Friday, July 29, 2016

News: Rolls-Royce sets course for profits

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The board of world-renowned engineers, Rolls-Royce, expects profits to soar in the second half of the year despite an 80% drop in the first half.

Reporting its results for the first half of 2016, the company announced that revenues were down 1% to £6.4 billion, with pre-tax profit plummeting to a £2.15 billion loss, largely due to a write-down of £2.2 billion due to changes in exchange rates. Underlying profit before tax was £104m, down 80% at constant exchange rates.

Warren East, chief executive at Rolls-Royce, said: "In the first half of 2016 Rolls-Royce performed broadly in line with expectations, delivering a result a little better than breakeven; and the outlook for the rest of the year remains unchanged. Order intake has been good and, although known headwinds constrained revenue and profit in the first half, the business remains well positioned to deliver a solid second half performance supported by growth in engine deliveries, stronger aftermarket revenues and incremental benefits from our ongoing restructuring programmes."

The aero engine manufacturer has been undertaking restructures and reviews, particularly on reducing costs, including headcount, footprint and sourcing. It has been forced to issue a number of profit warnings due to a weaker marine business and lower than expected demand for some products, including the Trent 700 engine.

East added: "We have taken some positive first steps on the journey that will lead Rolls-Royce to profitable and highly cash generative growth. Our strategic advantages lie in our focus on engineering excellence, operational excellence and capturing value in the aftermarket. In the first six months, we have made progress with our business transformation; introducing the greater pace and simplicity required to make Rolls-Royce a more resilient company."

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The Derby firm still has a bouyant order book valued at £79.5 billion. This grew by £3.4bn (4% from the 2015 year end) largely due to £2bn foreign exchange benefit from long-term US dollar planning rate change.

The order book is powered by Rolls-Royce's civil aerospace business which alone has secured £70 billion in orders. Order intake of £7.9 billion in the first half of 2016 for civil aerospace was £0.5 billion higher than the previous year. Key orders included a $2.7bn order from Norwegian for Trent 1000 engines and the selection by China Eastern of 20 Trent XWB powered Airbus A350 aircraft.

In May, Rolls-Royce despatched the first "shipset" of four Trent 900 engines as part of its largest ever order, for Emirates. The £6.16 billion deal, secured last year, is to provide Trent 900 engines and TotalCare service to the largest airline in the Middle East, for 50 Emirates A380s, the first of which will enter service later this year.

Having begun a restructuring programme in its aerospace business, the company previously said that the product transition in civil aerospace will drive long-term growth and that its "industrial transformation" will deliver that growth.

Rolls-Royce says that "Engineering excellence remains the cornerstone of our value to Civil Aerospace customers" and this is evident at the most advanced turbine blade casting facility in the world, which was officially opened on the Advanced Manufacturing Park (AMP) in Rotherham in 2015. When fully operational in 2017, the £110m, 150,000 sq ft facility will employ 150 people and have the capacity to manufacture more than 100,000 single crystal turbine blades a year.

This week's report added: "The successful roll-out of new engines, led in particular by the Trent XWB, 1000 and 7000, together with a growing aftermarket, is expected to drive significant revenue growth over the next ten years as we build toward a 50%-plus share of the installed widebody passenger market. As a result, we remain confident that the important investments we are making to transition our production will create a strong platform to drive customer service and strong cash flows, together with the current investments in new products and the streamlining of our existing product portfolios to ensure we are providing high value, cost-competitive products into our target end markets."

The report also touched on Rolls-Royce's nuclear business where revenue increased 14% but profit was £3m lower than 2015. The company secured outline planning permission for a manufacturing facility in Rotherham for large scale components for the civil nuclear sector. Due to delays and contract phasing, the company has switched focus to Small Modular Reactors (SMRs), exploring the technical and market opportunities and joining as partners in research projects alongside industry and the Nuclear AMRC in Rotherham.

The Times recently reported that the Government has selected businesses including Rolls-Royce for the next round of a competition to find a SMR design that offers a much more cost effective source of nuclear power than large scale projects like Hinkley Point C.

Rolls-Royce website

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