Challenging first half for Rolls-Royce

AERO engine manufacturer Rolls-Royce has continued efforts to divert attention away from its current woes to the brighter prospects offered for the second half of the year.

Chief executive Warren East tried to be upbeat when delivering his AGM statement but could not disguise the group’s predicament.

Speaking at the meeting, he confirmed that overall trading in the first few months of the year had been in line with expectations and that the outlook for the full year remained unchanged.

“Despite steady market conditions for most of our businesses, 2016 continues to be a challenging year overall as we sustain investment and start to transition major products in Civil Aerospace, and tackle weak markets in Marine,” he said.
 
Reflecting the headwinds being experienced by the group, he said profit before financing charges and tax would be significantly weighted towards the second half, with the first six months of the year expected to be close to breakeven.

Looking to the balance of the year, he said the second half outlook reflected increased large engine deliveries, good underlying growth in aftermarket revenues and expected incremental benefits from ongoing restructuring programmes.
 
Free cash flow is also expected to be significantly more weighted towards the second half than in 2015. This largely reflects the lower level of first half profit compared to the previous year and the strong cash flow performance at the end of 2015, some of which reversed in the first month of 2016.
 
Mr East said the priorities for 2016 were threefold: to strengthen group focus on engineering and operational excellence and to leverage its installed base; to deliver a strong start to its transformation programme; and to start rebuilding trust and confidence in its long-term growth prospects.

“Good progress has been made on a number of initiatives to deliver these priorities, including the early stages of our transformation programme. As a result, we are well on track to delivering the expected cost savings in 2016 of between £30-50m,” he said.

“In addition, the legacy restructuring programmes within Civil Aerospace, Defence Aerospace and Marine are also on track, including the major new investment to transform the Defence Aerospace manufacturing facility in Indianapolis, started in the second half of 2015.”
 
A more detailed update on progress will be given in the group’s half year results, which will be published in July.