximum and minimum policy bands decline gradually over time. For accounting
purposes, these derivative contracts are generally not designated in hedging relationships.
Other price risk – The Group’s cash equivalent balances represent investments in money-market instruments, with a term of up to three months.
The Group does not consider that these are subject to significant price risk.
167
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Derivative financial instruments
The nominal amounts, analysed by year of expected maturity, and fair values of derivative financial instruments are as follows:

|  |  | Expected maturity |  |  | Fair value |
|  |  | Between | Between |  |  |
| Nominal | Within | one and | two and | After |  |
| amount | one year | two years | five years | five years | Assets | Liabilities
| £m | £m | £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |  |  |
Foreign exchange contracts: |  |  |  |  |  |  |
Non-hedge accounted | 15,972 | 6,965 | 4,341 | 4,666 | – | 82 | (2,117)
Interest rate contracts: |  |  |  |  |  |  |
Fair value hedges | 2,001 | 484 | 658 | 859 | – | 103 | (69)
Cash flow hedges | 1,449 | – | – | 1,449 | – | 28 | (17)
Non-hedge accounted | 2,001 | 484 | 658 | 859 | – | 131 | –
Commodity contracts: |  |  |  |  |  |  |
Non-hedge accounted | 257 | 102 | 73 | 82 | – | 6 | (25)
| 21,680 | 8,035 | 5,730 | 7,915 | – | 350 | (2,228)
At 31 December 2022 |  |  |  |  |  |  |
Foreign exchange contracts: |  |  |  |  |  |  |
Non-hedge accounted | 22,844 | 9,539 | 4,180 | 8,898 | 227 | 145 | (3,996)
Interest rate contracts: |  |  |  |  |  |  |
Fair value hedges | 2,001 | – | 484 | 1,033 | 484 | 135 | (97)
Cash flow hedges | 1,449 | – | – | 1,449 | – | 89 | (2)
Non-hedge accounted | 2,001 | – | 484 | 1,033 | 484 | 214 | (1)
Commodity contracts: |  |  |  |  |  |  |
Non-hedge accounted | 219 | 97 | 79 | 43 | – | 65 | (3)
| 28,514 | 9,636 | 5,227 | 12,456 | 1,195 | 648 | (4,099)

As described above, all derivative financial instruments are entered into for risk management purposes, although these may not be designated
into hedging relationships for accounting purposes.
Currency analysis
Foreign exchange contracts are denominated in the following currencies:

|  |  | Nominal amount of currencies purchased forward |  |
| Sterling | USD | Euro | Other | Total
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Currencies sold forward: |  |  |  |  |
Sterling | – | 1,573 | – | 115 | 1,688
USD | 11,389 | – | 2,316 | 303 | 14,008
Euro | 53 | 171 | – | 21 | 245
Other At 31 December 2022 | 6 | 3 | 22 | – | 31
Currencies sold forward: |  |  |  |  |
Sterling | – | 4,321 | 45 | 146 | 4,512
USD | 16,246 | – | 1,578 | 253 | 18,077
Euro | 30 | 160 | – | 40 | 230
Other | – | 8 | 17 | – | 25

The nominal value of interest rate and commodity contracts are denominated in the following currencies:

| 2023 | 2022
| £m | £m
Sterling | 2,376 | 2,376
USD | 1,671 | 1,629
Euro | 1,661 | 1,665

168
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Non-derivative financial instruments are denominated in the following currencies:

| Sterling | USD | Euro | Other | Total
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Other non-current investments | 10 | 21 | – | – | 31
Trade receivables and similar items | 219 | 4,039 | 513 | 86 | 4,857
Other non-derivative financial assets | 94 | 163 | 58 | 17 | 332
Other assets | – | 22 | 22 | – | 44
Cash and cash equivalents | 1,242 | 869 | 1,463 | 210 | 3,784
Assets | 1,565 | 5,114 | 2,056 | 313 | 9,048
Borrowings | (904) | (1,605) | (1,590) | – | (4,099)
Lease liabilities | (195) | (1,222) | (45) | (198) | (1,660)
Financial RRSAs | – | (7) | (10) | – | (17)
Other liabilities | (32) | (131) | – | – | (163)
C Shares | (23) | – | – | – | (23)
Trade payables and similar items | (976) | (3,561) | (493) | (61) | (5,091)
Other non-derivative financial liabilities | (334) | (2,008) | (134) | (45) | (2,521)
Contract liabilities | – | (1,358) | – | – | (1,358)
Liabilities | (2,464) | (9,892) | (2,272) | (304) | (14,932)
| (899) | (4,778) | (216) | 9 | (5,884)
At 31 December 2022 |  |  |  |  |
Other non-current investments | 10 | 16 | 10 | – | 36
Trade receivables and similar items | 231 | 3,270 | 565 | 81 | 4,147
Other non-derivative financial assets | 61 | 666 | 33 | 15 | 775
Other assets | – | 24 | 11 | – | 35
Short-term investments | – | – | 11 | – | 11
Cash and cash equivalents | 398 | 897 | 1,155 | 157 | 2,607
Assets | 700 | 4,873 | 1,785 | 253 | 7,611
Borrowings | (893) | (1,627) | (1,587) | (1) | (4,108)
Lease liabilities | (181) | (1,401) | (49) | (216) | (1,847)
Financial RRSAs | – | (7) | (15) | – | (22)
Other liabilities | (11) | (90) | – | – | (101)
C Shares | (24) | – | – | – | (24)
Trade payables and similar items | (690) | (3,952) | (675) | (59) | (5,376)
Other non-derivative financial liabilities | (271) | (2,304) | (129) | (44) | (2,748)
Contract liabilities | – | (1,006) | – | – | (1,006)
Liabilities | (2,070) | (10,387) | (2,455) | (320) | (15,232)
| (1,370) | (5,514) | (670) | (67) | (7,621)

1
1
2
1 As described in note 19, trade payables and similar items at 31 December 2022 has decreased by £363m with a respective increase in other non-derivative financial liabilities
2 As described in note 15, contract liabilities at 31 December 2022 has increased by £586m
169
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Currency exposures
The Group’s actual currency exposures on financial instruments after taking account of derivative foreign currency contracts, which are not
designated as hedging instruments for accounting purposes, are as follows:
Functional currency of Group operations

| Sterling | USD | Euro | Other | Total
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Sterling | – | – | – | 5 | 5
USD | (6) | – | 1 | – | (5)
Euro | 1 | 4 | – | (2) | 3
Other At 31 December 2022 | 109 | 38 | 40 | – | 187
Sterling | – | – | 1 | 4 | 5
USD | (7) | – | (2) | 7 | (2)
Euro | (1) | – | – | – | (1)
Other | 108 | 26 | 86 | – | 220

Ageing beyond contractual due date of financial assets

|  |  | Between |  |
|  | Up to | three |  |
|  | three | months and | More than |
| Within | months | one year | one year |
| terms | overdue | overdue | overdue | Total
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Other non-current asset investments | 31 | – | – | – | 31
Trade receivables and similar items | 4,054 | 650 | 87 | 66 | 4,857
Other non-derivative financial assets | 328 | – | 4 | – | 332
Other assets | 44 | – | – | – | 44
Derivative financial assets | 350 | – | – | – | 350
Cash and cash equivalents | 3,784 | – | – | – | 3,784
| 8,591 | 650 | 91 | 66 | 9,398
At 31 December 2022 |  |  |  |  |
Other non-current asset investments | 36 | – | – | – | 36
Trade receivables and similar items | 3,646 | 219 | 169 | 113 | 4,147
Other non-derivative financial assets | 755 | 9 | 10 | 1 | 775
Other assets | 35 | – | – | – | 35
Derivative financial assets | 648 | – | – | – | 648
Short-term investments | 11 | – | – | – | 11
Cash and cash equivalents | 2,607 | – | – | – | 2,607
| 7,738 | 228 | 179 | 114 | 8,259

170
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Contractual maturity analysis of non-derivative financial liabilities

|  |  | Gross values |  |
|  | Between | Between |  |
| Within | one and | two and | After | Carrying
| one year | two years | five years | five years | value
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Borrowings | (694) | (943) | (3,042) | (14) | (4,099)
Lease liabilities | (358) | (366) | (697) | (735) | (1,660)
Financial RRSAs | (10) | – | (1) | (4) | (17)
Other liabilities | (42) | (6) | (25) | (90) | (163)
C Shares | (23) | – | – | – | (23)
Trade payables and similar items | (4,952) | (15) | (47) | (77) | (5,091)
Other non-derivative financial liabilities | (1,646) | (235) | (267) | (373) | (2,521)
Contract liabilities | (1,358) | – | – | – | (1,358)
| (9,083) | (1,565) | (4,079) | (1,293) | (14,932)
At 31 December 2022 |  |  |  |  |
Borrowings | (168) | (653) | (3,612) | (510) | (4,108)
Lease liabilities | (435) | (311) | (886) | (734) | (1,847)
Financial RRSAs | (10) | (7) | (1) | (5) | (22)
Other liabilities | (15) | (10) | (30) | (46) | (101)
C Shares | (24) | – | – | – | (24)
Trade payables and similar items | (5,128) | (131) | (65) | (52) | (5,376)
Other non-derivative financial liabilities | (1,591) | (443) | (276) | (438) | (2,748)
Contract liabilities | (1,006) | – | – | – | (1,006)
| (8,377) | (1,555) | (4,870) | (1,785) | (15,232)

1
1
2
1 As described in note 19, trade payables and similar items at 31 December 2022 has decreased by £363m with a respective increase in other non-derivative financial liabilities
2 As described in note 15, contract liabilities at 31 December 2022 has increased by £586m
Expected maturity analysis of derivative financial instruments

|  |  | Gross values |  |
|  | Between | Between |  |
| Within | one and | two and | After | Carrying
| one year | two years | five years | five years | value
| £m | £m | £m | £m | £m
At 31 December 2023 |  |  |  |  |
Derivative financial assets: |  |  |  |  |
Cash inflows | 2,024 | 1,943 | 2,333 | – |
Cash outflows | (2,021) | (1,805) | (2,311) | – |
Other net cash flows | 88 | 43 | 33 | – |
| 91 | 181 | 55 | – | 350
Derivative financial liabilities: |  |  |  |  |
Cash inflows | 5,535 | 3,296 | 4,377 | – |
Cash outflows | (6,418) | (4,027) | (5,189) | – |
Other net cash flows | (21) | (13) | (3) | – |
| (904) | (744) | (815) | – | (2,228)
At 31 December 2022 |  |  |  |  |
Derivative financial assets: |  |  |  |  |
Cash inflows | 3,002 | 551 | 3,179 | – |
Cash outflows | (2,907) | (540) | (2,886) | – |
Other net cash flows | 131 | 90 | 98 | 7 |
| 226 | 101 | 391 | 7 | 648
Derivative financial liabilities: |  |  |  |  |
Cash inflows | 6,658 | 4,238 | 8,290 | 722 |
Cash outflows | (8,019) | (5,162) | (10,604) | (745) |
Other net cash flows | (10) | (10) | (4) | – |
| (1,371) | (934) | (2,318) | (23) | (4,099)

1
1
1
1
1 Derivative financial assets and liabilities that are settled on a net cash basis
171
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20 Financial instruments continued
Interest rate risk
In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates.
The value shown is the carrying amount before taking account of swaps.

|  | 2023 |  |  | 2022 |
| Fixed rate | Floating rate | Total | Fixed rate | Floating rate | Total
| £m | £m | £m | £m | £m | £m
Short-term investments | – | – | – | – | 11 | 11
Cash and cash equivalents | – | 3,784 | 3,784 | – | 2,607 | 2,607
Borrowings | (4,036) | (63) | (4,099) | (4,096) | (12) | (4,108)
Lease liabilities | (1,269) | (391) | (1,660) | (1,235) | (612) | (1,847)
| (5,305) | 3,330 | (1,975) | (5,331) | 1,994 | (3,337)
Weighted average interest rates |  |  |  |  |  |
Borrowings | 3.7% | 5.9% |  | 3.7% | 4.7% |
Lease liabilities | 4.6% | 6.8% |  | 3.9% | 6.3% |

1
2
1 Cash and cash equivalents comprises bank balances and term deposits and earn interest based on short-term floating market interest rates
2 Interest rates for lease liabilities are considered to be the discount rates at the balance sheet date
None (2022: none) of the Group’s borrowings are subject to the Group meeting certain obligations, including customary financial covenants.
There are no rating triggers contained in any of the Group’s facilities that could require the Group to accelerate or repay any facility for a given
movement in the Group’s credit rating.
£105m (2022: £111m) of the Group’s lease liabilities include a customary loan-to-value covenant. The Group has several contractual cures available
in the event the stipulated loan-to-value ratio is exceeded. Failure by the Group to satisfy its contractual obligations under the covenant gives
rights to the lessor to terminate its lease and claim termination amounts for the outstanding lease balance. At 31 December 2023, none (2022:
none) of these were in breach.
Sensitivity analysis
Sensitivities at 31 December (all other variables held constant) – impact on profit after tax and equity

| 2023 | 2022
| £m | £m
Sterling 10% weaker against the USD | (1,207) | (1,600)
Sterling 10% stronger against the USD | 988 | 1,309
Euro 10% weaker against the USD | (176) | (46)
Euro 10% stronger against the USD | 144 | 38
Sterling 10% weaker against the Euro | (17) | (17)
Sterling 10% stronger against the Euro | 14 | 14
Commodity prices 10% lower | (17) | (21)
Commodity prices 10% higher | 17 | 21
Interest rates 50 basis points lower | (43) | (65)
Interest rates 50 basis points higher | 42 | 64

C Shares and payments to shareholders
The Company issues non-cumulative redeemable preference shares (C Shares) as an alternative to paying a cash dividend. C Shares in respect
of a year are issued in the following year. Shareholders are able to redeem any number of their C Shares for cash. Any C Shares retained attract
a dividend of Bank of England base rate on the 0.1p nominal value of each share, paid on a twice-yearly basis, and have limited voting rights. The
Company has the option to compulsorily redeem the C Shares, at any time, if the aggregate number of C Shares in issue is less than 10% of the
aggregate number of C Shares issued, or on the acquisition or capital restructuring of the Company.
Movements in issued and fully paid C Shares during the year were as follows:

| 2023 |  | 2022 |
|  | Nominal |  | Nominal
|  | value |  | value
| Millions | £m | Millions | £m
At 1 January | 23,855 | 24 | 24,928 | 25
Redeemed | (702) | (1) | (1,073) | (1)
At 31 December | 23,153 | 23 | 23,855 | 24

Payments to shareholders represent the value of C Shares to be issued in respect of the results for the year. There have been no issues
(2022: no issues) of C Shares declared in respect of the year to 31 December 2023.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21 Provisions for liabilities and charges

|  | Charged to |  |  |  |  | At
| At 1 January | income |  |  | Transferred to | Exchange | 31 December
| 2023 | statement | Reversed | Utilised | held for sale | differences | 2023
| £m | £m | £m | £m | £m | £m | £m
Contract losses | 1,592 | 500 | (433) | (185) | – | (2) | 1,472
Warranty and guarantees | 317 | 112 | (14) | (91) | (8) | (10) | 306
Trent 1000 wastage costs | 179 | 45 | (29) | (79) | – | – | 116
Employer liability claims | 33 | 1 | (7) | (3) | – | – | 24
Tax related interest and penalties | 16 | 9 | – | (2) | – | (1) | 22
Claims and litigation | 122 | 71 | (39) | (111) | – | – | 43
Other | 74 | 26 | (18) | (35) | – | (1) | 46
| 2,333 | 764 | (540) | (506) | (8) | (14) | 2,029
Current liabilities | 632 |  |  |  |  |  | 532
Non-current liabilities | 1,701 |  |  |  |  |  | 1,497

1
1 The charge to the income statement within net financing includes £59m (2022: £33m) as a result of the unwinding of the discounting of provisions previously recognised
Contract losses
Provisions for contract losses are recorded when the direct costs to fulfil a contract are assessed as being greater than the expected
recoverable amount. Provisions for contract losses are measured on a fully costed basis and during the year £185m of the provision has been
utilised. Additional contract losses for the Group of £500m have been recognised as a result of increases in the estimates of future LTSA costs,
due to inflationary increases and costs associated with supply chain challenges. Contract losses of £433m previously recognised have been
reversed following the renegotiation of some major contracts resulting in contract extensions and improved margins. The Group continues to
monitor the contract loss provision for changes in the market and revises the provision as required. The value of the remaining contract loss
provisions reflect, in each case, the single most likely outcome. The provisions are expected to be utilised over the term of the customer contracts,
typically within eight to 16 years.
IAS 37 requires a company to recognise any impairment loss that has occurred on assets used in fulfilling the contract before recognising
a separate provision for an onerous contract. No impairments were required for any of the assets solely used in the fulfilment of onerous contracts.
However, as per note 11, a number of aero engine lease right-of-use assets were impaired during the year and these will be used on a range of
contracts some of which are onerous.
The Trent 1000 intangible assets (certification costs and development costs) and Trent 1000 spare engines (right of use and owned) are tested
for impairment as part of the Trent 1000 Cash generating unit (CGU) and no impairment was required.
Warranty and guarantees
Provisions for warranty and guarantees relate to products sold and are calculated based on an assessment of the remediation costs related to
future claims based on past experience. During the year, £112m of additional provision has been recognised representing the single best estimate
of warranty and guarantee costs to be incurred on relevant sales and £91m of previously recognised costs have been utilised. The provision
generally covers a period of up to three years.
Trent 1000 wastage costs
In November 2019, the Group announced the outcome of testing and a thorough technical and financial review of the Trent 1000 TEN programme,
following technical issues which were identified in 2019, resulting in a revised timeline and a more conservative estimate of durability for the
improved HP turbine blade for the TEN variant. During the year, the Group has utilised £79m of the Trent 1000 wastage costs provision. This
represents customer disruption costs and remediation shop visit costs attributable to the wastage costs provision. During the year, a net charge
to the provision of £16m has been recognised reflecting the discount unwind and updates to forecasted costs based on the latest available
information. The value of the remaining provision reflects the single most likely outcome and is expected to be utilised in 2024.
Employer liability claims
The provision relating to employer healthcare liability claims is as a result of an historical insolvency of the previous provider and is expected to
be utilised over the next 30 years.
173
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21 Provisions for liabilities and charges continued
Tax related interest and penalties
Provisions for tax related interest and penalties relate to uncertain tax positions in some of the jurisdictions in which the Group operates.
Utilisation of the provisions will depend on the timing of resolution of the issues with the relevant tax authorities.
Claims and litigation
Provisions for claims and litigation represent ongoing matters where the outcome for the Group may be unfavourable. On 3 July 2023,
judgement in respect of a legal claim was rendered by the High Court, resulting in a charge to the income statement of £34m. The judgement
was satisfied in August 2023 resulting in a £92m utilisation. The value of any remaining provisions reflects the single most likely outcome in
each case.
The balance also includes the best estimate of any retained exposure by the Group’s captive insurance company for any claims that have been
incurred but not yet reported to the Group, as that entity retains a portion of the exposures it insures on behalf of the remainder of the Group.
Such exposures include policies for aviation claims, employer liabilities and healthcare claims. Significant delays can occur in the notification
and settlement of claims, and judgement is involved in assessing outstanding liabilities, the ultimate cost and timing of which cannot be known
with certainty at the balance sheet date. The insurance provisions are based on information currently available, however, it is inherent in the
nature of the business that ultimate liabilities may vary if the frequency or severity of claims differs from estimated.
Other
Other items are individually immaterial. The value of any remaining provisions reflects the single most likely outcome in each case.
22 Post-retirement benefits
The Group operates a number of defined benefit and defined contribution schemes:
— The UK defined benefit scheme is funded, with the assets held in a separate UK trust. The scheme closed to future accrual on 31 December
2020 for all active members and there are no new defined benefit accruals in the UK scheme. As at 31 December 2023, the scheme was
estimated to be funded at 113% on the Technical Provisions basis.
— The Group also operates a large trust-based defined contribution scheme for current employees in the UK (Rolls-Royce Retirement Savings
Trust). Pension contributions are generally paid as a salary sacrifice under which employees agree to a reduction in gross contractual pay in
return for the Group making additional pension contributions on their behalf. As a result, there is a decrease in wages and salaries and
a corresponding increase in pension costs of £72m (2022: £46m) in the year.
— Overseas defined benefit schemes are a mixture of funded and unfunded plans and provide benefits in line with local practice. Additionally,
in the US, and to a lesser extent in some other countries, the Group’s employment practices include the provision of healthcare and life
insurance benefits for retired employees. These healthcare schemes are unfunded.
The valuations of the defined benefit schemes are based on the results of the most recent funding valuation from 31 March 2023, where relevant,
updated by the scheme actuaries to 31 December 2023.
Changes to the defined benefit scheme
During the year, Power Systems continued to replace a number of their existing defined benefit schemes with a new company pension scheme
to offer payment options at time of retirement for other employee populations not included in 2022. The new system, which is similar in structure
to a defined contribution scheme with a guarantee from the company in accordance with German legislation, significantly reduces interest risks
and longevity risks for the employer for future commitments. A past service cost of £3m has been recognised within non-underlying operating
profit in relation to this new scheme. In addition, Rolls-Royce Power Systems concluded a works agreement resulting in a change to jubilee
benefits offered to employees based in Friedrichshafen. A past service credit of £5m has been recognised within non-underlying
operating profit.
Other
The Group is aware of a UK High Court legal ruling in June 2023 between Virgin Media Limited and NTL Pension Trustees II Limited, which
decided that certain historic rule amendments were invalid if they were not accompanied by the actuarial certifications. The ruling is subject to
appeal and the Group is monitoring developments. Whilst this ruling was in respect of another scheme, any final judgment would need to be
reviewed for its relevance to the RRUKPF scheme. As yet the RRUKPF pension advisers have not completed any analysis and, as the outcome of
the appeal is still unknown, no adjustments have been made to the Consolidated Financial Statements at 31 December 2023.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22 Post-retirement benefits continued
Amounts recognised in the income statement

