Rolls doubles its profit, but lift-off test lies ahead
Warren East’s reboot of struggling industrial giant Rolls Royce Holdings gathered pace as the aircraft-engine maker’s first-half profit more than doubled, aided by the CEO’s restructuring plan.
At the same time, East left his 12-month outlook for “modest” performance improvements unchanged in guidance on Tuesday, warning that the London-based company faces production hurdles in the second half that will make or break its year and indicate whether the recovery has truly taken hold.
Rolls-Royce shares surged 10%, the most in a year, wiping out declines on Monday when the company reined in expectations for its long-term cash goal. Under East, recruited in 2015, the group has cut management posts, reorganised units and begun a strategy review as it repositions to tap the biggest jetliner backlog in history.
“We’ve made good progress but there’s still a lot to do and I’m telling people this is no time for complacency,” East said on a conference call. “In particular, as we continue to manage the balance of in-service issues in civil aerospace alongside key new product introductions and increased production volumes.”
Adjusted pretax profit jumped to £287m in the first half from £104m a year earlier as sales advanced 12% to £7.57bn, Rolls said in a statement.
East’s restructuring helped boost profitability, together with increased deliveries of highermargin engines, including Trent 900s for the Airbus SE A380, and improved maintenance revenue as the low oil price extends the life of older aircraft.
The economics of producing the Trent XWB engine for Airbus’s newest A350 wide-body have also improved, according to East, with launch pricing “coming to an end”.
That was a vital development given the company’s reliance on the model, which has a six-year production backlog, Jefferies analyst Sandy Morris said.
Rolls said the XWB produced “the biggest loss but also the biggest improvement”. While 85 of the engines were delivered in the first half, up from 41 a year earlier, manufacturers tend to produce turbines at a loss and only later turn a profit on inservice repair and overhaul.
Among the second-half challenges identified by East are final development of new engines to power Airbus’s stretched A3501000 and Boeing’s largest 78710, as well as the A330neo, which has faced a series of delays. Rolls-Royce is also contending with issues on the 787’s baseline Trent 1000 turbine, which has led to the grounding of aircraft at customers including Thai Airways International.
The marine business remains a thorn in Rolls’s side, with losses widening as the oil price continues to weigh on demand for offshore vessels from the oil and gas industry.