Rolls Royce Holdings (RR.)


Rolls-Royce flags cost overhaul

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Rolls-Royce flags cost overhaul

Rolls-Royce (RR.) shares opened 4.2% up after first-half results revealed a 34% jump in pre-tax profits to £840 million, driven by a strong order book which rose 15% to £69.2 billion.

The British company posted post-tax loss totalling £358 million in the six months to June 30 compared with a net profit of £1.2 billion in the first half of 2012, a difference primarily due to the £700 million disposal profit of International Aero Engines in 2012.

The results include a £1.1 billion contribution from German diesel-engine business Tognum, incorporated into the firm's results for the first time since its joint acquisition with Daimler in 2011. Underlying revenue rose 27% to £7.3 billion, a rise of 9% excluding Tognum, where revenues are expected to remain flat.

The period saw some major milestones such as the first flight of the Airbus A350 powered by Trent XWB engines, an airliner designed to be more fuel-efficient as fuel costs rise over the medium term. It also saw a start on the first Trent-1000-TEN engine for the Boeing 787-10 programme, scheduled for entry into service in 2016, the certification of the A400M military transport aircraft powered by the TP400 engine, and the delivery of low-emission ship Environship.

In the commercial sector, the company has benefited from Airbus's record output of A330 wide-bodies and Boeing's production of the 787 Dreamliner.

However the engine maker's chief executive, John Rishton, said the company's cost performance and cash outflow has been unacceptable, and needs an overhaul to match the cost performance of its major competitors. In the US, rival GE has made lay-offs and slashed expenses by $474 million (£310 million) at its industrial engine-making unit this year.

"While underlying profits were up 34% our costs are rising faster than revenues, which is not good enough and needs to change," Rishton said, adding that an increase of £261 million in inventory was "disappointing".

Rolls' cash outflow swelled to £461 million in the first half, up from £447 million in the same period a year ago, causing its net cash position to fall to £921 millio from £1.3 billion.

Some progress has been made on boosting profitability by lowering costs, with return on sales widening to 11.9% from 11.4%, and last year the company exited a joint venture with Safran SA to build RTM322 helicopter engines.

Tognum has also said that strengthening its co-operation with Rolls-Royce and Daimler is a priority, and in July it promoted its former chief technology officer and deputy chief executive Dr Ulrich Dohle as its new chairman and chief executive, succeeding Joachim Coers, who left the company after nine years at his own request.

The company has other troubles. Two former employees have alleged the engine maker "cut corners on quality control requirements" and concealing information from customers. The ex-quality control officers in the US are challenging a court order that prevents them from going public with information they allege reveals potentially serious defects in its manufacturing processes. Rolls-Royce has denied the claims and said the lawsuit is entirely without merit.

The Australian Safety Transport Bureau (ASTB) has also conducted an investigation into the Qantas Airways flight that ran into trouble over Indonesia in November 2010. The ASTB said the company missed multiple opportunities to detect the faulty component that caused the engines to explode.

The shares are 1,214p – some way off the price targets of 1,340-1,350p set recently by analysts at BNP Paribas, Investec and Cantor.

Shareholders received 8.6p per share, up 13% year-on-year.