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
Defined benefit schemes: |  |  |  |  |  |
Current service cost and administrative expenses | 8 | 35 | 43 | 8 | 44 | 52
Past-service credit and settlement loss | – | (2) | (2) | (6) | (19) | (25)
| 8 | 33 | 41 | 2 | 25 | 27
Defined contribution schemes | 195 | 98 | 293 | 154 | 87 | 241
Operating cost | 203 | 131 | 334 | 156 | 112 | 268
Net financing (credit)/charge in respect of defined benefit schemes | (29) | 41 | 12 | (21) | 23 | 2
Total income statement charge | 174 | 172 | 346 | 135 | 135 | 270

The operating cost is charged as follows:

| Defined benefit |  |  | Defined contribution | Total |
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022
| £m | £m | £m | £m | £m | £m
Cost of sales | 33 | 37 | 211 | 168 | 244 | 205
Commercial and administrative costs | 2 | (17) | 41 | 38 | 43 | 21
Research and development costs | 6 | 7 | 41 | 33 | 47 | 40
| 41 | 27 | 293 | 239 | 334 | 266
Discontinued operations | – | – | – | 2 | – | 2
| 41 | 27 | 293 | 241 | 334 | 268

Net financing comprises:

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
Financing on scheme obligations | 218 | 66 | 284 | 149 | 46 | 195
Financing on scheme assets | (247) | (25) | (272) | (170) | (23) | (193)
Net financing (income)/charge in respect of defined benefit schemes | (29) | 41 | 12 | (21) | 23 | 2
Financing income on scheme surpluses | (29) | (1) | (30) | (21) | (3) | (24)
Financing cost on scheme deficits | – | 42 | 42 | – | 26 | 26

Amounts recognised in OCI in respect of defined benefit schemes

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
Actuarial gains and losses arising from: |  |  |  |  |  |
Demographic assumptions 1 | 180 | – | 180 | 19 | – | 19
Financial assumptions | (132) | (63) | (195) | 3,423 | 602 | 4,025
Experience adjustments 3 | 116 | 1 | 117 | (235) | (7) | (242)
Return on scheme assets excluding financing income | (12) | 26 | 14 | (3,751) | (207) | (3,958)
| 152 | (36) | 116 | (544) | 388 | (156)

2
2
1 For the UK Scheme, this reflects latest available CMI mortality projections and an update of the post-retirement mortality assumptions based on an analysis prepared for the 31 March 2023
funding valuation
2 Actuarial gains and losses arising from financial assumptions arise primarily due to changes in discount rate and inflation
3 This reflects an experience gain as a result of allowance for updated membership data following the valuation during the year offset by realised inflation being higher than expected in
the year
175
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22 Post-retirement benefits continued
Amounts recognised in the balance sheet in respect of defined benefit schemes

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
Present value of funded obligations | (4,537) | (993) | (5,530) | (4,621) | (944) | (5,565)
Fair value of scheme assets | 5,304 | 520 | 5,824 | 5,215 | 493 | 5,708
Net asset/(liability) on funded schemes | 767 | (473) | 294 | 594 | (451) | 143
Present value of unfunded obligations | – | (547) | (547) | – | (563) | (563)
Net asset/(liability) recognised in the balance sheet | 767 | (1,020) | (253) | 594 | (1,014) | (420)
Post-retirement scheme surpluses | 767 | 15 | 782 | 594 | 19 | 613
Post-retirement scheme deficits | – | (1,035) | (1,035) | – | (1,033) | (1,033)

1
1 The surplus in the UK scheme is recognised as, on an ultimate wind-up when there are no longer any remaining members, any surplus would be returned to the Group, which has the power
to prevent the surplus being used for other purposes in advance of this event
Overseas schemes are located in the following countries:

|  | 2023 |  |  | 2022 |
| Assets | Obligations | Net | Assets | Obligations | Net
| £m | £m | £m | £m | £m | £m
Canada | 199 | (239) | (40) | 187 | (226) | (39)
Germany | 31 | (679) | (648) | 10 | (638) | (628)
US pension schemes | 290 | (301) | (11) | 296 | (308) | (12)
US healthcare schemes | – | (318) | (318) | – | (333) | (333)
Other | – | (3) | (3) | – | (2) | (2)
Net asset/(liability) recognised in the balance sheet | 520 | (1,540) | (1,020) | 493 | (1,507) | (1,014)

Defined benefit schemes
Assumptions
Significant actuarial assumptions for UK schemes at the balance sheet date were as follows:

|  | 2023 | 2022
Discount rate |  | 4.50% | 4.80%
Inflation assumption (RPI) |  | 3.30% | 3.50%
Inflation assumption (CPI) |  | 2.85% | 2.95%
Transfer take-up assumption (employed deferred/deferred) |  | 35%/25% | 50%/40%
Bridging Pension Option (BPO) take-up assumption |  | 30% | 30%
Life expectancy from age 65: | current male pensioner | 20.8 years | 21�9 years
| future male pensioner currently aged 45 | 21.5 years | 23�2 years
| current female pensioner | 22.8 years | 23�7 years
| future female pensioner currently aged 45 | 24.1 years | 25�5 years

Discount rates are determined by reference to the market yields on AA rated corporate bonds. The rate is determined by using the profile of
forecast benefit payments to derive a weighted average discount rate from the yield curve.
The inflation assumption is determined by the market-implied assumption based on the yields on long-term index-linked government securities.
The mortality assumptions adopted for the UK pension schemes are derived from the SAPS S3 ‘All’ actuarial tables, with future improvements in
line with the CMI 2022 core projections updated to reflect use of an ‘A’ parameter of 0.25% for future improvements and long-term improvements
of 1.25%. Where appropriate, these are adjusted to take account of the scheme’s actual experience.
The assumption for transfers and the BPO is based on actual experience and actuarial advice.
Other assumptions have been set on advice from the actuary, having regard to the latest trends in scheme experience and the assumptions used
in the most recent funding valuation. The rate of increase of pensions in payment is based on the rules of the scheme, combined with the inflation
assumption where the increase is capped.
176
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22 Post-retirement benefits continued
Assumptions for overseas schemes are less significant and are based on advice from local actuaries. The principal assumptions are:

| 2023 | 2022
Discount rate | 4.20% | 4.70%
Inflation assumption | 1.60% | 2.30%
Long-term healthcare cost trend rate | 4.75% | 4.75%
Male life expectancy from age 65: current pensioner | 20.5 years | 20�5 years
future pensioner currently aged 45 | 22.4 years | 22�4 years

Changes in present value of defined benefit obligations

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
At 1 January | (4,621) | (1,507) | (6,128) | (8,010) | (2,204) | (10,214)
Exchange differences | – | 54 | 54 | – | (165) | (165)
Current service cost | (4) | (33) | (37) | (4) | (43) | (47)
Past-service cost | – | 2 | 2 | 6 | 24 | 30
Finance cost | (218) | (66) | (284) | (149) | (49) | (198)
Contributions by employees | – | (9) | (9) | – | (4) | (4)
Benefits paid out | 142 | 80 | 222 | 329 | 102 | 431
Actuarial gains/(losses) | 164 | (61) | 103 | 3,207 | 599 | 3,806
Transfers | – | (2) | (2) | – | (2) | (2)
Transferred to held for sale | – | 2 | 2 | – | – | –
Settlement | – | – | – | – | 235 | 235
At 31 December | (4,537) | (1,540) | (6,077) | (4,621) | (1,507) | (6,128)
Funded schemes | (4,537) | (993) | (5,530) | (4,621) | (944) | (5,565)
Unfunded schemes | – | (547) | (547) | – | (563) | (563)
The defined benefit obligations are in respect of: |  |  |  |  |  |
Active plan participants | (1,584) | (731) | (2,315) | (1,681) | (693) | (2,374)
Deferred plan participants | (1,287) | (100) | (1,387) | (1,172) | (93) | (1,265)
Pensioners | (1,666) | (709) | (2,375) | (1,768) | (721) | (2,489)
Weighted average duration of obligations (years) | 16 | 12 | 15 | 17 | 13 | 16

1
1 Although the UK scheme closed to future accrual on 31 December 2020, members who became deferred as a result of the closure and remain employed by the Group retain some additional
benefits compared to other deferred members. The obligations for these members are shown as active plan participants
Changes in fair value of scheme assets

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
At 1 January | 5,215 | 493 | 5,708 | 9,128 | 861 | 9,989
Exchange differences | – | (21) | (21) | – | 77 | 77
Administrative expenses | (4) | (1) | (5) | (4) | (1) | (5)
Financing | 247 | 25 | 272 | 170 | 23 | 193
Return on plan assets excluding financing | (12) | 26 | 14 | (3,751) | (207) | (3,958)
Contributions by employer | – | 69 | 69 | 1 | 80 | 81
Contributions by employees | – | 9 | 9 | – | 4 | 4
Benefits paid out | (142) | (80) | (222) | (329) | (102) | (431)
Settlement | – | – | – | – | (242) | (242)
At 31 December | 5,304 | 520 | 5,824 | 5,215 | 493 | 5,708
Total return on scheme assets | 235 | 51 | 286 | (3,581) | (184) | (3,765)

177
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22 Post-retirement benefits continued
Fair value of scheme assets at 31 December

|  | 2023 |  |  | 2022 |
| UK | Overseas |  | UK | Overseas |
| schemes | schemes | Total | schemes | schemes | Total
| £m | £m | £m | £m | £m | £m
Sovereign debt | 3,259 | 118 | 3,377 | 3,574 | 120 | 3,694
Corporate debt instruments | 1,996 | 270 | 2,266 | 1,492 | 257 | 1,749
Interest rate swaps | 170 | – | 170 | 196 | – | 196
Inflation swaps | 86 | – | 86 | 212 | – | 212
Cash and similar instruments | (892) | – | (892) | (1,066) | – | (1,066)
Liability driven investment (LDI) portfolios | 4,619 | 388 | 5,007 | 4,408 | 377 | 4,785
Listed equities | – | 69 | 69 | – | 78 | 78
Unlisted equities | 32 | – | 32 | 40 | – | 40
Synthetic equities | 20 | – | 20 | (8) | – | (8)
Corporate debt instruments | 630 | – | 630 | 772 | – | 772
Cash | – | 10 | 10 | – | 5 | 5
Other | 3 | 53 | 56 | 3 | 33 | 36
At 31 December | 5,304 | 520 | 5,824 | 5,215 | 493 | 5,708

1
2
3
1 UK cash and similar instruments include repurchase agreements on UK Government bonds amounting to £(993)m (2022: £(1,221)m). The latest maturity date for these short-term borrowings
is September 2024
2 A portfolio of gilt and swap contracts, backed by investment-grade credit instruments and diversified liquidity funds, that is designed to hedge the majority of the interest rate and inflation
risks associated with the schemes’ obligations
3 Portfolios of swap contracts designed to provide investment returns in line with global equity markets. The maximum exposure (notional value and accrued returns) on the portfolios was
£379m (2022: £344m)
The investment strategy for the UK scheme is controlled by the Trustee in consultation with the Group. The scheme assets do not directly include
any of the Group’s own financial instruments, nor any property occupied by, or other assets used by, the Group. At 31 December 2023, there was
no indirect holding of the Group’s financial instruments (2022: none).
Future contributions
The Group expects to contribute approximately £73m to its overseas defined benefit schemes in 2024 (2023: £70m).
In the UK, any cash funding of RRUKPF is based on a statutory triennial funding valuation process. The Group and the Trustee negotiate and
agree the actuarial assumptions used to value the liabilities (Technical Provisions); assumptions which may differ from those used for accounting
as set out on page 176. The assumptions used to value Technical Provisions must be prudent rather than a best estimate of the liability. Most
notably, the Technical Provisions discount rate is currently based upon UK Government bond yields plus a margin (0.5% at the 31 March 2023
valuation) rather than being based on yields of AA corporate bonds. Once each valuation is signed, a Schedule of Contributions (SoC) must be
agreed which sets out the cash contributions to be paid. The most recent valuation, as at 31 March 2023, agreed by the Trustee in October 2023,
showed that the RRUKPF was estimated to be 115% funded on the Technical Provisions basis (estimated to be 113% at 31 December 2023). All cash
due has been paid in full and the current SoC does not currently require any cash contributions to be made by the Group.
178
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22 Post-retirement benefits continued
Sensitivities
The calculations of the defined benefit obligations are sensitive to the assumptions set out above. The following table summarises how the
estimated impact of a change in a significant assumption would affect the UK defined benefit obligation at 31 December 2023, while holding all
other assumptions constant. This sensitivity analysis may not be representative of the actual change in the defined benefit obligation as it is
unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
For the most significant funded schemes, the investment strategies hedge the risks from interest rates and inflation measured on a proxy
solvency basis.
For the UK scheme, the interest rate and inflation hedging is currently based on UK Government bond yields without any adjustment for any
credit spread. The sensitivity analysis set out below has been determined based on a method that estimates the impact on the defined benefit
obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period.

|  | 2023 | 2022
|  | £m | £m
Reduction in the discount rate of 0.25% | Obligation | (185) | (205)
| Plan assets (LDI portfolio) | 204 | 235
Increase in inflation of 0.25% | Obligation | (75) | (70)
| Plan assets (LDI portfolio) | 77 | 91
Increase of 1% in transfer value assumption | Obligations | (30) | (30)
One year increase in life expectancy | Obligations | (155) | (165)

1
1
1 The differences between the sensitivities on obligations and plan assets arise largely due to differences in the methods used to value the obligations for accounting purposes and the
adopted proxy solvency basis
23 Share capital

| Non-equity |  | Equity |
| Special | Nominal | Ordinary shares | Nominal
| Share | value | of 20p each | value
| of £1 | £m | Millions | £m
Issued and fully paid |  |  |  |
At 1 January 2022 | 1 | – | 8,368 | 1,674
At 31 December 2022 | 1 | – | 8,368 | 1,674
Shares issued to employee share trust | – | – | 49 | 10
At 31 December 2023 | 1 | – | 8,417 | 1,684

The rights attaching to each class of share are set out on page 218.
In accordance with IAS 32, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as financial liabilities.
Accordingly, movements in C Shares are included in note 20. In addition, the rights of C share holders are included on page 218.
179
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24 Share-based payments
Effect of share-based payment transactions on the Group’s results and financial position

| 2023 | 2022
| £m | £m
Total expense recognised for equity-settled share-based payments transactions | 49 | 46
Total cost recognised for cash-settled share-based payments transactions | 17 | 1
Share-based payments recognised in the consolidated income statement | 66 | 47
Liability for cash-settled share-based payment transactions | 18 | 1

A description of the share-based payment plans is included in the remuneration report on pages 84 to 110.
Movements in the Group’s share-based payment plans during the year

|  | ShareSave | LTIP | DSBP
|  | Weighted average |  |
| Number | exercise price | Number | Number
| Millions | Pence | Millions | Millions
Outstanding at 1 January 2022 | 75�1 | 132 | 77�0 | 0�8
Granted | 0�1 | 104 | 47�2 | 12�3
Forfeited | (9.6) | 161 | (13.4) | (0.2)
Exercised | – | – | (17.8) | (0.7)
Outstanding at 31 December 2022 | 65�6 | 127 | 93�0 | 12�2
Granted | 0.1 | 115 | 44.7 | 7.0
Forfeited | (12.3) | 203 | (29.1) | (1.9)
Exercised | – | – | (7.6) | (0.1)
Outstanding at 31 December 2023 | 53.4 | 107 | 101.0 | 17.2
Exercisable at 31 December 2023 | – | – | – | –
Exercisable at 31 December 2022 | – | – | – | –

The weighted average share price at the date share options were exercised was 159p (2022: 95p). The closing price at 31 December 2023 was
300p (2022: 93p).
The weighted average remaining contractual life for the share options as at 31 December 2023 was one year (2022: two years) and the range of
exercise prices for the share options as at 31 December 2023 was 97p to 261p.
Fair values of share-based payment plans
The weighted average fair value per share of equity-settled share-based payment plans granted during the year, estimated at the date of grant,
are as follows:

| 2023 | 2022
LTIP | 216p | 90p
DSBP | 157p | 91p

Long-term incentive plans (LTIP)
The fair value of shares awarded is calculated using a pricing model that takes account of the non-entitlement to dividends (or equivalent) during
the vesting period and the market-based performance condition based on expectations about volatility and the correlation of share price returns
in the group of FTSE 100 companies and which incorporates into the valuation the interdependency between share price performance and total
shareholder return (TSR) vesting where market-based conditions are applicable. This adjustment decreases the fair value of the award relative
to the share price at the date of grant.
ShareSave
The fair value of the options granted is calculated using a pricing model that assumes that participants will exercise their options at the beginning
of the six-month window if the share price is greater than the exercise price. Otherwise, it assumes that options are held until the expiration of
their contractual term. This results in an expected life that falls somewhere between the start and end of the exercise window.
Deferred Share Bonus Plan (DSBP)
The fair value of shares awarded under DSBP is calculated as the share price on the date of the award, excluding expected dividends
(or equivalent).
180
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25 Contingent liabilities and commitments
In January 2017, after full cooperation, the Company concluded deferred prosecution agreements (DPA) with the SFO and the US Department
of Justice (DoJ) and a leniency agreement with the MPF, the Brazilian federal prosecutors. The terms of both DPAs have now expired. The
Company has submitted a final report to the Controller General, Brazil (CGU) under the terms of a two-year leniency agreement, signed in
October 2021, relating to the same historical matters. Certain authorities are investigating members of the Group for matters relating to
misconduct in relation to historical matters. The Group is responding appropriately. Action may be taken by further authorities against the
Company or individuals. In addition, the Group could still be affected by actions from other parties, including customers, customers’ financiers
and the Company’s current and former investors, including certain potential claims in respect of the Group’s historical ethics and compliance
disclosures which have been notified to the Company. The Directors are not currently aware of any matters that are likely to lead to a material
financial loss over and above the penalties imposed to date, but cannot anticipate all the possible actions that may be taken or their
potential consequences.
The Group has, in the normal course of business, entered into arrangements in respect of export finance, performance bonds, grant funding,
countertrade obligations and minor miscellaneous items, which could result in potential outflows if the requirements related to those
arrangements are not met. Various Group undertakings are party to legal actions and claims (including with tax authorities) which arise in the
ordinary course of business, some of which are for substantial amounts.
In connection with the sale of its products, the Group will, on some occasions, provide financing support for its customers, generally in respect
of civil aircraft. The Group’s commitments relating to these financing arrangements are spread over many years, relate to a number of customers
and a broad product portfolio and are generally secured on the asset subject to the financing. These include commitments of $0.9bn
(2022: $1.2bn) (on a discounted basis) to provide facilities to enable customers to purchase aircraft (of which approximately $0.7bn could be called
during 2024). These facilities may only be used if the customer is unable to obtain financing elsewhere and are priced at a premium to the
market rate. Significant events impacting the international aircraft financing market, the failure by customers to meet their obligations under
such financing agreements, or inadequate provisions for customer financing liabilities may adversely affect the Group’s financial position.
Customer financing provisions are made to cover guarantees provided where it is probable that a payment will be made. These are reported on
a discounted basis at the Group’s borrowing rate to better reflect the time span over which these exposures could arise. The values of aircraft
providing security are based on advice from a specialist aircraft appraiser. There were no provisions for customer financing provisions at
31 December 2023 or 31 December 2022.
The Group has responded appropriately to the Russia-Ukraine conflict to comply with international sanctions and export control regime, and to
continue to implement the business decision to exit from Russia. The Group could be subject to action by impacted customers, suppliers and
other contract parties.
While the outcome of the above matters cannot precisely be foreseen, the Directors do not expect any of these arrangements, legal actions or
claims, after allowing for provisions already made, to result in significant loss to the Group.
26 Related party transactions

| 2023 | 2022
| £m | £m
Sales of goods and services | 6,700 | 5,074
Purchases of goods and services | (7,471) | (5,577)
Lease payments to joint ventures and associates | (244) | (163)
Guarantees of joint arrangements’ and associates’ borrowings | 2 | 3
Guarantees of non-wholly owned subsidiaries’ borrowings | 3 | 3
Dividends received from joint ventures and associates | 54 | 73
Other income received from joint ventures and associates | 6 | 2

1
1 The Group has both sales and purchasing arrangements with its maintenance, repair and overhaul joint ventures. As part of this arrangement, the Group issues and receives credit notes
usable against amounts receivable and payable to these related parties. Purchases of goods and services from related parties are presented to be shown gross of these concessions. This
is consistent with the presentation of sales to related parties. Purchases from related parties incurred during the year to 31 December 2022 have been represented on this basis resulting
in an increase to this balance of £662m
Included in sales of goods and services to related parties are sales of spare engines amounting to £48m (2022: £19m). Profit recognised in the
year on such sales amounted to £88m (2022: £50m), including profit on current year sales and recognition of profit deferred on similar sales in
previous years. Cash receipts relating to the sale of spare engines amounted to £73m (2022: £40m).
Included in other financing charges in the income statement are interest costs of £34m (2022: £17m) incurred during the year which have been
settled by the Group on behalf of joint ventures, including £28m of costs incurred for using the Group offered SCF arrangement set out in note 19.
The aggregated balances with joint ventures are shown in notes 14 and 19. Transactions with Group pension schemes are shown in note 22.
181
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26 Related party transactions continued
Key management personnel are deemed to be the Directors (pages 70 to 71) and the members of the Executive Team (described on page 72).
Remuneration for key management personnel is shown below:

| 2023 | 2022
| £m | £m
Salaries and short-term benefits | 26 | 18
Post-retirement schemes | – | –
Share-based payments | 15 | 10
| 41 | 28
During the year, one director (2022: none) received termination benefits. For further detail, see the remuneration report |  |

