Page 1

Investors’ Update April

2017

Headlines Page 2

Investigating Authorities

16/17 January 2017

2016 Full Year Results

14 February 2017

Governance Event

29 March 2017

Business news Page 3

Research and Technology Page 5

IR activity: 2017 dates

4 May

Annual General Meeting (Derby)

1 August

H1 results

Events and conferences

April

IR roadshow (Paris) May

Warren East (CEO) – Redburn Conference (Toronto) John Dawson (IR) - Vertical Research Conference (New York) John Dawson (IR) – Berenberg Tarrytown (New York) TBC

Welcome to our first newsletter of 2017

With the full year results and main

roadshow activity behind us, together

with a corporate governance event last

week, it feels like a good time to look

back on the news flow from the start of

the year.

It’s been a busy first quarter. Alongside

our FY results and roadshows, there

have been important announcements,

including DPA agreements with the

SFO and DoJ in mid-January, news on

new engine orders, additional service

solutions, and R&D initiatives on ship

intelligence.

As before, we have included a few

questions and answers which came up

regularly on our roadshow travels, along

with an article from a recent publication

reviewing the Advance and Ultrafan®

development programme which I hope

will be of interest.

Finally, I would just note that our

programme co-ordinator Jacinta Francis

is moving on to a new role at the end of

this week, after five years in the team.

Jacinta leaves with our very best wishes

and we have started the search for a

worthy replacement.

John Dawson

Director of Investor Relations

020 7227 9087

Helen Harman

Assistant Director

020 7227 9339

Ross Hawley

Assistant Director

020 7227 9282

John Dawson

Director of

Investor Relations

Investors’ Update

April 2017

Page 2

Corporate news

Investigating Authorities

16/17 January 2017

2016 Full Year

Results 14 February 2017

We announced our 2016 results to the market at the London Stock

Exchange and all materials are available on our website including

webcast and transcript of the event. Our annual report for 2016 is also

available on the IR pages of our website.

Read more

Governance

Event 29 March 2017

Rolls-Royce hosted a group of UK-based shareholders and governance

analysts at our corporate headquarters in London. Led by our Chairman, Ian

Davis, the format was similar to last year’s event, with a brief presentation

and Q&A from Warren East followed by a review of the main activities and

key topics considered by the Board and core board committees of Audit and

Remuneration. Smaller groups were used for breakout Q&A sessions to

facilitate direct engagement with the committee chairs on key issues.

The transcript and presentation materials are available on the IR pages of our

website.

Read more

IR news

IR Calendar Since our FY16 results, the team have been active with roadshows in the US

and UK giving a chance for many of our investors to meet face to face.

Upcoming events include conferences in Toronto (with CEO) and New York

(IR-only) and the IR team will also be in Paris in late April.

We will have a very limited presence at the Paris Airshow and will be

restricting our activities to investor or company initiated meetings.

Do please get in touch if you would like to be notified when we are planning to

be in your location.

We announced we had reached a Deferred Prosecution

Agreement (DPA) with the UK Serious Fraud Office (SFO). In

addition to the agreement with the SFO, Rolls-Royce also

reached a DPA with the US Department of Justice (DoJ) and a

Leniency Agreement with Brazil’s Ministério Público Federal

(MPF).

Further details concerning the agreements reached with the relevant

investigating authorities were shared, including the amounts to be paid

to each respective authority, totalling £671m. Warren East said: “The

past practices that have been uncovered do not reflect the manner in

which Rolls-Royce does business today. We now conduct ourselves in a

fundamentally different way. We have zero tolerance of business

misconduct of any sort”.

