Rolls-Royce profits slump by further costs of engine problems

(qlmbusinessnews.com via theguardian.com – – Thur, 2nd Aug 2018) London, Uk – –

Rolls-Royce has slumped into the red after running up further costs as it works to fix problems with its latest jet engine.

The engineering giant swung to a headline pre-tax loss of £1.3bn in the six months to June 30 from a profit of £1.4bn last time. At an underlying level, the FTSE 100 business made an operating profit of £141m, compared with an £84m loss a year ago. Revenue for the six months to the end of June rose 12pc to £7.5bn.

Sorting out problems with its Trent 1000 engine landed Rolls with an exceptional charge of £554m in the period, a level that chief executive Warren East described as “abnormal”.

Cracks in Trent 1000 engines have forced Rolls into a costly emergency inspection and repair programme, as well as developing replacement parts and compensating airline customers whose aircraft have been grounded because of the troubles.

Rolls has previously said it expects costs for dealing with the Trent 1000 problems and issues with sister Trent 900 engine at about £450m a year in both 2018 and 2019, before dropping by “at least” £100m the following year.

Rolls finance chief Stephen Daintith said the £554m charge – which covers several years of dealing with the Trent 1000 problems – represents about 40pc of the total costs, which he put at about £1.3bn when they are finished in 2022.

Rolls has previously said it expects costs for dealing with the Trent 1000 problems and issues with sister Trent 900 engine at about £450m a year in both 2018 and 2019, before dropping by “at least” £100m the following year.

Rolls finance chief Stephen Daintith said the £554m charge – which covers several years of dealing with the Trent 1000 problems – represents about 40pc of the total costs, which he put at about £1.3bn when they are finished in 2022.

Mr East added: “We continue to be impacted by the challenge of managing significant Trent 1000 in-service issues and have recognised an exceptional charge of £554m, representing the profit impact of that part of the total current and estimated costs out to 2022 that is considered to be abnormal in nature.”

Rolls reported a positive cash flow of £10m, against a negative £264m at the same point a year ago. Analysts had been expecting a negative cash flow in the hundreds of millions.

Mr East has argued that Rolls' business model means it is better judged on cashflow rather than profits, as it sells engines at a loss but makes money on long-term servicing contracts. Cashflow is the amount of cash left in the business after meeting its costs.

Mr East is stripping out other costs to improve Rolls’s performance. A restructuring is under way that will see the company axe 4,600 jobs – or about one in 10 of all staff. All non-essential spending has also been curtailed.

Rolls upgraded its guidance for the full year as cost cuts fed through.

Mr East said the company is selling engines at a smaller loss and the civil aerospace engines division – the largest part of Rolls, making up about half of group sales, were up 26pc in the quarter. Revenues at power systems, which makes marine and land vehicle engines, were 13pc better, though the defence unit was flat.

The company said it now expects full year cash flow to be at the top end of guidance at between £450 and £550m, and underlying profit to be at between £400m and £500m.

“We are well placed to exceed free cash flow of £1bn by 2020, that's absolutely intact,” Mr East said, adding the company is “pushing towards our mid-term ambition for free cash flow per share to exceed £1.”

Jefferies analyst Sandy Morris said that “good news outweighed the bad in the results, despite justified foreboding about the Trent 1000”.

He added that although the £554m charge looked “intimidating”, Rolls had “perplexingly” delivered “where it matters, in the measures beyond 2020”.

By Alan Tovey