More detailed information regarding the Directors’ remuneration, shareholdings, pension entitlements, share options and other long-term
incentive plans is shown in the Remuneration Report on pages 84 to 110. The charge for share-based payments above is based on when the award
is charged to the income statement in accordance with IFRS 2 Share-Based Payments, rather than when the shares vest, which is the basis used
in the remuneration report.
27 Acquisitions, disposals, held for sale and discontinued operations
Acquisitions
On 30 June 2023, the Group completed its acquisition of Team Italia/Onyx Marine SRL for a cash consideration of £14m. Team Italia specialises
in yacht bridges and marine navigation and automation systems. The acquisition will provide key technology for marine automation systems and
will strengthen Power Systems’ position as a yacht market leader. The acquisition price of £14m has been allocated to £8m of goodwill, £2m of
customer relationships, £2m to right-of-use assets and £2m to other assets and liabilities.
Disposals
During the year, the Group divested of its 49% shareholding in its joint venture, Shanxi North MTU Diesel Co. Limited to the current JV partner
for proceeds of £5m. The carrying value of the Group’s investment that was derecognised was £5m resulting in nil profit on disposal.
Reconciliation of profit/(loss) on disposal of businesses in continuing operations to the income statement:

| Total
| £m
Profit/(loss) before taxation on disposal | –
Cumulative currency translation loss on liquidation of joint venture | (1)
Adjustment to consideration on disposals completed in prior periods | 2
Profit on disposal of businesses per income statement | 1

Reconciliation of cash flow on acquisition and disposal of businesses to the cash flow statement:

| Total
| £m
Proceeds on disposal | 5
Cash outflow on acquisitions | (14)
Net cash flows on disposals completed in prior periods | (9)
Cash flow on acquisition and disposal of businesses per cash flow statement | (18)

182
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27 Acquisitions, disposals, held for sale and discontinued operations continued
Held for sale
At 31 December 2023, the Group was in positive discussions with Deutz AG for the sale of the off-highway engines business in the lower power
range based in Power Systems. The business is available for sale in its current condition and the sale is considered highly probable based on the
agreement-in-principle reached as at 31 December 2023. In line with IFRS 5, the assets and liabilities related to the business have been classified
as held for sale and measured at the lower of their carrying value or fair value less costs to sell, resulting in a £7m impairment reversal.
The table below summarises the categories of assets and liabilities classified as held for sale at 31 December 2023. There were no assets
or liabilities held for sale at 31 December 2022.

| 2023
| £m
Intangible assets | 51
Inventory | 11
Trade receivables and other assets | 47
Assets held for sale | 109
Trade payables and other liabilities | (41)
Contract liabilities | (4)
Provisions for liabilities and charges | (8)
Post-retirement scheme deficits | (2)
Liabilities associated with assets held for sale | (55)
Net assets held for sale | 54

Discontinued Operations
ITP Aero represented a separate major line of business and was classified as a disposal group held for sale up to the date of disposal. Therefore,
the results up to 15 September 2022, in line with IFRS 5, were presented as discontinued operations.
The financial performance and cash flow information presented reflects the operations for the year that have been classified as discontinued
operations.

| 2023 | 2022
| £m | £m
Revenue | – | 275
Operating profit | – | 86
Profit before taxation | – | 78
Income tax charge | – | (10)
Profit for the year from discontinued operations on ordinary activities | – | 68
Costs of disposal on discontinued operations | – | –
Loss on disposal of discontinued operations (see above) | – | (148)
Loss for the year from discontinued operations | – | (80)
Net cash inflow from operating activities | – | 85
Net cash outflow from investing activities | – | (67)
Net cash outflow from financing activities | – | (25)
Exchange gain/(losses) | – | –
Net change in cash and cash equivalents | – | (7)

1
1
1
2
2
2
1 Profit from discontinued operations on ordinary activities is presented net of intercompany trading eliminations and related consolidation adjustments
2 Cash flows from investing activities include £nil (2022: £42m) costs of disposal paid during the year that are not a movement in the cash balance of the disposal group as they were
borne centrally
183
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28 Derivation of summary funds flow statement

|  |  | 2023 |  |  | 2022
|  |  |  | Impact of |  |
|  |  |  | other |  |
|  |  | Impact of | non- |  |
|  | Impact of | acquisition | underlying |  |
| Cash flow | hedge book | accounting | items | Funds flow | Funds flow
| £m | £m | £m | £m | £m | £m
Operating profit/(loss) | 1,944 | (475) | 50 | 71 | 1,590 | 652
Operating profit from discontinued operations | – | – | – | – | – | 86
Depreciation, amortisation and impairment | 1,019 | – | (50) | 9 | 978 | 953
Movement in provisions | (325) | 46 | – | 21 | (258) | (23)
Movement in Civil LTSA balance | 1,708 | (377) | – | – | 1,331 | 792
Movement in prepayments to RRSAs for LTSA parts | (315) | 63 | – | – | (252) | (8)
Settlement of excess derivatives | (389) | – | – | – | (389) | (326)
Loss on disposal of property, plant and equipment | 18 | – | – | – | 18 | 18
Joint venture trading | (119) | – | – | – | (119) | 25
Interest received | 159 | – | – | – | 159 | 36
Contributions to defined benefit schemes in excess of underlying |  |  |  |  |  |
operating profit charge | (28) | – | – | 2 | (26) | (32)
Share-based payments 1 | 66 | – | – | – | 66 | 47
Other | – | (8) | – | 1 | (7) | (53)
Operating cash flow before working capital and taxation | 3,738 | (751) | – | 104 | 3,091 | 2,167
Increase in inventories | (200) | – | – | – | (200) | (887)
Movement in trade receivables/payables and other assets/liabilities |  |  |  |  |  |
(excluding prepayments to RRSAs for LTSA parts) | (2,090) | (164) | – | (37) | (2,291) | (745)
Movement in contract assets/liabilities (excluding Civil LTSA) | 995 | 51 | – | – | 1,046 | 892
Revaluation of trading assets (excluding exceptional items) 3 | 206 | (10) | – | – | 196 | (521)
Realised derivatives in financing | 853 | – | – | – | 853 | 737
Cash flows on other financial assets and liabilities held for operating purposes | (845) | 853 | – | – | 8 | 77
Income tax | (172) | – | – | – | (172) | (174)
Cash from operating activities | 2,485 | (21) | – | 67 | 2,531 | 1,546
Capital element of lease payments | (291) | 21 | – | – | (270) | (198)
Capital expenditure | (699) | – | – | 4 | (695) | (504)
Investment | 69 | – | – | – | 69 | 28
Interest paid | (333) | – | – | – | (333) | (352)
Other (M&A, exceptional transformation and restructuring costs) | 54 | – | – | (71) | (17) | (29)
Free cash flow | 1,285 | – | – | – | 1,285 | 491
– of which is continuing operations | 1,285 |  |  |  | 1,285 | 505