Read more

Investors’ Update

April 2017

Page 3

Business news: Civil Aerospace

LessorCare launch; win of SelectCare™ order from Lufthansa

24 / 26 January 2017

We launched LessorCare which broadens our range of services offered by

Rolls-Royce and addresses lessors’ needs for a simple and flexible service

offering. Read more

We also won an order from Lufthansa for SelectCare services covering Trent

500 engines on its Airbus A340 aircraft operated by the airline. SelectCare is

one of our newer service packages including a fixed price overhaul service

agreement with supplementary services, delivering both cost certainty and

fleet plan flexibility. Read more

$1.7bn order for Trent 1000 engines 9 February 2017

We won a $1.7bn order from

Singapore Airlines for Trent

1000 engines to power 19

Boeing 787 Dreamliner

aircraft. The engines will be

covered by our flagship engine

service, TotalCare®, which

improves engine reliability,

increases time on wing, and

maximises the engine's

contribution to business

performance. Read more

CareStore introduced 7 March 2017

We introduced CareStore, an online gateway which will enable us to work

together with Civil Aerospace customers to help them make informed

decisions about which of Rolls-Royce’s wide range of digitally enabled

services best fit their needs.

Read more

First flight of

Boeing 787-10 Dreamliner 31 March 2017

Rolls-Royce announced its

Trent 1000 TEN engine

powered the first test flight of

the latest version of the Boeing

787 Dreamliner, the 787-10.

It means Trent 1000 engines

have powered the first flights

of every version of the

Dreamliner. Read more

Investors’ Update

April 2017

Page 4

Business news: Marine

Power for Italian Navy’s new high-speed vessels 25 January 2017

We were awarded a contract to supply engines and waterjets to power and

propel two new high-speed vessels designed and built by Intermarine

(Immsi Group) for the Italian Navy.

Read more

Contract for U.S. Coast Guard’s new offshore patrol cutter 28 February 2017

Rolls-Royce will provide an

extensive range of equipment,

including MTU marine

generator sets, to a new fleet of

U.S. Coast Guard Offshore

Patrol Cutters (USCG OPC).

The Rolls-Royce equipment

was selected OPC fleet’s first

nine vessels, with an option to

add two more.

Read more

Business news: Power Systems

Agreement to supply MTU engines for new Claas agricultural vehicles 23 January 2017

Agreement for the supply of MTU Series 1000 to 1500 engines (EU

Stage V emissions-compliant) for use in combine-harvesters, forage-

harvesters and 4x4 high-horsepower tractors from 2019.

MTU to supply Claas with a total of 4,000 to 5,000 engines per annum

(various series and emissions levels).

Read more

Emissions-compliant MTU engines for JCB 7 February 2017

For the first time, Rolls-Royce will be

supplying MTU engines for use in

excavators, having won an order from

British construction equipment

manufacturer JCB. MTU’s Series 1000

engines are compliant with EU-Stage IV

and EPA Tier 4f emissions legislation.

Read more

Investors’ Update

April 2017

Page 5

Business news: Nuclear

Successful restart of EDF reactors 27 February 2017

Rolls-Royce and AREVA NP have installed and successfully

commissioned the latest digital safety I&C technologies on to the first two

reactors at Cattenom and Paluel nuclear power stations in France, as part

of a 14-year upgrade programme across 20 reactors in what is the world’s

largest I&C modernisation programme.

Read more

I&C modernisation in China for Ling Ao 7 March 2017

We have completed the modernisation of Neutron Instrumentation

Systems at two units of Ling Ao nuclear power plant in Shenzen, China,

replacing an existing analog system, originally supplied by us in the early

2000s, with a new digital system using Spinline® technology.

Read more

Research and Technology, Product Development

Investment in Ship Intelligence 8 March 2017

We announced our framework and the first

stage in its research and development plans to

make remote and autonomous shipping a reality

and reap the benefits of increasing digitalisation

in the marine industry.

Read more

Collaboration with Stena Line and partnership with Tampere University of Technology 20/27 March 2017

Rolls-Royce has signed a deal with Swedish ferry company Stena Line AB,

to collaborate in the development of its first intelligent awareness system.

Read more

In addition, Rolls-Royce and Tampere University of Technology, Finland,

have announced a strategic partnership to develop and test the technology

to support systems necessary for autonomous navigation, enabling the first

generation of autonomous ships. The partners will work towards

developing and validating technologies using the University’s purpose built

autonomous ship simulator.

Read more

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This newsletter is for informational purposes only, it is not intended to contain any new material or non-public information relating to Rolls-Royce plc but

is a summary of recent public announcements and as such may not be relied on. Nothing in this document should be construed as a profit forecast,

however it may repeat certain statements that might be deemed to be forward-looking; such statements are made under the provisions of Rolls-

Royce’s Safe Harbour Statement which can be found as part of our presentation materials on Rolls-Royce’s website

www.rolls-royce.com/investors/investor-events-and-presentations

Investors’ Update

April 2017

Page 6

Q&A & Appendices

1. I was expecting a greater P&L benefit from transactional FX in your FY16 results than the reported

£20m. Can you please just remind me how this was calculated and what was offset.

Our FY16 press release stated: “The movement in the average achieved rate year on year was around two and

a half cents, providing a net underlying group benefit after balance sheet effects (the movement in achieved rate

also affects creditor and debtor balances of hedged cash flows), of around £20m”.

In simple terms there were two offsetting elements; the positive being the improvement in the achieved rate on

our hedged cash flow conversions on which we give guidance as to a 1c move being worth around £20m.

However offsetting this were impacts on the balance sheet, which are also reflected through the P&L. On the

latter, in our underlying results we revalue our hedged creditors and debtors to the forward achieved rates. The

combination of a reduction in the forward achieved rate and a change in the debtor/creditor mix, together with

an increased level of creditors at 2016 year end compared to the opening position led to a reduction in

underlying profit.

In each year the balance sheet revaluation effect can be positive or a negative; and in 2015 it was de minimis. It

is impossible to predict whether it will deliver a positive or negative P&L impact as it depends on the relative

movements in a number of balance sheet items and the forward achieved rates – but clearly in 2016 the

significant move in $/£ rates in the year made this a more material number.

2. A number of market participants have commented that in the future the company is likely to have a

net liabilities position (often using ‘negative equity’ as shorthand) on the balance sheet and this may

have an impact on distributable reserves. Can you confirm what the impact is and any potential

restrictions on making ‘dividend’ distributions over the next couple of years?

As at 31 December 2016 we had around £1.8bn of net assets at consolidated group level, which is where

accounting adjustments arising from IAS 39 (recognition of financial instruments) and IFRS 15 (revenue

recognition) will be seen. It is likely that we will have net liabilities once the restatement of IFRS 15 is reflected in

the group accounts, based on the 2015 analysis we completed last year. In itself, this is not a concern as the

group expects to have improving operational cash flows over the coming years, together with a robust liquidity

position and a healthy, investment-grade credit rating.

The net liability position that arises from the move to IFRS 15 does not impact the distributable reserves and the

capacity of the parent company, Rolls Royce Holdings plc, to make distributions. The parent company had

distributable reserves of around £1bn at 31 December 2016 and with distributions currently running at around

£220m per annum, we have significant cover at present with no restrictions on our ability to make distributions

at, or around, the current levels through to 2020.

We monitor the parent company’s level of distributable reserves and, if needed, will consider appropriate ways

to ensure that, in the long term, we have sufficient reserves in the appropriate entity so we can continue to make

distributions in line with the prevailing policy approved by the board at that time.

3. How is the SFO future payment accounted for on the balance sheet?

The £671m is recorded in ‘other creditors’ and accounts for the majority of the year-on-year increase from £2.1bn to £3bn. Note 16 to the accounts however incorrectly states that it was included in accruals and deferred income.

Investors’ Update - Appendices

April 2017

Page 7

4. 2017 is going to be a big year for IFRS 15 preparations - when might we see further newsflow on

this, including 2016 comparatives?

Our current expectation is that we will be able to provide 2016 reconciliations at the time of the half year results

at the beginning of August. We are targeting having our FY17 results announcement a couple of weeks later

than previously in order to give time to report FY17 under current accounting standards and show how 2017

would have been reported under IFRS 15.

Our interim results for 2018 will be the first time we will report only under IFRS 15. At the governance event last

week we shared the following slide:

5. Do comments on targeting to break even on the XWB by 2020 relate just to the XWB-84 or the XWB-

97 as well?