1
1
1
1
2
3
3
3
3
2
1 Included in other operating cash flows in the summarised free cash flow on page 22
2 The funds flow to 31 December 2022 has been represented to disclose cash flows on settlement of excess derivative contracts as cash flows from operating activities. As a result, operating
cash flows before working capital and income tax during the year to 31 December 2022 have reduced by £(326)m to £2,167m. Cash flows on settlement of excess derivative contracts were
previously shown after cash from operating activities in arriving at free cash flow. There is no impact to free cash flow
3 Included in working capital (excluding Civil LTSA balance) in the summarised free cash flow on page 22
The comparative information to 31 December 2023 has been presented in a different format to align to the current year presentation. In some
instances, the groupings of items may have changed. All comparative figures remain unchanged versus those reported in the 2022 Annual Report.
Free cash flow is a measure of the financial performance of the businesses’ cash flows which is consistent with the way in which performance is
communicated to the Board. Free cash flow is defined as cash flows from operating activities including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid relating to the settlement of excess derivatives, and excluding
amounts spent or received on activity related to business acquisitions or disposals and other material exceptional or one-off cash flows. The
Board considers that free cash flow reflects cash generated from the Group’s underlying trading.
Cash flow from operating activities is determined to be the nearest statutory measure to free cash flow. The reconciliation between free cash
flow and cash flow from operating activities can be found on page 216.
184
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company balance sheet
At 31 December 2023
Notes
2023
£m
2022
£m
ASSETS
Investments – subsidiary undertakings 2 14,810 14,762
LIABILITIES
Trade payables and other liabilities
3 (336) (335)
Other financial liabilities 4 (23) (24)
Current liabilities (359) (359)
NET ASSETS
6 14,451 14,403
EQUITY
Called-up share capital
5 1,684 1,674
Share premium 1,012 1,012
Merger reserve 6,962 6,962
Capital redemption reserve 2,749 2,748
Other reserve 397 349
Retained earnings 1,647 1,658
TOTAL EQUITY 14,451 14,403
The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the parent company income
statement. The result for the Company for the year was nil (2022: nil).
The Financial Statements on pages 185 to 189 were approved by the Board on 22 February 2024 and signed on its behalf by:
Tufan Erginbilgic Helen McCabe
Chief Executive Chief Financial Officer
Company’s registered number: 7524813
185
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
COMPANY FINANCIAL STATEMENTS
Company statement of changes in equity
For the year ended 31 December 2023
Attributable to ordinary shareholders
Share
capital
£m
Share
premium
£m
Merger
reserve
1
£m
Capital
redemption
reserve
£m
Other
reserve
2
£m
Retained
earnings
3, 4
£m
Total
equity
£m
At 1 January 2022 1,674 1,012 6,962 2,747 303 1,659 14,357
Redemption of C Shares – – – 1 – (1) –
Share-based payments – direct
to equity – – – – 46 – 46
At 1 January 2023 1,674 1,012 6,962 2,748 349 1,658 14,403
Arising on issues of ordinary shares 10 – – – – (10) –
Redemption of C Shares – – – 1 – (1) –
Share-based payments – direct
to equity – – – – 48 – 48
At 31 December 2023 1,684 1,012 6,962 2,749 397 1,647 14,451
1 The Company’s merger reserve was created as a result of a High Court approved scheme of arrangement in 2011, when the Company became the holding company for the
Rolls-Royce Group
2 Other reserve represents the value of the share-based payments in respect of employees of subsidiary undertakings for which payment has not been received
3 The reserves, which are distributable to the Company’s equity shareholders, are determined with reference to the Companies Act 2006 and requires judgement in determining the amount
available for distribution, subject to the restrictions explained in note 17 of the Consolidated Financial Statements. Further guidance is given in the Institute of Chartered Accountants in
England and Wales technical release 02/17BL in relation to what profits can be treated as distributable. At 31 December 2023, all the Company’s retained earnings are distributable, however,
the available amount may be different at the point any future distributions are made
4 At 31 December 2023, 52,912,406 ordinary shares with a net book value of £22m (2022: 11,402,796 ordinary shares with a net book value of £27m) were held for the purpose of share-based
payment plans and included in accumulated losses. During the year:
– 7,875,240 ordinary shares with a net book value of £15m (2022: 18,488,558 ordinary shares with a net book value of £39m) vested in share-based payment plans;
– the Company issued 49,100,000 (2022: none) new ordinary shares to the Group’s share trust for its employee share-based payment plans with a net book value of £10m (2022: £nil); and
– the Company acquired none (2022: none) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 284,850 (2022: 486,163) of its ordinary shares
through purchases on the London Stock Exchange
186
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
COMPANY FINANCIAL STATEMENTS
1 Accounting policies
Basis of accounting
Rolls-Royce Holdings plc (the Company) is a public company limited by shares incorporated and domiciled in England in the United Kingdom.
These Financial Statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework on the
historical cost basis.
These financial statements have been prepared on a going concern basis. Further details are given in the Going Concern Statement on page
58. After due consideration, the Directors consider that the Group has sufficient liquidity headroom to continue in operational existence for a
period of at least 18 months from the date of this report and there are no material uncertainties that may cast doubt on the Company’s going
concern status, accordingly they are satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the Company
Financial Statements�
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International
Financial Reporting Standards (IFRS) as adopted by the UK (UK-adopted international accounting standards), but makes amendments where
necessary in order to comply with the Companies Act 2006 and to take advantage of FRS 101 disclosure exemptions:
— a cash flow statement and related notes;
— comparative period reconciliation for investments and financial liabilities;
— comparative period reconciliation for share capital;
— the effects of new, but not yet effective accounting standards; and
—
the requirements of IAS 24 Related Party Disclosures and has, therefore, not disclosed transactions between the Company and its
wholly-owned subsidiaries.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these
Financial Statements�
There were no changes to accounting standards that had a material impact on these Financial Statements. The Company’s Financial Statements
are presented in sterling, which is the Company’s functional currency.
As permitted by section 408 of the Companies Act 2006, a separate income statement for the Company has not been included in these Financial
Statements. As permitted by the audit fee disclosure regulations, disclosure of non-audit fees information is not included in respect of
the Company.
Key areas of judgement and sources of estimation uncertainty
The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the Directors to exercise their
judgement in the process of applying the accounting policies. The Directors have not identified any critical estimates or judgements where there
is a significant risk of material change in the next 12 months at 31 December 2023.
Material accounting policies
Investments in subsidiary undertakings
Investments included in assets are investments in subsidiary companies, and these are held at historical cost less impairments which is considered
annually by the Directors.
Trade payables
Trade payables are recognised initially at the transaction price and subsequently measured at amortised cost using the effective interest method.
Financial instruments
In accordance with IAS 32, the Company’s C Shares are classified as financial liabilities and held at amortised cost from the date of issue
untilredeemed.
Equity
Ordinary shares are classified as equity. Equity instruments are measured at the fair value of the cash or other resources received or receivable,
net of the direct costs of issuing the equity instruments. The cost of issuing ordinary shares are charged to the share premium account.
Share-based payments
As described in the Remuneration Report on pages 84 to 110, the Company grants awards of its own shares to employees of its
subsidiary undertakings (see note 24 of the Consolidated Financial Statements). The costs of share-based payments in respect of these awards
are accounted for, by the Company, as an additional investment in its subsidiary undertakings. The costs are determined in accordance with
IFRS2. Any payments made by the subsidiary undertakings in respect of these arrangements are treated as a return of thisinvestment.
187
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 Accounting policies continued
Revisions to IFRS applicable in 2023
IFRS 17 Insurance Contracts
IFRS 17 issued in May 2018, establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts within
the scope of the Standard. The Standard is effective for years beginning on or after 1 January 2023 with a requirement to restate comparatives.
The Company enters into: financial guarantees where the Company guarantees payment in case of its subsidiary defaulting on a debt; and
performance guarantees where the Company guarantees certain subsidiaries performance to a customer. The Company has reviewed and
concluded that its arrangements meet the accounting definition of an insurance contract under IFRS 17. The Company has elected to apply IFRS17
(rather than IFRS 9) to all currently issued financial guarantee contracts. The Company has assessed the probability of losses on its financial and
performance guarantees and has determined that the probability is remote after consideration of both historical and
forward-looking triggers and as such the estimated liability is immaterial. As a result, no transition accounting entries were required as at 1January
2023 and, as the estimated liability is immaterial at 31 December 2023, no liability has been recognised in the Company Financial Statements.
At 31 December 2023, financial guarantees of borrowings amounted to £7,601m (2022: £9,724m) of which the total amount of debt drawn is £4,101m
(2022: £4,224m). Prior to adoption of IFRS 17, these potential exposures were considered to be contingent liabilities until such time that it became
probable that the Company would be required to make a payment under the guarantee. Under IFRS 17, the Company must recognise any
obligation at the inception of the contract for the expected fulfilment cash flows under the contract on a best estimate basis (liability for
remaining coverage).
2 Investments – subsidiary undertakings
£m
Cost:
At 1 January 2023 14,762
Cost of share-based payments in respect of employees of subsidiary undertakings less receipts from subsidiaries
in respect of those payments 48
At 31 December 2023 14,810
Details of the Company’s subsidiary undertakings and joint venture and associates undertakings are listed on pages 190 to 195.
The carrying value of the Company’s investments in subsidiary undertakings has been reviewed for impairment in accordance with IAS 36.
No indicators of impairment were identified at 31 December 2023.
3 Trade payables and other liabilities
2023
£m
2022
£m
Amounts owed to – subsidiary undertakings 336 335
Amounts owed to subsidiary undertakings are interest-free and repayable on demand.
4 Financial liabilities
C Shares
Movements during the year were as follows:
C Shares
of 0.1p
millions
Nominal
value
£m
At 1 January 2023 23,854 24
Redeemed (702) (1)
At 31 December 2023 23,152 23
The rights attaching to C Shares are set out on page 218.
188
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
NOTES TO THE COMPANY FINANCIAL STATEMENTS
5 Share capital
Non-equity Equity
Special
Share
of £1
Preference
shares of
£1 each
Nominal
value
£m
Ordinary
shares of
20p each
Millions
Nominal
value
£m
Issued and fully paid
At 1 January 2023 1 – – 8,368 1,674
Shares issued to employee share trust – – – 49 10
At 31 December 2023 1 – – 8,417 1,684
The rights attaching to each class of share are set out on page 218.
In accordance with IAS 32, the Company’s non-cumulative redeemable preference shares (C Shares) are classified as financial liabilities.
Accordingly, movements in C Shares are included in note 4.
6 Reconciliation of net assets between Rolls-Royce Holdings plc Group and Company
As at 31 December 2023, Rolls-Royce Holdings plc consolidated group had net liabilities of £3.6bn (2022: £6.0bn) compared to £14.5bn (2022:
£14.4bn) of net assets of the Company. The Company is a holding company and does not trade in its own right. The Company was incorporated
in 2011 and became the Rolls-Royce holding company through a Scheme of Arrangement. On becoming the Rolls-Royce holding company, the
value of the Company’s investment in subsidiaries was based on the market capitalisation of the Rolls-Royce Group at that time. There was an
increase in the investment as a result of a capital injection to Rolls-Royce Group Limited during 2020. The Group’s consolidated financial
statements are prepared on a historical cost basis except where UK adopted international accounting standards requires a valuation basis to be
applied (see page 187 for further details). As different principles are applied in preparing the Company and consolidated group balance sheets,
there is a difference in the financial position reported. Examples of such differences include the following items that are in the Consolidated
balance sheet but not reflected in the Company’s balance sheet: net contract liabilities of £13,294m (2022: £10,681m) as a result of IFRS 15; and
net financial liabilities of £2,035m (2022: £3,851m) arising from the recognition at fair value of foreign exchange derivatives held to manage
exposure on the Group’s future trading.
7 Contingent liabilities
For further details on action related to historical matters that could have an impact on the Company, see page 181.
8 Other information
Employees
The Company had no employees in 2023 (2022: none).
Share-based payments
Shares in the Company have been granted to employees of the Group as part of share-based payment plans, and are charged in the
employing company�
Emoluments of Directors
The remuneration of the Directors of the Company is shown below, further information is in the Remuneration Report on pages 84
to 110�
The total amount of remuneration paid to Directors for the year ended 31 December 2023 was £10,130,000 (2022: £7,577,000). £5,960,000 of
this was attributed to the highest paid Director (2022: £3,718,000).A cash allowance in lieu of company contributions to a pensions scheme was
also paid to three Directors (2022: two), which totalled £244,000 (2022: £199,000). No Directors exercised share options during the year (2022:
none) or received vested shares under the Long-Term Incentive Plan (2022: none). One director received payments for loss of office which totalled
£483,000 (2022: £nil).
No Director accrued any retirement benefits in the year (2022: none).
189
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
NOTES TO THE COMPANY FINANCIAL STATEMENTS
Company name Address Class of shares
% of class
held
Aerospace Transmission Technologies GmbH
1
Adelheidstrasse 40, D-88046, Friedrichshafen, Germany Capital Stock 50
Amalgamated Power Engineering Limited
2
London
3
Deferred
Ordinary
100
100
Bristol Siddeley Engines Limited
2
London
3
Ordinary 100
Brown Brothers & Company, Limited
4
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
KY11 9JT, Scotland
Ordinary 100
C.A. Parsons & Company Limited
4
London
3
Ordinary 100
Derby Specialist Fabrications Limited
2
London
3
Ordinary 100
Europea Microfusioni Aerospaziali S.p.A. Zona Industriale AS1, 83040 Morra de Sanctis, Avellino, Italy Ordinary 100
Heaton Power Limited
2
London
3
Ordinary 100
John Thompson Cochran Limited
2
Taxiway, Hillend Industrial Estate, Dalgety Bay, Dunfermline, Fife,
KY11 9JT, Scotland
6% Cumulative
Preference
Ordinary
100
100
Karl Maybach-Hilfe GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock 100
Kinolt Immo SA Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary 100
Kinolt Immobilien SA Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary 100
Kinolt Trading and Contracting LLC
5
REGUS Service Office, Office No. 1034, Shoumoukh Tower, 10th
Floor, Tower B, C-Ring Road, Al Sadd, PO Box 207207, Doha, Qatar
Ordinary 49
Kinolt Sistemas de UPS SpA Bucarest No 17 Oficina, No 33, Previdencia, Santiago, Chile Ordinary 100
Kinolt UK Limited
2
London
3
Ordinary 100
LLC Rolls-Royce Solutions Rus Shabolovka Street 2, 119049, Moscow, Russian Federation Ordinary 100
MTU Cooltech Power Systems Co., Limited
1
Building No 2, No 1633 Tianchen Road, Quingpu District, Shanghai,
China
Equity 50
MTU India Private Limited
6
6th Floor, RMZ Galleria, S/Y No. 144 Bengaluru, Bangalore,
Kamataka 560,064, India
Ordinary 100
MTU Polska Sp. z o.o. Ul. Lekka 3., Lokal U4. Raum, PLZ: 01-910, Ort: Warszawa, Poland Ordinary 100
NEI International Combustion Limited
2
London
3
Ordinary 100
NEI Mining Equipment Limited
2
London
3
Ordinary 100
NEI Nuclear Systems Limited
2
London
3
Ordinary 100
NEI Parsons Limited
2
London
3
Ordinary 100
NEI Peebles Limited
2
London
3
Ordinary 100
NEI Power Projects Limited
2
London
3
Ordinary 100
Nightingale Insurance Limited PO Box 33, Dorey Court, Admiral Park, St Peter Port GY1 4AT,
Guernsey
Ordinary 100
No-Break Power Limited
2
London
3
Ordinary 100
Powerfield Limited
2
Derby
7
Ordinary 100
PT Rolls-Royce Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,
Jakarta, 13610, Indonesia
Ordinary 100
PT Rolls Royce Solutions Indonesia Secure Building Blok B, Jl. Raya Protokol Halim, Perdanakusuma,
Jakarta, 13610, Indonesia
Ordinary 100
Rolls-Royce (Ireland) Unlimited Company
2
Ulster International Finance, 1st Floor IFSC House, IFSC, Dublin 1,
Ireland
Ordinary 100
Rolls-Royce (Thailand) Limited 989 Floor 12A, Unit B1, B2, Siam Piwat Tower, Rama 1, Pathumwan,
Bangkok, 10330, Thailand
Ordinary 100
Rolls-Royce Aero Engine Services Limited
2
London
3
Ordinary 100
Rolls-Royce Australia Pty Limited Level 1, 60 Martin Place, Sydney NSW 2000, Australia Ordinary 100
Rolls-Royce Australia Services Pty Limited Level 1, 60 Martin Place, Sydney NSW 2000, Australia Ordinary 100
Rolls-Royce Brasil Limitada Rua Jose Versolato, No. 111, Torre B, Sala 2502, Centro, São
Bernando do Campo, Sao Paulo, CEP 09750-730, Brazil
Quotas 100
Rolls-Royce Canada Limited 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common
Stock
100
Rolls-Royce Chile SpA Alcantra 200 office 601, Piso 6, C.O, 7550159 Las Condes,
Santiago, Chile
Ordinary 100
Rolls-Royce China Holding Limited 305 Indigo Building 1, 20 Jiuxianqiao Road, Beijing, 100016, China Registered
Capital
100
Rolls-Royce Commercial Aero Engines
Limited
2
London
3
Ordinary 100
Rolls-Royce Controls and Data Services
Limited
2
London
3
Ordinary 100
Rolls-Royce Controls and Data Services (NZ)
Limited
c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Ordinary 100
As at 31 December 2023, the companies listed below and on the following pages are indirectly held by Rolls-Royce Holdings plc, except
Rolls-Royce Group Limited, which is 100% directly owned by Rolls-Royce Holdings plc and Rolls-Royce plc which Rolls-Royce Holdings plc
directly owns 3.54%. The financial year end of each company is 31 December unless otherwise indicated.
190
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Subsidiaries
Company name Address Class of shares
% of class
held
Rolls-Royce Controls and Data Services (UK)
Limited
4
Derby
7
Ordinary 100
Rolls-Royce Corporation Wilmington
8
Common
Stock
100
Rolls-Royce Crosspointe LLC Wilmington
8
Partnership
(no equity)
100
Rolls-Royce Defense Products and Solutions,
Inc�
Wilmington
8
Common
Stock
100
Rolls-Royce Defense Services, Inc. Wilmington
8
Common
Stock
100
Rolls-Royce Deutschland Ltd & Co KG Amtsgericht Potsdam, Blankenfelde-Mahlow, Germany Ordinary 100
Rolls-Royce Electrical Norway AS Jarleveien 8A, 7041, Trondheim 500, Norway Ordinary 100
Rolls-Royce Energy Angola, Limitada
2
Rua Rei Katyavala, Edificio Rei Katyavala, Entrada B, Piso 8,
Luanda, Angola
Quota 100
Rolls-Royce Energy Systems Inc.
2
Wilmington
8
Common
Stock
100
Rolls-Royce Engine Services Holdings Co. Wilmington
8
Common
Stock
100
Rolls-Royce Engine Services Limitada Inc.
9
Bldg. 06 Berthaphil Compound, Jose Abad Santos Avenue,
ClarkSpecial Economic Zone, Clark, Pampanga, Philippines
Capital Stock 100
Rolls-Royce Erste Beteiligungs GmbH Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock 100
Rolls-Royce Finance Company Limited
2
London
3
Deferred
Ordinary
100
100
Rolls-Royce Finance Holdings Co. Wilmington
8
Common
Stock
100
Rolls-Royce Fuel Cell Systems Limited
4
Derby
7
Ordinary 100
Rolls-Royce General Partner (Ireland)
Limited
29 Earlshot Terrace, Dublin 2, Ireland Ordinary 100
Rolls-Royce General Partner Limited
2
London
3
Ordinary 100
Rolls-Royce Group Limited
13
London
3
Ordinary
Ordinary A
100
Rolls-Royce High Temperature Composites,
Inc�
Corporation Service Company, 2710 Gateway Oaks Drive,
Suite 150N, Sacramento, California 95833, United States
Ordinary 100
Rolls-Royce Holdings Canada Inc. 9500 Côte de Liesse, Lachine, Québec H8T 1A2, Canada Common C 100
Rolls-Royce Hungary Kft Gizella U. 51–57, 1143 Budapest, Hungary Cash shares 100
Rolls-Royce India Limited
2, 6, 10
Derby
7
Ordinary 100
Rolls-Royce India Private Limited
6
Birla Tower West, 2nd Floor 25, Barakhamba Road, New Delhi,
110001, India
Equity 100
Rolls-Royce Industrial & Marine Power
Limited
4
London
3
Ordinary 100
Rolls-Royce Industrial Power (India)
Limited
2, 6, 10
Derby
7
Ordinary 100
Rolls-Royce Industrial Power Engineering
(Overseas Projects) Limited
4
Derby
7
Ordinary 100
Rolls-Royce Industries Limited
4
Derby
7
Ordinary 100
Rolls-Royce International Limited Derby
7
Ordinary 100
Rolls-Royce Japan Co., Limited 31st Floor, Kasumigaseki Building, 3-2-5 Kasumigaseki,
Chiyoda-Ku, Tokyo, 100-6031, Japan
Ordinary 100
Rolls-Royce Leasing Limited Derby
7
Ordinary 100
Rolls-Royce Malaysia Sdn. Bhd. Unit A-3-6 TTDI Plaza, Jalan Wan Kadir 3, Taman Tun Dr Ismail,
6000 Kuala Lumpur, Malaysia
Ordinary 100
Rolls-Royce Marine North America, Inc. Wilmington
8
Common
Stock
100
Rolls-Royce Military Aero Engines
Limited
2, 6, 10
London
3
Ordinary 100
Rolls-Royce New Zealand Limited c/o Deloitte, 80 Queen Street, Auckland Central, Auckland 1010,
New Zealand
Ordinary 100
Rolls-Royce North America (USA)
Holdings Co.
Wilmington
8
Common
Stock
100
Rolls-Royce North America Holdings, Inc. Wilmington
8
Common
Stock
100
Rolls-Royce North America Ventures, Inc. Wilmington
8
Common
Stock
100
Rolls-Royce North America, Inc. Wilmington
8
Common
Stock
100
191
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
SUBSIDIARIES
Company name Address Class of shares
% of class
held
Rolls-Royce North American Technologies,
Inc�
Wilmington
8
Common
Stock
100
Rolls-Royce Oman LLC Bait Al Reem, Business Office #131, Building No 81, Way No 3409,
Block No 234, Al Thaqafa Street, Al Khuwair, PO Box 20, Postal
Code 103, Oman
Ordinary 100
Rolls-Royce Operations (India)
Private Limited
2, 6
Birla Tower West, 2nd Floor, 25 Barakhamba Road, New Delhi,
110001, India
Ordinary 100
Rolls-Royce Overseas Holdings Limited
4
Derby
7
Ordinary
Ordinary A
100
100
Rolls-Royce Overseas Investments Limited
4
Derby
7
Ordinary 100
Rolls-Royce Placements Limited London
3
Ordinary 100
Rolls-Royce plc London
3
Ordinary 100
Rolls-Royce Power Engineering Limited Derby
7
Ordinary 100
Rolls-Royce Power Systems AG Maybachplatz 1, 88045, Friedrichshafen, Germany Ordinary 100
Rolls-Royce Retirement Savings Trust
Limited
2, 6
Derby
7
Ordinary 100
Rolls-Royce Saudi Arabia Limited 3010 – Al Arid, Unit No 1, Riyadh 13332 – 7663, Saudi Arabia Cash shares 100
Rolls-Royce Singapore Pte. Ltd. 6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,
Singapore
Ordinary 100
Rolls-Royce SMR Limited Derby
7
Ordinary 75�7
Rolls-Royce Solutions (Suzhou) Co. Ltd 9 Long Yun Road, Suzhou Industrial Park, Suzhou 215024,
Jiang Su, China
Ordinary 100
Rolls-Royce Solutions Africa (Pty) Limited 36 Marconi Street, Montague Gardens, Cape Town, 7441,
South Africa
Capital Stock 100
Rolls-Royce Solutions America Inc. Wilmington
8
Ordinary 100
Rolls-Royce Solutions Asia Pte. Limited 10 Tukang Innovation Drive, Singapore 618302 Ordinary 100
Rolls-Royce Solutions Augsburg GmbH Dasinger Strasse 11, 86165, Augsburg, Germany Capital Stock 100
Rolls-Royce Solutions Benelux B.V. Merwedestraat 86, 3313 CS, Dordrecht, Netherlands Ordinary 100
Rolls-Royce Solutions Berlin GmbH Villa Rathenau, Wilhelminenhofstrasse 75, 12459 Berlin, Germany Common
Seed
Preferred
Series A
Preferred
100
100
100
Rolls-Royce Solutions Brasil Limitada Via Anhanguera, KM 29203, 05276-000 Sao Paulo – SP, Brazil Ordinary 100
Rolls-Royce Solutions Enerji Deniz Ve
Savunma Anonim Şirketi
Hatira Sokak, No. 5, Ömerli Mahellesi, 34555 Arnavutköy,
Istanbul,Turkey
Ordinary 100
Rolls-Royce Solutions France S.A.S. Immeuble Colorado, 8/10 rue de Rosa Luxembourg-Parc des
Bellevues 95610, Erangy-sur-Oise, France
Ordinary 100
Rolls-Royce Solutions GmbH Maybachplatz 1, 88045, Friedrichshafen, Germany Capital Stock 100
Rolls-Royce Solutions Hong Kong Limited No.8 Hart Avenue, Unit D, 8th Floor, Tsim Sha Tsui, Kowloon,
Hong Kong
Ordinary 100
Rolls-Royce Solutions Ibérica s.l.u. Calle Copérnico 26–28, 28823 Coslada, Madrid, Spain Ordinary 100
Rolls-Royce Solutions Israel Limited 4 Ha’Alon Street, South Building, Third Floor, 4059300 Kfar Neter,
Israel
Ordinary 100
Rolls-Royce Solutions Italia S.r.l. Via Aurelia Nord, 328, 19021 Arcola (SP), Italy Capital Stock 100
Rolls-Royce Solutions Japan Co. Limited Resorttrust Building 4-14-3, Nishitenma Kita-ku, Osaka 530-0047,
Japan
Ordinary 100
Rolls-Royce Solutions Korea Limited 22nd Floor, Olive Tower, 41 Sejongdaero 9 gil, Junggu, 100-737
Seoul, Republic of Korea
Ordinary 100
Rolls-Royce Solutions Liège Holding S.A. Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary 100
Rolls-Royce Solutions Liège S.A. Rue de l’Avenir 61, 4460, Grace-Hollogne, Belgium Ordinary 100
Rolls-Royce Solutions Magdeburg GmbH Friedrich-List-Strasse 8, 39122 Magdeburg, Germany Capital Stock 100
Rolls-Royce Solutions Mexico City S.A.
deC.V.
Xochicalco 620, Colonia Letran Valle, Delegacion Benito Juarez,
Mexico City 03650, Mexico
Common
Shares
100
Rolls-Royce Solutions Middle East FZE S3B5SR06, Jebel Ali Free Zone, South P.O. Box 61141, Dubai,
United Arab Emirates
Ordinary 100
Rolls-Royce Solutions Ruhstorf GmbH Rotthofer Strasse 8, 94099 Ruhstorf a.d. Rott, Germany Capital Stock 100
Rolls-Royce Solutions South Africa (Pty)
Limited
36 Marconi Street, Montague Gardens, Cape Town, 7441,
South Africa
Ordinary 100
Rolls-Royce Solutions UK Limited Derby
7
Ordinary 100
Rolls-Royce Solutions Willich GmbH Konrad-Zuse-Str. 3, 47877, Willich, Germany Ordinary 100
Rolls-Royce Sp z.o.o. Opolska 100 31-323, Krakow, Poland Ordinary 100
Rolls-Royce Submarines Limited Atlantic House, Raynesway, Derby, Derbyshire DE21 7BE,
United Kingdom
Ordinary 100
Rolls-Royce Technical Support Sarl Centreda I, Avenue Didier Daurat, 31700 Blagnac, Toulouse, France Ordinary 100
192
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
SUBSIDIARIES
Company name Address Class of shares
% of class
held
Rolls-Royce Total Care Services Limited
4
Derby
7
Ordinary 100
Rolls Royce Turkey Güç Çözümleri San. ve
Tic.Ltd.Şti.
Acıbadem Mah. Çeçen Sk. Akasya A Kule Kent Etabı Blok No: 25, İç
Kapı No:13, Üsküdar, Istanbul, Turkey
Cash shares 100
Rolls-Royce UK Pension Fund Trustees
Limited
2
Derby
7
Ordinary 100
Rolls-Royce Zweite Beteiligungs GmbH Eschenweg 11, 15827 Blankenfelde-Mahlow, Germany Capital Stock 100
Ross Ceramics Limited Derby
7
Ordinary 100
Servowatch Systems Limited Endeavour House, Benbridge Industrial Estate, Holloway Road,
Heybridge, Maldon, Essex CM9 4ER, United Kingdom
Ordinary 100
Sharing in Growth UK Limited
11
Derby
7
Limited by
guarantee
100
Spare IPG 20 Limited
4
London
3
Ordinary 100
Spare IPG 21 Limited
2
London
3
Ordinary 100
Spare IPG 24 Limited
4
London
3
Ordinary 100
Spare IPG 32 Limited
4
London
3
Ordinary 100
Spare IPG 4 Limited
2
London
3
Ordinary 100
Team Italia Marine S.R.L. Kampanien, Via Luigi Einaudi 114/B, 61032 Fano, Pesaro and
Urbino, Italy
Ordinary 100
The Bushing Company Limited
4
London
3
Ordinary 100
Timec 1487 Limited
2
London
3
Ordinary 100
Turbine Surface Technologies Limited
1
Unit 13a, Little Oak Drive, Sherwood Park, Annesley,
Nottinghamshire NG15 0DR, United Kingdom
Ordinary A
Ordinary B
Nil
100
Vessel Lifter, Inc.
2
Corporation Service Company, 1201 Hays Street, Tallahassee,
Florida 32301, United States
Common
Stock
100
Vinters Defence Systems Limited
2