This relates to the XWB-84 only. We started delivering XWB-84 production engines in 2014 and are targeting

achieved break-even on installed engine deliveries through a combination of cost reduction and price increases

by 2020. The XWB-97 is only expected to enter into service later this year and whilst we’re assuming we’ll make

good progress on reducing its cost by 2020 we do expect it to lag the progress made on the XWB-84 engine

reflecting its later entry into service.

6. Are you going to be at the Paris air show this year?

The IR team will be at the Paris air show early in the week but there is minimal capacity both from management

and in terms of chalet meeting space. As a result we will not be hosting analyst-led meetings as we have done

previously and at Farnborough last year.

7. Can you give an update on the Advance and Ultrafan® programme? The Rolls-Royce magazine has recently published an article on this programme, which is attached overleaf for your information.

the Magazine ISSUE 152 3

AVIATIONthe magazine

Three years ago, Rolls-Royce announced two new engine designs, Advance and UltraFan®, to deliver transformational efficiency improvements in future large aero engines.

2 rolls-royce.com

ULTRA SPECIAL

the Magazine ISSUE 152 5

The new fan system was put through it’s test process in the chilling cold of the GLACIER test facility in Canada.

hy was such transformational change needed? To explain, it is useful to look at what is happening in the current product

ranges, where the rate of improvement in the efficiency of large aero engines averages at around 0.5-1% per annum and the scale of investment to achieve that modest but important outcome is increasing.

To achieve this annual improvement, engineers are primarily tweaking technology in the high temperature part of the engine but the science is maturing and it’s getting harder to gain the changes by focusing mainly on thermal efficiency.

The current Rolls-Royce production line boasts the world’s most efficient large aero engine in the Trent XWB, but for the generation of engines beyond Trent, iterative design and development would not be good enough. The company would be spending more on R&D for less in return. To gain fundamental improvement, fundamental change was needed.

A new engine architecture, together with very advanced technologies including the use of new materials and composites, were necessary to make progress possible at the pace required.

Both play a key role in enabling the company to stay on track to meet engine and aircraft efficiency targets for 2050 set by The Advisory Council for Aviation Research and Innovation in

Europe (ACARE*).Advance is the first of the new designs and is

critical to meeting the ACARE targets as the engine core technology is vital to achieving the necessary improvements in emissions and efficiency.

Advance, available from 2020, is 20% more fuel efficient than the original Trent engine, the

Trent 700 and UltraFan, available from 2015, is 25% more efficient.

Advance features a new core that incorporates design changes across the engine in the HP and IP spools. Assembly has begun and the core, known as Advance3, will run for the first time this summer.

Compressor and individual technology tests have all been successfully achieved already in the lead up to the full system test. For test purposes, Advance3 will employ a Trent XWB fan system and a Trent 1000 LP system – basically because these were the best match.

UltraFan is the second engine design. It incorporates the new Advance core, it also

4 rolls-royce.com

integrates a new fan system (carbon composite and titanium fan blades). Perhaps most notably though, the demonstrator employs a power gearbox within the architecture of the engine; the first time Rolls-Royce has opted for this design approach on a large engine.

The design of UltraFan is based on a simple premise that there are two key elements in a gas turbine that you are trying to maximise: thermal efficiency and propulsive efficiency. Thermal efficiency comes from running turbines hot and fast, whereas propulsive efficiency comes primarily from a very large front fan running at slow speed. Hence modern engines have large bypass ratios, as much of

the thrust is derived from the front fan itself.If you optimise the fan at low speed, then

you are left with the challenge of how to incorporate a fast LP turbine. By incorporating a gearbox between the two, you disassociate the speeds as the engine is no longer direct drive.

Leading the UltraFan demonstrator programme is Mike Whitehead, Chief Engineer and Head of Programme – UltraFan Technologies, who takes up the story.

COMPRESSOR AND INDIVIDUAL TECHNOLOGY TESTS HAVE ALL BEEN SUCCESSFULLY ACHIEVED.

W

“We could see that using our traditional engine architecture would create an issue with the size and weight of the LP turbine. Engine designs will continue to move towards larger fan sizes moving at slower speeds to maximise efficiency. By incorporating a power gearbox, we have been able to reduce the size of the LP turbine and the number of stages. We have also grown the IP turbine a few stages and so we share the power load between the two,” he explains.

“If you look at the industry it’s fairly obvious that our competitors have gone through similar thought processes. We know the competition are flying this technology but on much smaller engines,” adds Mike.

“I believe what we are doing (for large engines) is far more challenging, particularly in

the management of power loads. UltraFan will employ the most powerful gearbox in the world. The differences are not just in the power, torque and technology but also in how the engines operate.

“We knew that it would be more complicated than any gearbox anyone had ever built before. Not physically bigger but in terms of its torque density, the power transmitting through it and the weight and volume limitations we would be operating within – this would be off the scale compared to anything anyone had done before.”

Although Rolls-Royce has experience in the design of gear systems for gas

turbines stretching back as far as the 1940s and right up to today’s LiftSystem™ on the F-35B Lightning fighter, the company wanted to bring an experienced partner into the programme to work on this area of technology, particularly in manufacturing.

“I could not design a gearbox without knowing how to make it. The manufacturing

method you need has got to be consistent with the design methodology. We found an ideal partner in Liebherr for this, a company that has great experience in gears and that understands the aerospace industry too,” says Mike.

Together Rolls-Royce and Liebherr have created a joint venture to do the work, Aerospace Transmission Technologies.

To test the gearbox system Rolls-Royce built a €65 million test facility at its site in Dahlewitz, Germany. Testing began in October last year.

The facility houses two rigs, an attitude and a power test rig.

“Currently we are commissioning the power gear test facility, training the people who work in the facility and testing the new

power gear system itself. We are doing it all at the same time.

“This year is about continuing to test the gearbox on the attitude rig in the new facility. This rig allows us to simulate the effects on the gears of take-off, landing, and banking in flight. It also allows an understanding of the oil system flow dynamics.

“Soon we will be commissioning the power test rig which will allow us to run the gearbox at full power with representative torque and speed. That rig will be completed and be testing at the end of Q1. We will assemble another gearbox to go on that rig and then it’s about commissioning that rig in the facility in 2017 and extracting data as we increase power on the gearbox.

“We have a second major design of the gearbox in place now and that will go on test towards the end of this year. We are in a learning process.

“We anticipate having a fully designed UltraFan demonstrator by the end of this year with a view to having our first UltraFan built and ready for test in 2019. Then we have around 2.5 years of testing and we assume we will have at least one design review during that period too.

“By end of 2021 we will have flown the UltraFan demonstrator. Around that time, we start to consider what a production engine will look like for estimated EIS in 2025,” says Mike.

As for Mike himself he firmly believes he has the best job any engineer could dream of.

“Bringing all this new technology together in one functioning system is what makes Rolls-Royce special. Getting it all to work together successfully is the real ‘magic’ and I believe that it’s this that makes Rolls-Royce great.”

AUTHOR DAVID HOWIEDavid Howie is Director of Redburn Communications, a business marketing and brand consultancy.

*ACARE has set challenging goals for aviation to meet by 2050. These include developing technologies and procedures to:

•Reduce aircraft CO2 emissions by 75% (per passenger kilometre)

•Reduce noise by 65%

•Reduce oxides of nitrogen (NOx) by 90%This is all relative to a typical new aircraft produced in 2000.

the Magazine ISSUE 152 7 6 rolls-royce.com

BRINGING ALL THIS NEW TECHNOLOGY TOGETHER IN ONE FUNCTIONING SYSTEM IS WHAT MAKES ROLLS-ROYCE SPECIAL.

Testing the power gearbox in the new facility in Germany.

ABOVE A planetary gear system has been selected.HERE Assembly of the Advance3 compressor.

Ultrafan uses a composite fan blade with a titanium leading edge.