London
3
Ordinary 100
Vinters Engineering Limited Derby
7
Ordinary 100
Vinters International Limited
4
Derby
7
Ordinary 100
Vinters Limited
4
Derby
7
Ordinary 100
Vinters-Armstrongs (Engineers) Limited
2
London
3
Ordinary 100
Vinters-Armstrongs Limited
2
London
3
Ordinary B 100
Yocova Private Ltd
2
London
3
Ordinary 100
Yocova PTE. Ltd. 6 Shenton Way, #33-00 OUE, Downtown Singapore 068809,
Singapore
Ordinary 100
1 Although the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records
anon-controlling interest
2 Dormant entity
3 Kings Place, 90 York Way, London N1 9FX, United Kingdom
4 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2023. Rolls-Royce plc will issue a guarantee pursuant to s479A in relation
to the liabilities of the entity
5 Although the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records
anon-controlling interest
6 Reporting year end is 31 March 2024
7 Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom
8 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States
9 Entity in liquidation
10 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ending 31 March 2024. Rolls-Royce plc will issue a guarantee pursuant to S479A in relation to
the liabilities of the entity
11 The entity is not included in the consolidation, as Rolls-Royce plc does not have a beneficial interest in the net assets of the entity
12 The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements)
13 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2023. The Company will issue a guarantee pursuant to s479A in relation
to the liabilities of the entity
14 Entity is accounted for as a joint venture as approval is required from the other shareholder for operationally running the affairs of the entity
193
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
SUBSIDIARIES
Company name Address Class of shares
% of class
held
Group
interest
held
%
Aero Gearbox International SAS
12
18 Boulevard Louis Sequin, 92700 Colombes, France Ordinary 50 50
Airtanker Services Limited Airtanker Hub, RAF Brize Norton, Carterton, Oxfordshire
OX18 3LX, United Kingdom
Ordinary 23�5 23�5
Alpha Leasing (US) (No.2) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) (No.4) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) (No.5) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) (No.6) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) (No.7) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) (No.8) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Leasing (US) LLC Wilmington
8
Partnership
(no equity held)
– 50
Alpha Partners Leasing Limited 1 Brewer’s Green, London SW1H 0RH, United Kingdom Ordinary A 100 50
Beijing Aero Engine Services Company
Limited
Room 711, Building 2, No.1 Jinhang Middle Road, Shunyi
District, Beijing, China
Capital 50 50
CFMS Limited 43 Queen Square, Bristol BS1 4QP, United Kingdom Limited by
guarantee
– 50
Clarke Chapman Portia Port Services
Limited
Maritime Centre, Port of Liverpool, Liverpool L21 1LA,
United Kingdom
Ordinary A 100 50
Egypt Aero Management Services
9
EgyptAir Engine Workshop, Cairo International Airport,
Cairo, Egypt
Ordinary 50 50
EPI Europrop International GmbH Pelkovenstr. 147, 80992 München, Germany Capital Stock 28 28
Eurojet Turbo GmbH Lilienthalstrasse 2b, 85399 Halbergmoos, Germany Ordinary 33 33
Force MTU Power Systems Private Limited Mumbai Pune Road, Akurdi, Pune, Maharashtra 411035,
India
Capital Stock 49 49
Genistics Holdings Limited Derby
7
Ordinary A 100 50
Global Aerospace Centre for Icing and
Environmental Research Inc.
12
1000 Marie-Victorin Boulevard, Longueuil Québec
J4G 1A1, Canada
Ordinary 50 50
Hoeller Electrolyzer GmbH
14
Alter Holzhafen, 23966 Wismar, Germany Ordinary 54�2 54�2
Hong Kong Aero Engine Services Limited 33rd Floor, One Pacific Place, 88 Queensway, Hong Kong Ordinary 50 50
International Aerospace Manufacturing
Private Limited
6, 12
Survey No. 3 Kempapura Village, Varthur Hobli,
Bangalore, KA 560037, India
Ordinary 50 50
ITP Next Generation Turbines SLU Parque Tecnologico Edificio 300, 48170, Zamudio,
Vizcaya, Spain
Ordinary-B 25 25
Light Helicopter Turbine Engine Company
(unincorporated partnership)
Suite 119, 9238 Madison Boulevard, Madison, Alabama
35758, United States
Partnership
(no equity held)
– 50
Manse Opus Management Company
Limited
6
Third Floor Queensberry House, 3 Old Burlington Street,
London W1S 3AE, United Kingdom
Limited by
guarantee
33 33
MEST Co., Limited 97 Bukjeonggongdan 2-gil, Yangsan-si,
Gyeongsangnam-do, 50571, Republic of Korea
Normal 46�8 46�8
MTU Power Systems Sdn. Bhd. Level 10 Menara LGB, 1 Jalan Wan Kadir Taman Tun Dr
Ismail 6000 Kuala Lumpur, Malaysia
Ordinary A 100 49
MTU Turbomeca Rolls-Royce ITP GmbH Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 25 25
MTU Turbomeca Rolls-Royce GmbH Am Söldnermoos 17, 85399 Hallbergmoos, Germany Capital Stock 33�3 33�3
MTU Yuchai Power Company Limited No 7 Danan Road, Yuzhou, Yulin, Guangxi, China, 537005,
China
Capital Stock 50 50
N3 Engine Overhaul Services GmbH
& Co KG
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50 50
N3 Engine Overhaul Services
Verwaltungsgesellschaft Mbh
Gerhard-Höltje-Strasse 1, D-99310, Arnstadt, Germany Capital Stock 50 50
Rolls Laval Heat Exchangers Limited
2
Derby
7
Ordinary 50 50
Rolls-Royce & Partners Finance (US)
(No 2) LLC
Wilmington
8
Partnership
(no equity held)
– 50
Rolls-Royce & Partners Finance (US) LLC Wilmington
8
Partnership
(no equity held)
–
50
SAFYRR Propulsion Limited
2
Derby
7
B Shares 100 50
Singapore Aero Engine Services Private
Limited
11 Calshot Road, 509932, Singapore Ordinary 50 50
Taec Ucak Motor Sanayi AS Levent Mahallesi Prof. Ahmet Kemal Aru Sk. No: 4/1,
Beşiktaş, Turkey
Cash Shares 49 49
194
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Joint ventures and associates
Company name Address Class of shares
% of class
held
Group
interest
held
%
Techjet Aerofoils Limited
12
Tefen Industrial Zone, PO Box 16, 24959, Israel Ordinary A
Ordinary B
50
50
50
TRT Limited Derby
7
Ordinary B 100 50
Turbo-Union GmbH Lilienthalstrasse 2b, 85399 Halbergmoos, Germany Capital Stock 40�0 40�0
United Battery Management GmbH
9
Wilhelminenhofstr. 76/77, 12459, Berlin, Germany Ordinary 30 30
Xian XR Aero Components Co., Limited
12
Xujiawan, Beijiao, Po Box 13, Xian 710021,
Shaanxi, China
Ordinary 49 49
1 Although the interest held is 50%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records
anon-controlling interest
2 Dormant entity
3 Kings Place, 90 York Way, London N1 9FX, United Kingdom
4 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2023. Rolls-Royce plc will issue a guarantee pursuant to s479A in relation
to the liabilities of the entity
5 Although the interest held is 49%, the Company controls the entity (see note 1 to the Consolidated Financial Statements) and, as a result, consolidates the entity and records
anon-controlling interest
6 Reporting year end is 31 March 2024
7 Moor Lane, Derby, Derbyshire DE24 8BJ, United Kingdom
8 Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19809, United States
9 Entity in liquidation
10 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ending 31 March 2024. Rolls-Royce plc will issue a guarantee pursuant to S479A in relation to
the liabilities of the entity
11 The entity is not included in the consolidation, as Rolls-Royce plc does not have a beneficial interest in the net assets of the entity
12 The entity is accounted for as a joint operation (see note 1 to the Consolidated Financial Statements)
13 Entity to take advantage of s479A Companies Act 2006 (s479A) audit exemption for the year ended 31 December 2023. The Company will issue a guarantee pursuant to s479A in relation
to the liabilities of the entity
14 Entity is accounted for as a joint venture as approval is required from the other shareholder for operationally running the affairs of the entity
195
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
FINANCIAL STATEMENTS
JOINT VENTURES AND ASSOCIATES
Report on the audit of the financial statements
Opinion
In our opinion:
— Rolls-Royce Holdings plc’s consolidated financial statements and company financial statements (the “financial statements”) give a true and fair
view of the state of the group’s and of the company’s affairs as at 31 December 2023 and of the group’s profit and the group’s cash flows for
the year then ended;
—
the consolidated financial statements have been properly prepared in accordance with UK-adopted international accounting standards as
applied in accordance with the provisions of the Companies Act 2006;
— the company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework”, and applicable law); and
— the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and company balance sheets as
at 31 December 2023; the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flow
statement, the consolidated and company statements of changes in equity for the year then ended; and the notes to the financial statements,
comprising material accounting policy information and other explanatory information.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under
ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that
the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in
the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided.
Other than those disclosed in note 7, we have provided no non-audit services to the company or its controlled undertakings in the period
under audit.
Our audit approach
Overview
Audit scope
—
Following our assessment of the risks of material misstatement of the financial statements, including the impact of climate change, we subjected
35 individual components (including three joint ventures) to full scope audits for group reporting purposes, which with an element of
sub-consolidation, equates to 16 group reporting opinions. In addition, nine components performed targeted specified audit procedures.
— The group engagement team audited the company and other centralised functions including those covering the group treasury operations,
corporate taxation, post-retirement benefits, and certain goodwill and intangible asset impairment assessments. The group engagement team
performed audit procedures over the group consolidation and financial statements disclosures and performed group level analytical
procedures over out of scope components.
—
The components on which audit procedures were performed accounted for 96% of revenue, 76% of profit before taxation and 90% of
total assets�
— Some centralised audit testing was performed where appropriate for reporting components in group audit scope who are supported by the
group’s Finance Service Centres (FSCs).
—
As part of the group audit supervision process, the group engagement team met with and discussed the approach and results of audit
procedures with component teams and reviewed their audit files and final deliverables. In person site visits to components in the UK, Germany
and US were also performed.
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ROLLS-ROYCE HOLDINGS PLC
196
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Independent auditors’ report
Key audit matters
— Long-term contract accounting and associated provisions (group)
— Deferred tax asset recognition and recoverability (group)
— Translation of foreign currency denominated transactions and balances (group)
— Presentation and accuracy of underlying results and disclosure of other one-off items (including exceptional items) (group)
— Recoverability of the company’s investments in subsidiary undertakings (company)
Materiality
—
Overall group materiality: £93m (2022: £80m) based on approximately 0.6% of underlying revenue (2022: approximately 0.6% of five year
average underlying revenues from continuing operations).
— Overall company materiality: £147m (2022: £147m) based on approximately 1.0% of total assets.
— Performance materiality: £70m (2022: £60m) (group) and £110m (2022: £110m) (company).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the
auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the
efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the
context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
This is not a complete list of all risks identified by our audit.
The key audit matters below are consistent with last year.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
Key audit matter
How our audit addressed the key audit matter
Long-term contract accounting and associated provisions
(group)
Audit Committee report and note 1 to the consolidated financial
statements – Accounting policies – Revenue recognition and contract
assets and liabilities
The Civil Aerospace and Defence businesses operate primarily with
long-term customer contracts that span multiple periods. These
long-term contracts require a number of assumptions to be made in
order to determine the expected lifetime revenue and costs of the
contract and the amounts of revenue and profit/loss that are recognised
in each reporting period.
Small adjustments in assumptions can have a significant impact on the
results of an individual financial year. Changes to the profile of shop
visits or operating conditions of engines can result in different
performance assumptions and hence cost profiles. Some contracts
include inflation linked price escalations which require judgement to
determine the extent to which future price increases are highly
probable not to reverse and therefore can be recognised. These changes
to forecasts can result in revisions to the revenue previously
recognised.
For Defence, long-term contracts tend to be for a fixed price or based
on a cost plus or target cost reimbursement for qualifying costs and
there are also some flying hours arrangements. For Civil Aerospace
aftermarket contracts, income is earned based on engine flying hours
(EFH). Management is required to estimate this to determine the total
income expected over the life of a contract. The group expects large
engine EFH to recover to pre-pandemic levels during 2024.
In addition, the profitability of Civil Aerospace aftermarket contracts
typically assumes that there will be significant cost improvements over
the lifetime (eight to 15 years) of the contracts. Significant assumptions
need to be made in determining time-on-wing, whether incremental
costs should be treated as wastage or are part of the ongoing cost of
servicing a contract, future exchange rates used to translate foreign
currency income and costs and other operating parameters used to
calculate the projected life cycle. These future costs are also risk adjusted
to take into account forecasting accuracy which represents an
additional judgement.
At the development stage of a programme, agreements are entered
into with certain Civil Aerospace suppliers to share in the risk and
rewards of the contracts (Risk and Revenue Sharing Partners – ‘RRSP’).
This can involve upfront participation fees from the RRSP that are
amortised over the engine production phase. In addition, certain revenue
and costs are recorded in the consolidated income statement net of
the RRSP’s share.
The nature of the Civil Aerospace business gives rise to a number of
contractual guarantees, warranties and potential claims, including the
in-service issues of the Trent 1000 programme. The accounting for
these can be complex and judgemental and may impact the consolidated
income statement immediately or over the life of the contract. The
valuation of provisions for the associated amounts are judgemental and
need to be considered on a contract by contract basis.
We focused our work on a number of contracts where we consider
there to be the highest degree of management judgement or estimation
and designed specific procedures over the long-term contract
accounting targeted at the associated risks. We also sample tested the
remaining population of contracts. The audit procedures performed
included:
—
We attended meetings with Civil Aerospace and Defence engine
programme and customer contract managers in order to understand
the operational matters impacting the performance of specific
contracts and any amendments to contractual arrangements that
could have an impact on performance;
— We obtained and read the relevant sections of a sample of contracts
to understand the key terms including performance obligations and
pricing structures;
— We assessed how management had forecast the speed and shape of
the recovery of engine flying hours including by considering the
downside scenarios modelled and comparing the assumptions to
industry data;
—
We challenged management’s judgments and associated risk
adjustments relating to the risk of customer default and insolvency;
— We re-performed the calculations used to determine the degree of
completion for a sample of contracts and this was also used in
assessing the magnitude of any catch-up adjustments;
—
We compared the previously forecast results of a sample of contracts
with the actual results to assess the performance of the contract and
the historical accuracy of forecasting;
— We verified a sample of costs incurred to third party documentation
in order to assess the validity of the forecast costs to complete;
— We assessed the assumptions relating to life cycle cost reductions to
determine the likelihood of realisation and where relevant the speed
at which they would be achieved, including the impact on the number
of shop visits, validating these assumptions directly with the senior
programme engineers;
—
We obtained support for the risk adjustments made in respect of
future costs and challenged management’s assumptions through
assessment against historical performance, known technical issues
and the stage of completion of the programme;
— We recalculated the price escalation included within the contracts;
—
We challenged the assessment of provisions for onerous contracts
to determine the completeness of the unavoidable costs to fulfil the
contractual obligations. We also validated the rates used to discount
the future cash flows;
—
We assessed the sensitivity of the Trent 1000 provision to reasonable
changes in estimates, particularly in respect of the repair and overhaul
facility capacity, technical cost creep on the known issues and cost
outturns against previous provisions, in determining whether the
provision was sufficient;
—
We read and understood the key terms of a sample of RRSP contracts
to assess whether revenue and costs had been appropriately reflected,
net of the share attributable to the RRSP in the consolidated
income statement;
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
Key audit matter
How our audit addressed the key audit matter
Long-term contract accounting and associated provisions
(group) continued
Management has modelled the potential impact of climate change on
its forecasts and has incorporated these estimates into the long-term
contracts for Civil Aerospace, which is the business with the highest
expected exposure to the impact of climate change. This included
incorporating the potential impact of carbon prices on the group’s
direct emissions including engine testing and those of its suppliers and
the potential impact of climate change on commodity prices in cost
estimates. The impact of climate change on long-term contracts is highly
uncertain and requires estimates on carbon prices, the cost and speed
of decarbonisation, the ability of the group and its suppliers to pass on
incremental costs and assessing the associated impact on aviation
demand.
—
With assistance from our valuation experts, we considered the
appropriateness of the key assumptions used by management to
model the impact of climate change, including deploying valuation
experts to benchmark the carbon and commodity price forecasts
utilised. We validated management’s assertions on the ability of
suppliers and the group to pass on incremental costs by reviewing
supplier and customer contracts for price change mechanisms. Where
appropriate we performed independent sensitivity analysis to
determine to what extent reasonably possible changes in these
assumptions could result in material changes to the revenue
recorded in the year and assessed the appropriateness of the
associated disclosures;
—
We read and challenged management’s accounting papers that were
prepared to explain the positions taken in respect of their key contract
judgements;
—
We considered whether there were any indicators of management
override of controls or bias in arriving at their reported position; and
—
We also assessed the adequacy of disclosures in note 1 of the key
judgements and estimates involved in long-term contract accounting.
Based on the work performed, we concur that management’s estimates
for long-term contract accounting and associated provisions are
materially appropriate, in the context of the financial statements taken
as a whole.
Deferred tax asset recognition and recoverability (group)
Audit Committee report, note 1 to the consolidated financial statements
– Accounting policies – Taxation and note 5 to the consolidated financial
statements – Taxation
The recognition and recoverability of deferred tax assets in Rolls-Royce
plc, where there have been significant taxable losses in the past, is
based on a number of significant assumptions. Deferred tax assets can
be recognised in relation to these losses to the extent it is probable
that there will be sufficient future taxable profits to utilise them.
Rolls-Royce plc has recognised significant deferred tax assets on the
basis of expected future levels of profitability. The magnitude of the
assets recognised necessitates the need for a number of assumptions
in assessing the future levels of profitability in the UK over an extended
period. This requires assumptions on future profits from the group’s
aftermarket and original equipment sales including EFH, associated
costs and the future exchange rates used to translate foreign currency
denominated amounts.
At 31 December 2023, the group recognised £2,399m (2022: £2,183m)
of deferred tax assets in the UK of which £1,476m (2022: £1,054m) relate
to tax losses. £406m of additional deferred tax assets have been
recognised in the year as a result of the latest assessment, including
from the impact of new contracts (including the trilateral AUKUS
agreement) signed in the year, the growth in Civil EFH, the expected
outcome of the group’s strategic initiatives and other macroeconomic
factors. £1,635m of potential deferred tax assets in relation to UK losses
remain unrecognised on the basis that management has judged there
are not yet sufficient probable future taxable profits for them to be
utilised against.
We evaluated management’s methodology for assessing the recognition
and recoverability of deferred tax assets, including the ability to offset
certain deferred tax liabilities and deferred tax assets. Where
recognition is supported by the availability of sufficient probable
taxable profits in future periods against which brought forward tax
losses can be utilised, our evaluation of these future profits considered
both the business model and the applicable UK tax legislation.
We assessed the future profit forecasts of the UK tax group and the
underpinning assumptions including management’s risk weighting of
particular profit streams in Rolls-Royce plc and tested that the
assumptions, including the forecasts for periods beyond the normal
five year forecasting horizon, were reasonable. In doing this, we verified
that the forecasts did not include taxable profit growth that could not
be demonstrated as probable.
Where applicable we assessed the consistency of the forecasts used
to justify the recognition of deferred tax assets to those used elsewhere
in the business, including for long-term contract accounting,
for the going concern assessment and longer term viability statement.
We also assessed the risk adjustments applied by management to these
profit forecasts to future periods that are significantly further in time
than the group’s normal five year forecasting process and considered
whether these appropriately reflect the estimation risk in the longer
term forecasts.
199
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
Key audit matter
How our audit addressed the key audit matter
Deferred tax asset recognition and recoverability (group)
continued
The existence of tax losses brought forward from prior periods and
other deductible temporary differences in Rolls-Royce plc, combined
with the impact of climate change on future forecasts, presents a
heightened risk that deferred tax assets previously recognised may not
be recoverable. Since the recognised deferred tax asset is recoverable
over a long period, management has reflected their assessment of the
impact of climate change within the model forecasting probable taxable
profits. This incorporates multiple assumptions including future carbon
prices, commodity prices, the impact of government action on aviation
demand, the cost and speed of decarbonisation and the ability of
suppliers and Rolls-Royce plc to pass on price changes. To assess the
impact of inherent uncertainty management has performed sensitivities
over key estimates.
We considered the appropriateness of the climate change assumptions
modelled as part of their probability weighted scenarios to forecast
probable profit levels and performed consistent procedures to those
set-out in the long-term contract accounting and associated provisions
key audit matter. We also performed additional sensitivity analysis to
understand whether reasonably possible changes to these assumptions
could lead to a material change in the recognised asset and where
appropriate ensured that adequate disclosure was provided.
We assessed the treatment of the losses that are realised or unrealised
on the group’s hedge book and whether they were treated appropriately
and how they are recovered using the same profit forecasts.
We also assessed the adequacy of disclosures over this area, particularly
the impact of changes in key estimates of the asset recognised and this
has been disclosed in notes 1 and 5.
We did not identify any material uncorrected exceptions from our
audit work.
Translation of foreign currency denominated transactions
and balances (group)
Note 1 to the consolidated financial statements – Accounting policies
– Foreign currency translation
Foreign exchange rate movements influence the reported consolidated
income statement, the consolidated cash flow statement and
consolidated balance sheet. One of the group’s primary accounting
systems that is used by a number of its subsidiaries translates
transactions and balances denominated in foreign currencies at a fixed
budget rate for management information purposes. Foreign currency
denominated transactions and balances are then re-translated to actual
average and closing spot rates through manual adjustments. Due to
the manual nature of the process and significance of the recurring
adjustments needed there is a risk that transactions and balances
denominated in foreign currencies are incorrectly translated in the
consolidated financial statements.
We performed the following specific audit procedures over this area:
—
Obtained an understanding of the process employed by management
to correctly record the translation of foreign currency balances
and transactions;
—
Tested system reports identifying transactions and balances in source
currency by agreeing these to general ledger balances;
— Tested on a sample basis the manual calculations of the adjustment
needed to correctly record the translation of the foreign currency
denominated transactions and balances;
— Sampled balances and transactions requiring adjustment by source
currency and tested to source data and assessed the completeness
of these balances and transactions;
— Created an independent expectation of the gain on the translation
of monetary assets and liabilities based on the movements in the
group’s key exchange rates and associated balances in the year and
compared this to the gain recorded in the year; and
— Agreed the exchange rates used in management’s translation adjust-
ments to an independent source.
There were no material uncorrected exceptions from our audit work.
200
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
Key audit matter
How our audit addressed the key audit matter
Presentation and accuracy of underlying results and
disclosure of other one-off items (including exceptional
items) (group)
Note 1 to the consolidated financial statements – Accounting policies
– Presentation of underlying results, note 2 to the consolidated financial
statements – Segmental analysis and note 28 to the consolidated
financial statements – Derivation of summary funds flow statement
In addition to the performance measures prescribed by International
Financial Reporting Standards, the group also presents its results on
an underlying basis, as the Directors believe this better reflects the
performance of the group during the year. The group also presents a
free cash flow metric which the Directors believe reflects the cash
generated from underlying trading. This differs from the cash flows
presented in the consolidated cash flow statement.
The underlying results differ significantly from the reported statutory
results and are used extensively to explain performance to
shareholders. Alternative performance measures can provide investors
with additional understanding of the group’s performance if consistently
calculated, properly used and presented. However, when improperly
used and presented, these non-GAAP measures can mislead investors
and may mask the real financial performance and position. There is
judgement in determining whether items should be excluded from
underlying profit or free cash flow.
A key adjustment between the statutory results and the underlying
results relates to the foreign exchange rates used to translate foreign
currency transactions and balances. The underlying results reflect the
achieved rate on foreign currency derivative contracts settled in the
period and retranslates assets and liabilities at the foreign currency
rates at which they are expected to be realised or settled in the future.
As the group can influence which derivative contracts are settled in
each reporting period it has the ability to influence the achieved rate
and hence the underlying results.
One of the items excluded from underlying profit is exceptional
restructuring costs associated with the new transformation programme.
Judgement is required to determine what costs are related to this
programme to warrant exclusion from underlying profit.
We have considered the judgements taken by management to determine
what should be treated as an exceptional item and the translation of
foreign currency amounts and obtained corroborative evidence
for these.
We also considered whether there were items that were recorded within
underlying profit that are exceptional in nature and should be reported
as an exceptional item. No such material items were identified. As part
of this assessment we challenged management’s rationale for the
designation of certain items as exceptional or one-off and assessed
such items against the group’s accounting policy, considering the nature
and value of those items.
Within underlying results, foreign currency transactions are presented
at rates achieved on derivative contracts hedging the net operating
cash flows of the group and monetary assets and liabilities are
retranslated at rates forecast to be achieved on derivative contracts
when the associated cash flows occur. We have agreed these forecast
rates to the profile of the derivatives that are expected to mature in the
future and tested their application to the relevant monetary assets
and liabilities.
We tested the reconciling items between the underlying operating
profit and free cash flow disclosed in note 28 including verifying that
the items adjusted for are consistent with the prior period. This included
validating a sample of restructuring costs and verifying that the costs
were sufficiently related to the announced transformation programme.
We also considered whether free cash flow contains material one-off
items which require further disclosure.
We assessed the appropriateness and completeness of disclosures of
the impact of one-off or non-underlying items primarily in notes 1, 2
and 28 to the consolidated financial statements and found them to be
appropriate. This included assessing the explanations management
provided on the reconciling items between underlying performance
and statutory performance in note 2.
Overall we found that the classification judgements made by
management were in line with their policy for underlying results and
exceptional items, had been consistently applied and there are no
material uncorrected misstatements resulting from our testing.
Recoverability of the company’s investments in subsidiary
undertakings (company)
Note 2 to the company financial statements – Investments – subsidiary
undertakings
Investments in subsidiary undertakings of £14,810m (2022: £14,762m)
are accounted for at cost less provision for impairment in the company
balance sheet at 31 December 2023�
Investments are tested for impairment if impairment indicators exist. If
such indicators exist, the recoverable amounts of the investments in
subsidiaries are estimated in order to determine the extent of the
impairment loss, if any. Any such impairment loss is recognised in the
income statement�
A review of potential indicators of impairment was performed by
management focusing on the developments in the year, concluding
that no such indicators were present and therefore that the investments’
carrying values remain recoverable.
We evaluated management’s assessment of whether any potential
indicators of impairment existed at 31 December 2023. In doing this,
we considered the market capitalisation of the company at 31 December
2023, which exceeded the carrying value of investments in subsidiary
undertakings. We also considered the latest expected performance of
the group by comparing the latest cash flow forecasts audited as part
of other key audit matters to those estimated in the 2022 impairment
model as well as the performance in the year.
Overall, we found that management’s judgement that there has been
no indicator of potential impairment to be appropriate.
201
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.
Our scoping is based on the group’s consolidation structure. We define a component as a single reporting unit which feeds into the group
consolidation. Of the group’s 324 reporting components, 35 individual components (including three joint ventures) were subject to full scope
audits for group purposes, which following an element of sub-consolidation, equates to 16 group reporting opinions; and nine components
performed targeted specified audit procedures.
In order to achieve audit coverage over the financial statements, under our audit methodology, we test both the design and operation of relevant
business process controls and perform substantive testing over each financial statement line item.
The group operates Finance Service Centres (FSCs) to bulk process financial transactions in Derby (UK), Indianapolis (US) and Bengaluru (India).
Based on our assessment it is not possible to fully test revenue and profit centrally as certain key processes, such as long-term contracting,
remain within the business due to their nature and are not handled by the FSCs.
Our audit covered 96% of revenue, 76% of profit before tax and 90% of total assets. All entities that contribute in excess of 1% of the group’s
revenue were included in scope.
Further specific audit procedures over central functions, the group consolidation and areas of significant judgement (including corporate
taxation, certain goodwill balances and intangible assets, treasury and post-retirement benefits) were performed by the group audit team.
Where work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those
reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the
consolidated financial statements.
We issued formal written instructions to all component auditors setting out the audit work to be performed by each of them and maintained
regular communication with the component auditors throughout the audit cycle. These interactions included attending certain component
clearance meetings and holding regular conference calls, as well as reviewing and assessing any matters reported. The group engagement team
also reviewed selected audit working papers for certain component teams to evaluate the sufficiency of audit evidence obtained and fully
understand the matters arising from the component audits.
In addition, senior members of the group engagement team have visited component teams across all group’s major segments in the UK, US and
Germany. These visits were in-person for these locations. They included meetings with the component auditor and with local management.
Reflective of its nature, our audit of the company financial statements focused on the investments in subsidiary undertakings and validating
amounts owed to subsidiary undertakings.
The impact of climate risk on our audit
As part of our audit we made enquiries of management to understand the process they adopted to assess the extent of the potential impact of
climate risk on the group’s and company’s financial statements and to support the disclosures made within the Sustainability section of the
Strategic report. In addition to enquiries with management, we understood the governance process in place to assess climate risk, reviewed the
group’s assessment of climate related risk including both physical and transition risks and read additional reporting made on climate related
matters, including its CDP public submission and the group’s disclosures in line with the Task Force on Climate-related Financial disclosure
(TCFD) framework.
We held meetings with management including the group’s sustainability team to consider the completeness of management’s climate risk
assessment and its consistency with internal climate plans and board minutes, including whether the time horizons management have used take
account of all relevant aspects of climate change such as transition risks. We also considered the consistency with the group’s communications
on climate related impacts. The group’s short and medium term targets are currently under review, although it remains committed to emission
reductions. The group has also set out net zero 2050 commitments, albeit the pathway to this is not fully developed.
We considered the following areas which depend on medium to long-term profit or cash flow forecasts to potentially be materially impacted by
climate risk and consequently we focused our audit work in these areas: long-term contract accounting in the UK Civil business (including
contract loss provisions); the recoverability of deferred tax assets in the UK and the recoverability of the carrying value of goodwill and certain
intangible assets. Our findings were reported to and discussed with the Audit Committee and management. Where significant, further details of
how climate change has been considered in these areas and our audit response is given in the key audit matters above.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
To respond to the audit risks identified in these areas we tailored our audit approach to address these, in particular, we:
— Deployed our valuation experts to benchmark carbon pricing and key commodity price forecasts against forecasts of future prices and found
them to be materially reasonable. These have been incorporated by management in their forecasts of the group’s future cost base for
long-term contract accounting and associated provisions as well as scenarios utilised in assessing the recoverability of deferred tax assets,
goodwill and other assets;
— Considered the reasonableness of management’s assertion that climate change is unlikely to have a material impact on aviation demand by
comparing management’s EFH forecasts against other industry benchmarks and considering the sensitivity of EFH to different GDP growth
rates expected under differing climate scenarios;
— Verifying that estimates of capital and cash costs from reductions to the group’s scope 1 and scope 2 emissions have been incorporated in the
group’s forecasts including those used for going concern and the disclosures around the viability of the group that are included in the
Strategic Report;
— Considered whether management had adequately reflected the risk of regulatory changes or demand changes to the extent known in the
useful economic lives and recoverable value of other intangible assets including those related to diesel engines produced by Power Systems;
—
Validated management’s judgement that climate change is unlikely to have a material impact on other estimates at 31 December 2023
including the recoverability of inventory or the expected credit loss provision associated with trade receivables and contract assets by
considering the short timeframe these assets are expected to be utilised compared to the period over which transition and physical risks are
expected to arise; and
—
Where appropriate, performed independent sensitivity analysis to determine to what extent reasonably possible changes in the climate related
assumptions in the group’s forecasts could result in material changes to the impacted balances and assessed the appropriateness of the
associated disclosures.
We also considered the consistency of the disclosures in relation to climate change (including the disclosures in the Sustainability section of the
Strategic Report) within the Annual Report and our knowledge obtained from our audit. This included considering the models management used
in the TCFD scenario analysis and if the assumptions in those models are consistent with the assumptions used elsewhere in the
financial statements.
As disclosed within the Sustainability section of the Strategic Report the achievement of net zero by 2050 will require significant change across
the aviation sector in particular, including widespread adoption of Sustainable Aviation Fuels or other alternative fuel sources. Management has
not included the incremental cost of this in its longer term forecasts, based on the assumptions that such costs can be passed onto customers
and will occur after the average life of the current existing contracts.
Our procedures did not identify any material impact in the context of our audit of the financial statements as a whole for the year ended
31 December 2023. The future estimated financial impacts of climate risk are clearly uncertain given the medium to long-term timeframes involved
and their dependency on how governments, global markets, corporations and society respond to the issue of climate change and the speed of
technological advancements that may be necessary. Accordingly, financial statements cannot capture all possible future outcomes as these are
not yet known.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the
individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the
financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Financial statements – group
Financial statements – company
Overall materiality
£93m (2022: £80m). £147m (2022: £147m).
How we determined it
Approximately 0.6% of underlying revenue (2022:
approximately 0.6% of five year average underlying
revenues from continuing operations).
Approximately 1.0% of total assets.
Rationale for benchmark
applied
We have consistently used underlying revenue to determine
materiality as opposed to a profit based benchmark. This
is because there is considerable volatility in profit before
tax as a result of revenue recognition under IFRS 15 and
from the fair value movement in the group’s derivatives.
Underlying revenue continues to be a key performance
metric for the group and is more stable than the profit
metric. Reflecting the reduced impact that the COVID-19
pandemic has had on the group’s revenue in the year, we
have reverted back to basing our materiality on in-year
underlying revenue only.
We determined our materiality based on total assets, which
is more applicable than a performance-related measure
as the company is an investment holding company for the
group. The higher company materiality level was used for
the purposes of testing balances not relevant to the group
audit, such as investments in subsidiary undertakings and
intercompany balances�
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of
materiality allocated across components was between £4m and £70m. Certain components were audited to a local statutory audit materiality
that was also less than our overall group materiality.
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and
extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance
materiality was 75% (2022: 75%) of overall materiality, amounting to £70m (2022: £60m) for the group financial statements and £110m (2022: £110m)
for the company financial statements.
In determining the performance materiality, we considered a number of factors – the history of misstatements, risk assessment and aggregation
risk and the effectiveness of controls – and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £3m (group audit)
(2022: £3m) and £7m (company audit) (2022: £7m) as well as misstatements below those amounts that, in our view, warranted reporting for
qualitative reasons.
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the group’s and the company’s ability to continue to adopt the going concern basis of
accounting included:
— Testing the model used for management’s going concern assessment which is primarily a liquidity assessment given there are no significant
financial covenants in its committed debt facilities. Management’s assessment covered the 18 months to August 2025. We focused on this
period and also considered the subsequent four months to the end of 2025;
— Management’s base case forecasts are based on its normal budget and forecasting process for each of its businesses for the next five years.
We understood and assessed this process by business including the assumptions used for 2024 and 2025 and assessed whether there was
adequate support for these assumptions. We also considered the reasonableness of the monthly phasing of cash flows. A similar assessment
was performed on the stressed downside cash flows, including understanding of the scenarios modelled by management, how they were
quantified and the resultant monthly phasing of the stressed downside cash flow forecast;
—
We have read and understood the key terms of all committed debt facilities to understand any terms, covenants or undertakings that may
impact the availability of the facility;
—
Using our knowledge from the audit and assessment of previous forecasting accuracy we calculated our own sensitivities to apply to
management’s cash flow forecasts. We overlaid these on management’s forecasts to arrive at our own view of management’s downside forecasts.
This included consideration of management’s assessment of the impact of climate change and the likelihood of any downside risks crystallising
in the period to August 2025;
—
We considered the potential mitigating actions that management may have available to it to reduce costs, manage cash flows or raise additional
financing and assessed whether these were within the control of management and possible in the period of the assessment; and
— We assessed the adequacy of disclosures in the Going concern statement and statements in note 1 of the consolidated and company financial
statements and found these appropriately reflect the key areas of uncertainty identified.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group’s and the company’s ability to continue as a going concern for a period of at least twelve
months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of
the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group’s and the company’s
ability to continue as a going concern.
In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the
going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to
conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on
the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report based on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006
have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as
described below.
205
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OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
Strategic report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report
for the year ended 31 December 2023 is consistent with the financial statements and has been prepared in accordance with applicable
legal requirements.
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic report and Directors’ report.
Directors’ Remuneration
In our opinion, the part of the Remuneration Committee report to be audited has been properly prepared in accordance with the Companies
Act 2006.
Corporate governance statement
The Listing Rules require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate
governance statement relating to the company’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other
information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance
statement, included within the governance report is materially consistent with the financial statements and our knowledge obtained during the
audit, and we have nothing material to add or draw attention to in relation to:
— The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;
—
The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an
explanation of how these are being managed or mitigated;
—
The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the group’s and company’s ability to continue to do so
over a period of at least twelve months from the date of approval of the financial statements;
—
The directors’ explanation as to their assessment of the group’s and company’s prospects, the period this assessment covers and why the
period is appropriate; and
— The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet
its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
Our review of the directors’ statement regarding the longer-term viability of the group and company was substantially less in scope than an audit
and only consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in
alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the
financial statements and our knowledge and understanding of the group and company and their environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate
governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
—
The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the
information necessary for the members to assess the group’s and company’s position, performance, business model and strategy;
— The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
— The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s compliance with the
Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.
206
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities in respect of the Financial Statements, the directors are responsible for the
preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view.
The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud, is detailed below.
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related
to the regulations of country aviation authorities such as the Civil Aviation Authority, import and export restrictions including sanctions, and the
UK Bribery Act, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also
considered those laws and regulations that have a direct impact on the financial statements such as the Listing Rules of the UK Financial Conduct
Authority, the Companies Act 2006 and tax legislation. We evaluated management’s incentives and opportunities for fraudulent manipulation
of the financial statements (including the risk of override of controls), and determined that the principal risks were related to (1) posting
inappropriate journal entries to manipulate financial results; (2) management bias in accounting estimates such as long-term contract accounting
and associated provisions; (3) the sale of Civil engines to joint ventures for no clear commercial purpose or above market prices; and
(4) inappropriately including or excluding transactions from the group’s underlying or free cash flow alternative performance metrics. The group
engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response
to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:
— Discussions throughout the year with management, internal audit, the group’s legal counsel, and the head of ethics and compliance, including
consideration of known or suspected instances of non-compliance with laws and regulation and fraud;
— Reading the minutes of the group’s Safety, Energy Transition & Tech Committee and assessment of ‘speak-up’ matters reported through the
group’s Ethics Line and the results of management’s investigation of such matters;
— Verifying sales of spare engines to joint ventures are in line with the approved timetable and are at a price supported by external valuation;
— Reading the minutes of Board meetings to identify any inconsistencies with other information provided by management;
— Reviewing legal expense accounts to identify significant legal spend that may be indicative of non-compliance with laws and regulations;
—
Challenging assumptions and judgements made by management in determining significant accounting estimates (because of the risk of
management bias), in particular in relation to long-term contract accounting and associated provisions;
— Identifying and testing unusual journal entries, in particular journal entries posted with unusual account combinations, and testing all material
consolidation journals; and
—
Challenging why certain items are excluded or included from underlying profit or free cash flow and review of disclosures included in the
Annual Report explaining and reconciling alternative performance measures to statutory metrics.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with
laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting
a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment
by, for example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques.
However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to
target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a
conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditors
responsibilities. This description forms part of our auditors’ report.
207
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
INDEPENDENT AUDITORS’ REPORT
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part
16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent
in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
— we have not obtained all the information and explanations we require for our audit; or
— adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches
not visited by us; or
— certain disclosures of directors’ remuneration specified by law are not made; or
— the company financial statements and the part of the Remuneration Committee report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the members on 3 May 2018 to audit the financial statements for
the year ended 31 December 2018 and subsequent financial periods. The period of total uninterrupted engagement is six years, covering the
years ended 31 December 2018 to 31 December 2023.
Other matter
In due course, as required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these financial statements
will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in
accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditors’ report provides no assurance over whether the annual
financial report will be prepared using the single electronic format specified in the ESEF RTS.
Ian Morrison (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
22 February 2024
208
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
INDEPENDENT AUDITORS’ REPORT
Independent assurance report
To the stakeholders of Rolls-Royce Holdings plc
1. Introduction and objectives of work
Bureau Veritas UK Limited (Bureau Veritas) has been engaged by
Rolls-Royce Holdings plc (Rolls-Royce) to provide limited assurance of its
selected sustainability performance indicators for inclusion in its 2023
Annual Report (the ‘Report’). The objective is to provide assurance to
Rolls-Royce and its stakeholders over the accuracy and reliability of the
reported information and data.
2. Scope of work
The scope of our work was limited to assurance over the following
information included within the Report for the period 1 January to
31 December 2023 (the ‘Selected Information’):
— Total Energy Consumption;
—
Total Scope 1 + 2 Greenhouse Gas (GHG) Emissions (market based):
Operations and facility emissions (excluding product testing activities);
— Total Solid and Liquid Waste Generated;
— Recycling and Recovery Rate (%);
— Number of Total Reportable Injuries;
— Number of People Reached Through Science, Technology, Engineering
and Mathematics (STEM) Education Outreach Programmes; and
—
Employee Engagement Score – ‘grand mean’ and increase compared
to 2022�
3. Reporting criteria
The Selected Information needs to be read and understood together with
the Rolls-Royce ‘Sustainability Data Basis of Reporting’, a copy of which is
set out at www.rollsroyce.com/sustainability/performance/reporting-
approach.aspx. These internal definitions draw on externally available
guidance, the Greenhouse Gas Protocol Corporate Accounting and
Reporting standard (revised edition).
4. Limitations and exclusions
Excluded from the scope of our work is assurance of information
relating to:
— activities outside the defined assurance period;
—
positional statements of a descriptive or interpretative nature,
or of opinion, belief, aspiration or commitment to undertake future
actions; and
—
other information included in the Report other than the Selected
Information, including but not limited to normalised figures, total
reportable injury rate etc.
The following limitations should be noted:
—
This limited assurance engagement relies on a risk-based selected
sample of sustainability data and the associated limitations that
this entails.
—
The reliability of the reported data is dependent on the accuracy of
metering and other production measurement arrangements employed
at site level, not addressed as part of this assurance.
—
This independent statement should not be relied upon to detect all errors,
omissions or misstatements that may exist.
—
For the sites Solihull, Raynesway and Barnoldswick (collectively
contributing approximately 7% of the total waste reported by Rolls-Royce)
we received excel reports from the third-party waste management
provider as evidence but additional waste documentation (waste transfer
notes, consignment notes, invoices) were not provided for all the waste
movements sampled within the timeframe.
— For Aiken site, we did not receive evidence for the liquid waste reported
by the site, as the documentation was not available within the timeframe.
The liquid waste from Aiken contributes approximately 1% of the total
waste reported by Rolls-Royce.
5. Responsibilities
This preparation and presentation of the Selected Information in the Report
are the sole responsibility of the management of Rolls-Royce.
Bureau Veritas was not involved in the drafting of the Report or of the
Reporting Criteria. Our responsibilities were to:
—
obtain limited assurance about whether the Selected Information has
been prepared in accordance with the Reporting Criteria;
—
form an independent conclusion based on the assurance procedures
performed and evidence obtained; and
— report our conclusions to the directors of Rolls-Royce.
6. Assessment standard
We performed our work to a limited level of assurance in accordance with
International Standard on Assurance Engagements (ISAE) 3000 Revised,
Assurance Engagements Other than Audits or Reviews of Historical
Financial Information (effective for assurance reports dated on or after
December 15, 2015), issued by the International Auditing and Assurance
Standards Board.
7. Summary of work performed
As part of our independent assurance our work included:
1� Conducting interviews with relevant personnel of Rolls-Royce, including
the central corporate team and representatives from nine sites;
2�
Reviewing the data collection and consolidation processes used to
compile Selected Information, including assessing assumptions made
and the data scope and reporting boundaries;
3� Reviewing documentary evidence provided by Rolls-Royce;
4� Agreeing a selection of the Selected Information to the corresponding
source documentation;
5�
Reviewing Rolls-Royce systems for quantitative data aggregation
and analysis;
6�
Assessing the disclosure and presentation of the Selected
Information to ensure consistency with assured information;
7�
Carrying out six remote site visits to Aiken, USA; Friedrichshafen,
Germany; Indianapolis, USA; Raynesway, UK; Solihull, UK; Tukang,
Singapore, and three physical site visits Barnoldswick (Bankfield), UK;
EMA, Italy; and Magdeburg, Germany selected on a risk-based basis
following discussion with Bureau Veritas and Rolls Royce, with
consideration of contribution to assured data, geographical
contribution and type of operations;
8�
Re-performing a selection of aggregation calculations of the
Selected Information; and
9� Re-performing greenhouse gas emissions conversions calculations.
A 5% materiality threshold was applied to this assurance. It should be noted
that the procedures performed in a limited assurance engagement vary in
nature and timing from, and are less in extent than for, a reasonable
assurance engagement. Consequently, the level of assurance obtained in
a limited assurance engagement is substantially lower than the assurance
that would have been obtained had a reasonable assurance engagement
been performed.
8. Conclusion
On the basis of our methodology and the activities and limitations described
above nothing has come to our attention to indicate that the Selected
Information is not fairly stated in all material respects.
9. Statement of independence, integrity and competence
Bureau Veritas is an independent professional services company that
specialises in quality, environmental, health, safety and social
accountability with over 190 years history. Its assurance team has extensive
experience in conducting verification over environmental, social, ethical
and health and safety information, systems and processes.
Bureau Veritas operates a certified
1
Quality Management System which
complies with the requirements of ISO 9001:2015, and accordingly maintains
a comprehensive system of quality control including documented policies
and procedures regarding compliance with ethical requirements,
professional standards, quality reviews and applicable legal and regulatory
requirements which we consider to be equivalent to ISQM 1 & 2
2
�
Bureau Veritas has implemented and applies a Code of Ethics, which meets
the requirements of the International Federation of Inspections Agencies
(IFIA)
3
, across the business to ensure that its employees maintain integrity,
objectivity, professional competence and due care, confidentiality,
professional behaviour and high ethical standards in their day-to-day
business activities. We consider this to be equivalent to the requirements
of the IESBA code
4
. The assurance team for this work does not have any
involvement in any other Bureau Veritas projects with Rolls-Royce.
Bureau Veritas UK Limited
Registered in England & Wales, Company Number: 1758622
Registered Office: Suite 206 Fort Dunlop, Fort Parkway,
Birmingham, B24 9FD
London, 13 February 2024
1 Certificate available on request
2 International Standard on Quality Management 1 (Previously International Standard on
Quality Control 1) & International Standard on Quality Management 2
3 International Federation of Inspection Agencies – Compliance Code – Third Edition
4 Code of Ethics for Professional Accountants issued by the International Ethics Standards
Board for Accountants
209
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
Sustainability assurance statement
In 2023, our total gross Scope 1 + 2 greenhouse gas (GHG) emissions were 328,277 tonnes of carbon dioxide equivalent (tCO
2
e). This represents
a decrease of 14% compared with 381,530 tCO
2
e in 2022�
Aspect tCO
2
e 2019 2020 2021 2022 2023
Emissions from activities for which the
Company own or control including the
combustion of fuel and operation of
facilities. [Direct GHG Emissions (Scope 1)]
Global
(excluding UK)
154,353 150,169 146,666 129,705 109,257
UK 90,540 84,684 72,689 101,389 72,346
Emissions from the purchase of electricity,
heat, steam and cooling purchased for our
own use. [Indirect GHG Emissions (Scope 2)
location-based]
Global
(excluding UK)
120,836 98,816 101,916 97,682 88,504
UK 80,469 60,945 53,608 52,754 58,170
Total gross GHG emissions Global
(excluding UK)
275,189 248,985 248,582 227,387 197,761
UK 171,009 145,629 126,297 154,143 130,516
Energy consumption used to calculate above
emissions – kWh
Global
(excluding UK)
1,045,900,361 950,440,181 915,918,407 853,562,740 766,756,722
UK 740,382,626 656,739,567 591,579,063 733,201,790 631,964,645
Intensity Ratio (total GHG emissions per £m
revenue)
Total 27�9 34�3 33�4 28�3 19.9
Emissions from the purchase of electricity,
heat, steam and cooling purchased for our
own use. [Indirect GHG Emissions (Scope 2)
market-based]
Global
(excluding UK)
303 2,023 203 4,294 751
UK 1,707 1,900 1,830 1,033 1,326
Outside of Scopes Global
(excluding UK)
– – – – –
UK 20,743 45,213 23,614 2,802 2,960
Additional supporting information
Electricity purchased from renewable
sources – kWh
Global
(including UK)
245,314,593 304,067,206 297,013,845 306,978,404 307,898,844
Energy generated on-site from renewable
sources – kWh
Global
(including UK)
7,517,844 7,401,115 3,350,779 9,209,251 13,849,461
The above figures include 307,898,844 kWh of renewable energy
purchases either backed by the Renewable Energy Guarantees of
Origin (REGO) scheme in the UK or the Guarantees of Origin (GoO)
from a relevant EU Member State. This energy is used by the majority
of our facilities in the UK and Germany. The source in the UK includes
a proportion of electricity that was generated by the combustion of
biofuel. The associated emissions are included above under the location
based Scope 2 emissions (using grid average emission factors). They
are also reported separately as market-based Scope 2 emissions
(covering the emissions of nitrous oxide and methane) and Outside of
Scopes (covering the emissions of carbon dioxide). In addition, the
above figures include 13,849,461 kWh of electricity and heat generated
on-site from renewable energy sources, including solar panels and
ground source heat pumps.
We include the reporting of fugitive emissions of hydrofluorocarbons
(HFCs), associated with air conditioning equipment, into our GHG
emissions figures. These include emissions from our facilities in the US
and Canada only. We do not anticipate that emissions from other
facilities will have a significant impact on the above figures.
With the exceptions noted above, we have reported on the underlying
energy use and emission sources required under the Companies
(Directors’ Report) and Limited Liability Partnerships (Energy and
Carbon Report) Regulations 2018. In accordance with these regulations,
the above statement excludes emissions associated with the ITP Aero
business, sold on 15 September 2022. Historical data has been restated
to reflect this. All these sources fall within the scope of our Consolidated
Financial Statements�
We have used the GHG Protocol Corporate Accounting and Reporting
Standard (revised edition) as of 31 December 2014 utilising the
operational control approach, supplemented by the GHG Reporting
Guidance for the Aerospace Industry (version 3) and emission factors
from the UK Government’s GHG Conversion Factors for Company
Reporting 2023. We report our emissions of: carbon dioxide; methane;
nitrous oxide; hydrofluorocarbons and perfluorocarbons on a carbon
dioxide equivalent basis. We had no emissions of sulphur hexafluoride
or nitrogen trioxide.
Further details on our methodology for reporting and the criteria
used can be found within our basis of reporting, available to download
at www.rolls-royce.com
210
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Greenhouse gas emissions
Foreign exchange
Foreign exchange rate movements influence the reported income
statement, the cash flow and closing net debt balance. The average
and spot rates for the principal trading currencies of the Group are
shown in the table below:
2023 2022 Change
USD per GBP Year-end spot rate 1.27 1�20 +6%
Average spot rate 1.24 1�24 0%
EUR per GBP Year-end spot rate 1.15 1�13 +2%
Average spot rate 1.15 1�17 -2%
The Group’s global corporate income tax contribution
The Group’s total corporation tax payments in 2023 were £172m. Around
90% of this was paid in the US, Germany, Singapore and Canada.
Together with the UK, the operations in these countries are where the
majority of the Group’s business is undertaken and employees are
based. Although the UK group was profitable in 2023, UK tax payments
were not material due to the availability of losses and other tax reliefs
which have been brought forward from loss making years. The balance
of tax payments were made in around 40 other countries.
In common with most multinational groups, the total of all profits and
losses for corporate income tax purposes is not the same as the
consolidated loss before taxation reported on page 114.
The main reasons for this are:
(i)
the consolidated income statement is prepared under IFRS, whereas
the corporate income tax profits and losses for each company are
determined by local tax accounting rules;
(ii) accounting rules require certain income and costs relating to our
commercial activities to be eliminated from, or added to, the
aggregate of all the profits of the Group companies when
preparing the consolidated income statement (consolidation
adjustments); and
(iii)
specific tax rules including exemptions or incentives as determined
by the tax laws in each country.
In most cases, paragraphs (i) and (ii) above are only a matter of timing
and therefore tax will be paid in an earlier or later year. The impact of
paragraph (iii) above will often be permanent, depending on the
relevant tax law. Further information on the tax position of the Group
can be found as follows:
—
Audit Committee Report (page 80) – updates given to the Audit
Committee during the year;
— note 1 to the Consolidated Financial Statements (page 122) – details
of key areas of uncertainty and accounting policies for tax;
— note 5 to the Consolidated Financial Statements (pages 145 to 148);
and
— Details of the tax balances in the Consolidated Financial Statements
together with a tax reconciliation. This explains the main drivers of
the tax rate and the impact of our assessment on the recovery of UK
deferred tax assets.
Information on the approach to managing the Group’s tax affairs can
be found at www.rolls-royce.com
Investments and capital expenditure
The Group subjects all major investments and capital expenditure to a
rigorous examination of risks and future cash flows. Investments and
capital expenditure must align to the Group’s strategy and create
shareholder value. All major investments, including the launch of major
programmes, require Board approval.
The Group has a portfolio of projects at different stages of their
lifecycles. All of our major investments and projects are assessed using
a range of financial metrics, including discounted cash flow and return
on investment.
Financial risk management
The Board has established a structured approach to financial risk
management. The Financial risk committee (Frc) is accountable for
managing, reporting and mitigating the Group’s financial risks and
exposures. These risks include the Group’s principal counterparty,
currency, interest rate, commodity price, liquidity and credit rating
risks outlined in more depth in note 20. The Frc is chaired by the Chief
Financial Officer. The Group has a comprehensive financial risk policy
that advocates the use of financial instruments to manage and hedge
business operations risks that arise from movements in financial,
commodities, credit or money markets. The Group’s policy is not to
engage in speculative financial transactions. The Frc sits quarterly to
review and assess the key risks and agree any mitigating actions required.
Capital structure
£m 2023 2022
Total equity (3,629) (6,016)
Cash flow hedges (12) (26)
Group capital (3,641) (6,042)
Net debt (1,952) (3,251)
Operations are funded through various shareholders’ funds, bank
borrowings, bonds and notes. The capital structure of the Group reflects
the judgement of the Board as to the appropriate balance of funding
required. Funding is secured by the Group’s continued access to the
global debt markets. Borrowings are funded in various currencies using
derivatives where appropriate to achieve a required currency and
interest rate profile. The Board’s objective is to retain sufficient
financial investments and undrawn facilities to ensure that the Group
can both meet its medium-term operational commitments and cope
with unforeseen obligations and opportunities.
The Group holds cash and short-term investments which, together with
the undrawn committed facilities, enable it to manage its liquidity risk.
211
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
Other financial information
During the year to 31 December 2023, the Group cancelled its undrawn
£1bn bank loan facility, which was due to mature in January 2024 and
its undrawn UKEF £1bn facility, which was due to mature in March 2026.
These facilities had remained undrawn during the year. In addition, the
Group replaced the £2,500m committed bank borrowing facility with
a new £2,500m facility with a maturity date of November 2026 with the
banks having the option to extend with two one-year extension options
(3+1+1).
At the year end, the Group retained aggregate liquidity of £7.2bn,
including cash and cash equivalents of £3.7bn and undrawn borrowing
facilities of £3.5bn.
The Group has one material debt maturity in 2024. The maturity profile
of the borrowing facilities is regularly reviewed to ensure that
refinancing levels are manageable in the context of the business and
market conditions. There are no rating triggers in any borrowing
facility that would require the facility to be accelerated or repaid due
to an adverse movement in the Group’s credit rating. The Group
conducts some of its business through a number of joint ventures. A
major proportion of the debt of these joint ventures is secured on the
assets of the respective companies and is non-recourse to the Group.
This debt is further outlined in note 17.
Credit rating
£m Rating Outlook
Moody’s Investors Service Ba2 Positive
Standard & Poor’s BB+ Positive
Fitch BB+ Positive
The Group subscribes to Moody’s, Standard & Poor’s and Fitch for
independent long-term credit ratings with the ratings in the table above
being applicable at the date of this report.
Accounting
The Consolidated Financial Statements have been prepared in
accordance with IFRS, as adopted by the UK.
During the year, the Group adopted IFRS 17 described on page 125. The
Group identified that the Standard will impact the results of its captive
insurance company as it issues insurance contracts, however, since the
contracts insure other group companies, there is no material impact on
the Consolidated Financial Statements. The Group also concluded that
its parent company guarantee arrangements in the form of financial or
performance guarantees, that meet the IFRS 17 definition of insurance
contracts, have no impact on the Consolidated Financial Statements of
the Group for the year to 31 December 2023.
There are no other new standards or interpretations issued by the IASB
that had a significant impact on the Consolidated Financial Statements.
Following a review which was prompted by an enquiry arising from a
review of the Group’s 2022 Annual Report and Accounts by the
Corporate Reporting Review team of the Financial Reporting Council
(FRC), cash flows on settlement of excess derivatives have been
reclassified from cash flows from financing activities to cash flows from
operating activities in the cash flow statement as a result of a change
in accounting policy as at 31 December 2023.
The previous classification as cash flows from financing activities was
based on the Directors judgement of the economic nature of the
activities as the cash flows relate to cash payments deferred in
connection with the Group’s action to reduce the size of the USD hedge
book by $11.8bn across 2020-2026 in 2021. The Directors have
reassessed their judgement in line with IAS 7 Statement of Cash Flows
and have concluded that it would be more appropriate to classify these
cash flows as cash flows from operating activities.
As a result of the above, cash flows from operating activities during the
year to 31 December 2022 have reduced by £(326)m to £1,524m with a
corresponding decrease in cash outflows from financing activities from
£(2,866)m to £(2,540)m. There is no impact to the total change in cash
and cash equivalents or to any alternative performance measures.
The Group does not consider that any standards, amendments or
interpretations issued by the IASB, but not yet applicable will have a
significant impact on the Consolidated Financial Statements in 2024.
212
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER FINANCIAL INFORMATION
Alternative performance measures (APMs)
Business performance is reviewed and managed on an underlying basis. These alternative performance measures reflect the economic substance
of trading in the year. In addition, a number of other APMs are utilised to measure and monitor the Group’s performance.
Definitions and reconciliations to the relevant statutory measure are included below. All comparative periods relate to 31 December 2022.
Underlying results from continuing operations
Underlying results are presented by recording all relevant revenue and cost of sales transactions at the average exchange rate achieved on
effective settled derivative contracts in the period that the cash flow occurs. Underlying results also exclude: the effect of acquisition
accounting and business disposals, impairment of goodwill and other non-current assets where the reasons for the impairment are outside of
normal operating activities, exceptional items and certain other items which are market driven and outside of managements control. Statutory
results have been adjusted for discontinued operations and underlying results from continuing operations have been presented on the same
basis. Further detail can be found in note 2 and note 27.
2023
£m
2022
£m
Revenue from continuing operations
Statutory revenue 16,486 13,520
Derivative and FX adjustments (1,077) (829)
Underlying revenue 15,409 12,691
Gross profit from continuing operations
Statutory gross profit 3,620 2,757
Derivative and FX adjustments (461) (262)
Programme exceptional credits (21) (69)
Exceptional transformation and restructuring charges 55 8
Acquisition accounting and M&A 46 53
Impairments (8) (10)
Underlying gross profit 3,231 2,477
Commercial and administrative costs from continuing operations
Statutory commercial and administrative (C&A) costs (1,110) (1,077)
Derivative and FX adjustments 1 (2)
Exceptional transformation and restructuring charges 47 39
Other underlying adjustments (2) (22)
Underlying C&A Costs (1,064) (1,062)
Research and development costs from continuing operations
Statutory research and development (R&D) costs (739) (891)
Derivative and FX adjustments (4) –
Acquisition accounting 4 5
Underlying R&D costs (739) (886)
Operating profit from continuing operations
Statutory operating profit 1,944 837
Derivative and FX adjustments (475) (264)
Programme exceptional credits (21) (69)
Exceptional transformation and restructuring charges 102 47
Acquisition accounting and M&A 50 58
Impairments (8) 65
Other underlying adjustments (2) (22)
Underlying operating profit 1,590 652
Underlying operating margin 10.3% 5.1%
2023
pence
2022
pence
Basic EPS from continuing operations
Statutory basic EPS 28.85 (14.24)
Effect of underlying adjustments to profit/(loss) before tax (13.94) 20�45
Relate tax effects (1.16) (4.26)
Basic underlying EPS 13.75 1�95
213
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
Reconciliation of alternative performance measures
Underlying results from discontinued operations
2023
£m
2022
£m
Results from discontinued operations
Profit for the year from ordinary activities – 68
Loss on disposal of discontinued operations – (148)
Statutory operating loss – (80)
Acquisition accounting and M&A – 179
Derivative and FX adjustments – (1)
Related tax effects – (31)
Underlying operating profit – 67
Organic change
Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. The movement in
underlying change to organic change is reconciled below.
All amounts below and on the following page are shown on an underlying basis and reconciled to the nearest statutory measure above.
Total Group income statement
2023
£m
2022
£m
Change
£m
FX
£m
Organic
change
£m
Organic
change
%
Underlying revenue 15,409 12,691 2,718 88 2,630 21%
Underlying gross profit 3,231 2,477 754 22 732 30%
Underlying operating profit 1,590 652 938 5 933 143%
Net financing costs (328) (446) 118 – 118 (26)%
Underlying profit before taxation 1,262 206 1,056 5 1,051 –
Taxation (120) (48) (72) (1) (71) –
Underlying profit for the year (continuing operations) 1,142 158 984 4 980 –
Civil Aerospace
2023
£m
2022
£m
Change
£m
FX
£m
Organic
change
£m
Organic
change
%
Underlying revenue 7,348 5,686 1,662 17 1,645 29%
Underlying OE revenue 2,703 1,982 721 15 706 36%
Underlying services revenue 4,645 3,704 941 2 939 25%
Underlying gross profit 1,394 853 541 1 540 63%
Commercial and administrative costs (354) (371) 17 (1) 18 (5)%
Research and development costs (343) (452) 109 (3) 112 (25)%
Joint ventures and associates 153 113 40 – 40 35%
Underlying operating profit 850 143 707 (3) 710 –
Defence
2023
£m
2022
£m
Change
£m
FX
£m
Organic
change
£m
Organic
change
%
Underlying revenue 4,077 3,660 417 (11) 428 12%
Underlying OE revenue 1,766 1,634 132 (4) 136 8%
Underlying services revenue 2,311 2,026 285 (7) 292 14%
Underlying gross profit 804 726 78 – 78 11%
Commercial and administrative costs (173) (174) 1 (1) 2 (1)%
Research and development costs (72) (122) 50 1 49 (40)%
Joint ventures and associates 3 2 1 – 1 50%
Underlying operating profit 562 432 130 – 130 30%
214
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES
Power Systems
2023
£m
2022
£m
Change
£m
FX
£m
Organic
change
£m
Organic
change
%
Underlying revenue 3,968 3,347 621 82 539 16%
Underlying OE revenue 2,661 2,187 474 55 419 19%
Underlying services revenue 1,307 1,160 147 27 120 10%
Underlying gross profit 1,050 918 132 21 111 12%
Commercial and administrative costs (456) (441) (15) (8) (7) 2%
Research and development costs (187) (204) 17 (4) 21 (10)%
Joint ventures and associates 6 8 (2) – (2) (25)%
Underlying operating profit 413 281 132 9 123 44%
New Markets
2023
£m
2022
£m
Change
£m
FX
£m
Organic
change
£m
Organic
change
%
Underlying revenue 4 3 1 – 1 33%
Underlying OE revenue 2 1 1 – 1 100%
Underlying services revenue 2 2 – – – –
Underlying gross profit/(loss) 1 (1) 2 – 2 –
Commercial and administrative costs (24) (23) (1) – (1) 4%
Research and development costs (137) (108) (29) (2) (27) 25%
Joint ventures and associates – – – – – –
Underlying operating loss (160) (132) (28) (2) (26) 20%
Trading cash flow
Trading cash flow is defined as free cash flow (on page 216) before the deduction of recurring tax and post-employment benefit expenses.
Trading cash flow per segment is used as a measure of business performance for the relevant segments.
2023
£m
2022
£m
Civil Aerospace 626 226
Defence 511 426
Power Systems 461 158
New Markets (63) (57)
Total reportable segments trading cash flow 1,535 753
Other businesses 5 5
Central and inter-segment (57) (49)
Trading cash flow from continuing operations 1,483 709
Discontinued operations – (12)
Trading cash flow 1,483 697
Underlying operating profit charge exceeded by contributions to defined benefit schemes (26) (32)
Tax
1
(172) (174)
Free cash flow 1,285 491
1 See page 117 for tax paid in the statutory cash flow statement
215
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES
Free cash flow
Free cash flow is a measure of the financial performance of the businesses’ cash flow which is consistent with the way in which performance is
communicated to the Board. Free cash flow is defined as cash flows from operating activities, including capital expenditure and movements in
investments, capital elements of lease payments, interest paid, amounts paid relating to the settlement of excess derivatives, and excluding
amounts spent or received on activity related to business acquisitions or disposals and other material exceptional or one-off cash flows. Free
cash flow from continuing operations has been presented to remove free cash flow from discontinued operations as defined in note 27. For
further detail, see note 28.
Free cash flow from cash flows from operating activities
2023
£m
2022
£m
Statutory cash flows from operating activities
1
2,485 1,524
Capital expenditure (699) (540)
Investment (including investment from NCI and movement in joint ventures, associates and other investments) 69 28
Capital element of lease payments (291) (218)
Interest paid (333) (352)
Exceptional transformation and restructuring costs 69 76
M&A costs 2 2
Other (17) (29)
Free cash flow 1,285 491
Discontinued operations free cash flow
2
– 14
Free cash flow from continuing operations 1,285 505
1 Statutory cash flows from operating activities at 31 December 2022 has been re-presented. See note 1
2 Discontinued operations free cash flow excludes: transactions with parent company of £nil (2022: £(65)m), movements in borrowings of £nil (2022: £22m), exceptional restructuring costs
of £nil (2022: £nil), M&A costs of £nil (2022: £44m) and other of £nil (2022: £(6)m)
Group R&D expenditure
In year gross cash expenditure on R&D excludes contributions and fees, amortisation and impairment of capitalised costs and amounts capitalised
during the year. For further detail, see note 3.
Gross capital expenditure
Gross capital expenditure during the year, excluding capital expenditure from discontinued operations. All proposed investments are subject to
rigorous review to ensure that they are consistent with forecast activity and provide value for money. The Group measures annual capital
expenditure as the cash purchases of PPE acquired during the year.
2023
£m
2022
£m
Purchases of PPE (cash flow statement) 429 359
Less: capital expenditure from discontinued operations – (14)
Net capital expenditure 429 345
216
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES
Key performance indicators
The following measures are key performance indicators and are calculated using alternative performance measures or statutory results. Seebelow
for calculation of these amounts.
All comparative periods relate to 31 December 2022, unless otherwise stated.
Order backlog
Order backlog, also known as unrecognised revenue, is the amount of revenue on current contracts that is expected to be recognised in future
periods. Civil Aerospace OE orders, where the customer has retained the right to cancel (for deliveries in the next seven to 12 months), are
excluded. Further details are included in note 2 of the Consolidated Financial Statements.
Adjusted return on capital (abbreviated to return on capital)
Return on capital is defined as net operating profit after tax (NOPAT) as a percentage of average invested capital. NOPAT is defined as
underlying net profit excluding net finance costs and the tax shield on net finance costs. Invested capital is defined as current and non-current
assets less current liabilities. It excludes pension assets, cash and cash equivalents, and borrowings and lease liabilities. Return on capital assesses
the efficiency in allocating capital to profitable investments.
2023
£m
2022
£m
Underlying operating profit 1,590 652
Less: taxation
1
(151) (48)
Underlying operating profit (post-taxation) 1,439 604
Total assets 31,512 29,450
Less: post-retirement schemes surpluses (782) (613)
Less: cash and cash equivalents (3,784) (2,607)
Current liabilities (14,926) (13,918)
Liabilities held for sale
(55) –
Less: borrowings and lease liabilities 809 358
Invested capital (closing) 12,774 12,670
Invested capital (average) 12,722 12,334
Return on capital 11.3% 4.9%
1 Excluding underlying taxation on underlying finance income/(costs) of £31m (2022: £nil)
Total underlying cash costs as a proportion of underlying gross margin (abbreviated to TCC/GM)
Total underlying cash costs during the year (represented by underlying research and development (R&D) expenditure and underlying
commercial and administrative (C&A) costs) as a proportion of underlying gross profit. This measure provides an indicator of total cash costs
relative to gross profit. A reduction in total cash costs relative to gross profit indicates how effective the business is at managing and/or
reducing its costs.
2023
£m
2022
£m
Underlying R&D expenditure
1
836 928
Underlying C&A 1,064 1,062
Total cash costs 1,900 1,990
Underlying gross profit 3,231 2,477
Total cash costs as a proportion of underlying gross profit 0.59 0�80
1 Excludes £6m (2022: £nil) impact of derivative and FX adjustments
217
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
RECONCILIATION OF ALTERNATIVE PERFORMANCE MEASURES
Index
Accounting policies ������������������������������������������������������������������������������������122
Agreements for compensation for loss of office �������������������������������� 103
Authority to issue and purchase shares �������������������������������������������������219
Board of Directors ����������������������������������������������������������������������������������������� 70
Change of control �������������������������������������������������������������������������������������������� 219
Changes to the Articles of Association �������������������������������������������������219
Corporate governance statement ���������������������������������������������������������������������65
Directors’ conflicts of interest ���������������������������������������������������������������������� 79
Directors’ indemnities ������������������������������������������������������������������������������218
Directors’ service contracts and letters of appointment ��������������� 105
Directors’ share interests ����������������������������������������������������������� 104 and 110
Disclosure of information to auditors ��������������������������������������������������������112
Engagement with employees ���������������������������������������������������������������������60
Engagement with suppliers, customers and others
in a business relationship with the Company ��������������������������������������� 60
Employment of disabled people ��������������������������������������������������������������47
Financial instruments and risk management ���������������������������������������163
Future developments ����������������������������������4 to 15, 18 to 31 and 32 to 43
Greenhouse gas emissions ��������������������������������������������������������������������������� 210
Major shareholdings ������������������������������������������������������������������������������������219
Political donations ��������������������������������������������������������������������������������������� 220
Post-balance sheet events ������������������������������������������������������������������������� 136
Purchase of own shares ������������������������������������������������������������������������������ 219
Related party transactions ��������������������������������������������������������������������������182
Research and development ������������������������������������������������������������������������� 144
Share capital and rights ����������������������������������������������������������������������������������218
Subsidiaries, joint ventures and associates ������������������������������������������� 190
Task force on climate-related financial disclosures ��������������������������� 35
Board of Directors
The Directors of the Company who were in office during the year and
up to the date of signing the financial statements were Dame Anita
Frew, Tufan Erginbilgic, Helen McCabe, Birgit Behrendt, Stuart Bradie,
Paulo Cesar Silva, George Culmer, Lord Jitesh Gadhia, Beverly Goulet,
Nick Luff, Wendy Mars and Dame Angela Strank. In addition, Paul Adams,
Panos Kakoullis, Mike Manley and Sir Kevin Smith served as Directors
during the year, before stepping down from the Board. Their respective
resignation dates can be found on page 18.
Directors’ indemnities
The Directors have the benefit of an indemnity provision contained in
the Articles. In addition, the Directors have been granted a qualifying
third-party indemnity provision which was in force throughout the
financial year and remains in force. Also, throughout the year, the
Company purchased and maintained directors’ and officers’ liability
insurance in respect of the Company and its subsidiaries and for their
directors and officers.
Share price
During the year, the share price increased by 227% from 92p to 300p,
compared to a 67% increase in the FTSE aerospace and defence
sector and a 3% increase in the FTSE 100. The Company’s share price
ranged from 91p in January 2023 to 313p in December 2023.
Share capital
On 31 December 2023, the Company’s issued share capital comprised:
8,416,696,989 Ordinary Shares 20p each
23,152,464,515 C Shares 0�1p each
1 Special Share £1
The ordinary shares are listed on the London Stock Exchange.
The Company issues non-cumulative redeemable preference shares
(C Shares) as an alternative to paying a cash dividend. Further
information on payments to shareholders is on page 221.
Share class rights
The full share class rights are set out in the Company’s Articles, which
are available at www.rolls-royce.com. The rights are summarised below.
Ordinary Shares
Each member has one vote for each Ordinary Share held. Holders of
Ordinary Shares are entitled to: receive the Company’s Annual Report;
attend and speak at general meetings of the Company; appoint one or
more proxies or, if they are corporations, corporate representatives;
and exercise voting rights. Holders of Ordinary Shares may receive a
bonus issue of C Shares or a dividend and on liquidation may share in
the assets of the Company.
C Shares
C Shares have limited voting rights and attract a preferential dividend,
paid on a twice-yearly basis. On a return of capital on a winding-up,
the holders of C Shares shall be entitled, in priority to any payment to
the holders of Ordinary Shares, to the repayment of the nominal
capital paid-up or credited as paid-up on the C Shares held by them,
together with a sum equal to the outstanding preferential dividend
which will have been accrued but not paid until the date of return of
capital. The holders of C Shares are only entitled to attend, speak and
vote at a general meeting if a resolution to wind up the Company is to
be considered, in which case they may vote only on that resolution.
The Company has the option to redeem the C Shares compulsorily, at
any time if: the aggregate number of C Shares in issue is less than 10%
of the aggregate number of all C Shares issued on or prior to that time
or the event of a capital restructuring of the Company; the introduction
of a new holding company; the acquisition of the Company by another
company; or a demerger from the Group.
Special Share
Certain rights attach to the special rights non-voting share (Special
Share) issued to the UK Secretary of State for the Department of
Business and Trade (Special Shareholder). These rights are set out in
the Articles. Subject to the provisions of the Companies Act 2006 (the
Act), the Treasury Solicitor may redeem the Special Share at par value
at any time. The Special Share confers no rights to dividends but, in the
event of a winding-up, it shall be repaid at its nominal value in priority
to any other shares.
Certain provisions of the Articles (in particular those relating to the
foreign shareholding limit, disposals and the nationality of the
Company’s Directors) that relate to the rights attached to the Special
Share may only be altered with the consent of the Special Shareholder.
The Special Shareholder is not entitled to vote at any general meeting
or any other meeting of any class of shareholders.
218
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
Directors’ report
Restrictions on transfer of shares and limitations on holdings
There are no restrictions on transfer or limitations on the holding of
the Ordinary Shares or C Shares other than under the Articles (as
described here), under restrictions imposed by law or regulation (for
example, UK Market Abuse Regulations) or pursuant to the Company’s
inside information and share dealing policy. The Articles provide that
the Company should be and remain under UK control. As such, an
individual foreign shareholding limit is set at 15% of the aggregate votes
attaching to the share capital of all classes (taken as a whole) and
capable of being cast on a poll and to all other shares that the Directors
determine are to be included in the calculation of that holding. The
Special Share may only be issued to, held by and transferred to the
Special Shareholder or their successor or nominee.
Shareholder agreements and consent requirements
No disposal may be made to a non-Group member which, alone or when
aggregated with the same or a connected transaction, constitutes a
disposal of the whole or a material part of either the nuclear propulsion
business or the assets of the Group as a whole, without the consent of
the Special Shareholder.
Authority to issue shares
At the 2023 AGM, an ordinary resolution was passed authorising the
Directors to allot new ordinary shares up to a nominal value of
£557,839,799, equivalent to one-third of the issued share capital of the
Company. This resolution also authorised the Directors to allot up to
two-thirds of the total issued share capital of the Company, although
only in the case of a rights issue. A further special resolution was passed
to effect a disapplication of pre-emption rights for a maximum of 5%
of the issued share capital of the Company. These authorities are valid
until the 2024 AGM or 30 June 2024, whichever is sooner. During the
year, 49,100,000 ordinary shares were issued to the Employee Benefit
Trust to satisfy awards under the Company’s share plans. The Directors
propose to renew each of these authorities at the 2024 AGM to be held
on 23 May 2024. The Board believes that these authorities will allow
the Company to retain flexibility to respond to circumstances and
opportunities as they arise.
Authority to purchase own shares
At the 2023 AGM, the Company was authorised by shareholders to
purchase up to 836,759,698 of its own ordinary shares, representing
10% of its issued ordinary share capital.
The authority for the Company to purchase its own shares expires at
the conclusion of the 2024 AGM or 30 June 2024, whichever is sooner.
A resolution to renew the authority will be proposed at the
2024 meeting.
The Company did not purchase any of its own ordinary shares under
this authority during 2023.
Deadlines for exercising voting rights
Electronic and paper proxy appointments, together with voting
instructions, must be received by the Registrar not less than 48 hours
before a general meeting.
Voting rights for employee share plan shares
Shares are held in an employee benefit trust for the purpose of
satisfying awards made under the various employee share plans. For
shares held in a nominee capacity or if plan/trust rules provide the
participant with the right to vote in respect of specifically allocated
shares, the trustee votes in line with the participants’ instructions. For
shares that are not held absolutely on behalf of specific individuals, the
general policy of the trustees, in accordance with investor protection
guidelines, is to abstain from voting in respect of those shares.
Major shareholdings
At 31 December 2023, the following shareholders had notified an
interest in the issued ordinary share capital of the Company in
accordance with section 5.1.2 of the Disclosure and Transparency Rules.
No notifications have been received in the period 1 January to
22February 2024.
Shareholder
Date of change
in interest
% of issued
ordinary
share capital
Blackrock, Inc. 18 December 2023 5�01
Causeway Capital
Management LLC 29 September 2023 4�99
Harris Associates L.P. 16 November 2020 4�99
Massachusetts Financial
Services Company 28 March 2022 4�94
The Capital Group
Companies, Inc. 3 February 2022 4�98
Changes to the Articles of Association
The Articles may be amended or new articles may be adopted by a
special resolution of the Company’s shareholders, subject to the
provisions of the Act. The Company will propose certain changes to
the Articles at the 2024 AGM, full details of which can be found in the
Notice of Meeting available at www.rolls-royce.com
Change of control
Contracts and joint venture agreements
There are a number of contracts and joint venture agreements which
would allow the counterparties to terminate or alter those arrangements
in the event of a change of control of the Company. These arrangements
are commercially confidential and their disclosure could be seriously
prejudicial to the Company.
Borrowings and other financial instruments
The Group has several borrowing facilities provided by various banks.
These facilities generally include provisions which may require any
outstanding borrowings to be repaid or the alteration or termination
of the facility upon the occurrence of a change of control of the
Company. At 31 December 2023, these facilities were 36% drawn
(2022:27%).
The Group has entered into a series of financial instruments to hedge
its currency, interest rate and commodity exposures. These contracts
provide for termination or alteration in the event that a change of
control of the Company materially weakens the creditworthiness of
theGroup.
Employee share plans
In the event of a change of control of the Company, the effect on the
employee share plans would be as follows:
—
Incentive Plan – deferred share awards will normally vest immediately,
and may be time pro-rated. The new controlling company might offer
an award in exchange instead (normally on substantially equivalent
terms to the existing award).
—
ShareSave – options would become exercisable immediately. The
new controlling company might offer an equivalent option in exchange
for cancellation of the existing option.
—
Share Purchase Plan (SPP) – consideration received as shares would
be held within the SPP, if possible, otherwise the consideration would
be treated as a disposal from the SPP.
—
LTIP – awards would vest on the change of control, subject to the
Remuneration Committee’s judgement of performance and may be
reduced pro rata to service in the vesting period. Any applicable
holding period will cease in the event of a change of control.
219
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
DIRECTORS’ REPORT
Political donations
The Company’s policy is that it does not, directly or through any
subsidiary, make what are commonly regarded as donations to any
political party. However, the Act defines political donations very broadly
and so it is possible that normal business activities, such as sponsorship,
subscriptions, payment of expenses, paid leave for employees fulfilling
certain public duties and support for bodies representing the business
community in policy review or reform, which might not be thought of
as political expenditure in the usual sense, could be captured. Activities
of this nature would not be thought of as political donations in the
ordinary sense of those words. The resolution to be proposed at the
2024 AGM, authorising political donations and expenditure, is to ensure
that the Group does not commit any technical breach of the Act.
During the year, expenses incurred by Rolls-Royce North America, Inc.
in providing administrative support for the Rolls-Royce North America
political action committee (PAC) was $60,584.71 (2022: $59,169.05).
PACs are a common feature of the US political system and are governed
by the Federal Election Campaign Act.
The PAC is independent of the Group and independent of any political
party. The PAC funds are contributed voluntarily by employees and the
Group cannot affect how they are applied, although under US law, the
business expenses are paid by the employee’s company. Such
contributions do not count towards the limits for political donations
and expenditure for which shareholder approval will be sought at the
2024 AGM to renew the authority given at the 2023 AGM.
Disclosures required under Listing Rule 9.8.6 as at 31 December 2023
Gender identity
Number of
Board
members
Percentage
of the
Board
Number of
senior positions
on the Board
Number in
executive
management
Percentage of
executive
management
Men 6 50% Chief Executive, SID 7 70%
Women 6 50% Chair, Chief Financial
Officer
3 30%
Other categories – – – – –
Not specified/prefer not to say – – – – –
Ethnic background
Number of
Board
members
Percentage
of the
Board
Number of
senior positions
on the Board
Number in
executive
management
Percentage of
executive
management
White British or other White (including
minority-white groups)
11 92% Chair, Chief Executive
Chief Financial Officer,
SID
10 100%
Mixed/multiple ethnic groups – – – – –
Asian/Asian British 1 8% – – –
Black/African/Caribbean/Black British – – – – –
Other ethnic group, including Arab – – – – –
Not specified/prefer not to say – – – – –
Disclosures in the Strategic Report
The Board has taken advantage of section 414C(11) of the Act to include
disclosures in the Strategic Report including:
— employee involvement;
— the employment of disabled people;
—
the future development, performance and position of the
Group; and
— research and development activities.
Information required by UK Listing Rule (LR) 9.8.4
There are no disclosures to be made under LR 9.8.4.
Management report
The Strategic Report and the Directors’ Report together are the
management report for the purposes of Rule 4.1.8R of the DTR.
By order of the Board
Pamela Coles
Chief Governance Officer
22 February 2024
220
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
DIRECTORS’ REPORT
Managing your shareholding
Your shareholding is managed by Equiniti Limited (the Registrar). When
making contact with the Registrar, please quote your shareholder
reference number (SRN). This is an 11-digit number that can be found
on your share certificate or on any other shareholder correspondence.
You can manage your shareholding at www.shareview.co.uk, speak to
the Registrar on +44 (0)371 384 2637 (8.30am to 5.30pm, Monday to
Friday) or you can write to the Registrar at Equiniti, Aspect House,
Spencer Road, Lancing, West Sussex BN99 6DA. If you hold your shares
in a share dealing account (sometimes referred to as a nominee account)
then you must contact your account provider with any questions about
your shareholding.
Payments to shareholders
The Company makes payments to shareholders by issuing redeemable
C Shares of 0.1p each. You can redeem C Shares for cash and either
take the cash or reinvest the proceeds in the C Share Reinvestment
Plan (CRIP) to purchase additional Ordinary Shares providing you
complete a payment instruction form, which is available from the
Registrar. Once you have submitted your payment instruction form,
you will receive cash or additional Ordinary Shares each time the
Company issues C Shares. If you choose to receive cash, we strongly
recommend that you include your bank details on the payment
instruction form and have payments credited directly to your bank
account. This removes the risk of a cheque going astray and means that
cleared payments will be credited to your bank account on the
payment date.
As set out in further detail elsewhere (see page 19), our capital
framework is focused on three clear priorities: a strong balance sheet
with an investment grade profile; a commitment to reinstating and
growing shareholder returns; and a disciplined approach to investments.
Strengthening the balance sheet is a clear priority. We are positioning
Rolls-Royce to withstand better volatility and external shocks and to
give us financial flexibility for the future. When the Board is confident
that the strength of the balance sheet is assured and we are
comfortably within an investment grade profile, we are committed to
reinstating and growing shareholder distributions.
Shareholders wishing to redeem their existing C Shares, or participate
in the CRIP must lodge instructions with the Registrar to arrive no later
than 5.00pm on 31 May 2024 (CREST holders must submit their election
in CREST by 2.55pm). The payment of C Share redemption monies will
be made on 4 July 2024 and the CRIP purchase will begin as soon as
practicable after 5 July 2024.
Share dealing
The Registrar offers ordinary shareholders an internet dealing service
at www.shareview.co.uk and a postal dealing service. Real-time dealing
is available during market hours, 8.00am to 4.30pm, Monday to Friday
excluding bank holidays. Orders can still be placed outside of market
hours. The fee for internet dealing is 1.5% of the transaction value,
subject to a minimum fee of £45. The fee for telephone dealing is 1.5%
of the transaction value, subject to a minimum fee of £60. The fee for
postal dealing is 1.9% of the transaction value, subject to a minimum
fee of £70. This service is only available to shareholders resident in
certain jurisdictions. Before you can trade you must register to use the
service. Other share dealing facilities are available, but you should
always use a firm regulated by the FCA (see register.fca.org.uk).
Your share certificate
Your share certificate is an important document. If you sell or transfer
your shares you must make sure that you have a valid share certificate
in the name of Rolls-Royce Holdings plc. If you place an instruction to
sell your shares and cannot provide a valid share certificate, the
transaction cannot be completed and you may be liable for any costs
incurred by the broker. If you are unable to find your share certificate,
please inform the Registrar immediately.
American Depositary Receipts (ADR)
ADR holders should contact the depositary, JP Morgan, by calling
+1(800) 990 1135 (toll free within the US) or +1(651) 453 2128 (outside
the US) or via www.adr.com/contact/jpmorgan
Warning to shareholders – investment scams
We are aware that some of our shareholders have received unsolicited
telephone calls or correspondence, offering to buy or sell their shares
at very favourable terms. The callers can be very persuasive and extremely
persistent and often have professional websites and telephone numbers
to support their activities. They will sometimes imply a connection to
Rolls-Royce and provide incorrect or misleading information. This type
of call should be treated as an investment scam – the safest thing to do
is hang up. Remember: if it sounds too good to be true, it probably is.
You should always check that any firm contacting you about potential
investment opportunities is properly authorised by the FCA. If you deal
with an unauthorised firm you will not be eligible for compensation under
the Financial Services Compensation Scheme. You can find out more
about protecting yourself from investment scams by visiting the FCA’s
website at www.fca.org.uk/scamsmart, or by calling the FCA’s
consumer helpline on 0800 111 6768 (overseas callers dial
+44 207 066 1000). If you have already paid money to share fraudsters,
contact Action Fraud immediately on 0300 123 2040, whose website is
www.actionfraud.police.uk
Visit Rolls-Royce online
Visit www.rolls-royce.com to find out more about the latest financial
results, the share price, payments to shareholders, the financial
calendar and shareholder services.
Communication preferences
You can sign up to receive the latest news updates to your phone or
email by visiting www.rolls-royce.com and registering for our alert
service. If you do not wish to receive a hard copy Annual Report in
future, you can do this online at www.shareview.co.uk
Annual general meeting (AGM)
The 2024 AGM will be held at 11.00am on 23 May 2024 as a hybrid
meeting. Full details are available on our website at www.rolls-royce.com
Analysis of ordinary shareholders at 31 December 2023
Type of holder
Number of
shareholders
% of total
shareholders
Number of
shares
% of
total shares
Individuals 156,041 98�81 192,398,711 2�29
Institutional and other investors 1,884 1�19 8,224,298,278 97�71
Total 157,925 100 8,416,696,989 100
Size of holding (number of ordinary shares)
1 – 150 47,764 30�25 4,182,746 0�05
151 – 500 55,557 35�18 14,854,037 0�17
501 – 10,000 50,289 31�84 95,754,916 1�14
10,001 – 100,000 3,426 2�17 84,657,464 1�01
100,001 – 1,000,000 498 0�31 170,166,920 2�02
1,000,001 and over 391 0�25 8,047,080,906 95�61
Total 157,925 100 8,416,696,989 100
221
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
OTHER INFORMATION
Shareholder information
AGM annual general meeting
AI artificial intelligence
APM alternative performance measure
Articles Articles of Association of Rolls-Royce Holdings plc
AUKUS Australia, United Kingdom, United States
BESS battery energy storage system
bps basis points
C&A commercial and administrative
CDP Carbon Disclosure Project
C Shares non-cumulative redeemable preference shares
Our Code Global Code of Conduct
the Code 2018 UK Corporate Governance Code
CMD capital markets day
Company Rolls-Royce Holdings plc
CPS cash flow per share
CRIP C Share Reinvestment Plan
D&I diversity and inclusion
DoJ US Department of Justice
DPAs deferred prosecution agreements
DTR the FCA’s Disclosure Guidance and Transparency Rules
EFH engine flying hours
ELG Enterprise Leadership Group
EPS earnings per share
ESG environment, social, governance
ET&S engineering, technology and safety
EU European Union
EUR euro
FCA Financial Conduct Authority
FCF free cash flow
FLAAA Future Long Range Assault Aircraft
FRC Financial Reporting Council
FTE full time equivalent
FX foreign exchange
GBP Great British pound or pound sterling
GCAP Global Combat Air Programme
GDA generic design assessment
GDP gross domestic product
GHG greenhouse gas
Group Rolls-Royce Holdings plc and its subsidiaries
HPT high pressure turbine
HSE health, safety and environment
HVO hydrotreated vegetable oil
IASB International Accounting Standards Board
ICAO International Civil Aviation Organisation
IFRS International Financial Reporting Standards
KPIs key performance indicators
ktCO
2
e kilotonnes of carbon dioxide equivalent
kW kilowatts
LIBOR London inter-bank offered rate
LTIP long-term incentive plan
LTSA long-term service agreement
M&A mergers and acquisitions
MoU memorandum of understanding
MRO maintenance repair and overhaul
MSP Manchester Square Partners
MtCO
2
e million tonnes of carbon dioxide equivalent
MWh megawatt-hour
NCI non-controlling interest
NED Non-Executive Director
net zero
company
net zero carbon emissions from our operations and
facilities and our products are compatible with net zero
operations by 2050
NOPAT net operating profit after tax
OCI other comprehensive income
OE original equipment
OECD Organisation for Economic Cooperation and
Development
P&L profit and loss
PBT profit before tax
PPE property, plant and equipment
PSP performance share plan
R&D research and development
Registrar Equiniti Limited
RMS risk management system
RRMS Rolls-Royce management system
RRSAs risk and revenue sharing arrangements
SAF sustainable aviation fuel
SBTs Science-Based Targets
SID Senior Independent Director
SFO UK Serious Fraud Office
SMR small modular reactors
STEM science, technology, engineering and mathematics
TCC total cash costs
TCC/GM total underlying cash costs as a proportion of
underlying gross margin
TCFD Task Force on Climate-related Financial Disclosures
TRI total reportable injuries
TSR total shareholder return
UKEF UK Export Finance
UNSDG United Nations Sustainable Development Goals
USD/US$ United States dollar
Trade marks
The following trade marks which appear throughout this Annual Report are
trade marks registered and owned by companies within the Rolls-Royce Group:
CorporateCare
®
mtu
®
Pearl
®
TotalCare
®
Trent
®
UltraFan
®
222
ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 2023
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ROLLS-ROYCE HOLDINGS PLC ANNUAL REPORT 20 2 3
© Rolls-Royce plc 2024
Rolls-Royce Holdings plc
Registered office: Kings Place,
90 York Way, London N1 9FX
T +44 (0)20 7222 9020
www.rolls-royce.com
Company number: 7524813