TIDMRR.
RNS Number : 4631S
Rolls-Royce Holdings plc
09 July 2020
09 July 2020
ROLLS-ROYCE HOLDINGS PLC H1 2020 TRADING UPDATE
First half 2020 summary
-- Widebody engine flying hours (EFH) down approximately 50% in H1 and 75% in Q2
-- Good progress on Trent 1000 fixes; achieved single-digit aircraft on ground target
-- Defence remained resilient; low double-digit percent decline in Power Systems revenue
-- Free cash outflow of approximately GBP3bn, reflects GBP1.1bn
reduction in receipts from EFH and engine deliveries and GBP1.1bn
one-time impact from the cessation of invoice factoring
-- GBP1.0bn cost mitigation actions for 2020 on track; approximately GBP300m achieved in H1
-- Expect improved H2 performance with FY free cash outflow of approximately GBP4bn
-- Restructuring underway supporting free cash flow recovery to at least GBP750m in 2022
-- $10bn reduction in hedge book to de-risk and re-align to expected mid-term demand
-- Liquidity increased to GBP8.1bn including new undrawn GBP2bn 5-year term-loan facility
Warren East, CEO, said: "These are exceptional times. The
COVID-19 pandemic has created a historic shock in civil aviation
which will take several years to recover. We started this year with
positive momentum and strong liquidity and acted swiftly to
conserve cash and cut costs to protect Rolls-Royce during the
pandemic. We are taking steps to resize our Civil Aerospace
business to adapt to lower medium-term demand from customers and
help secure our future. This means we have had to take the very
difficult decision to lose people who have helped us become the
company we are and who have been proud to work for Rolls-Royce. It
is my first priority to treat everyone - whether they are leaving
or staying - with dignity and respect. We will take the lessons of
how we have dealt with this unprecedented challenge with us and
position ourselves to emerge as an even stronger company in the
future."
Protecting our people and communities
We have worked hard to safeguard our people while ensuring our
operations have been able to continue during this difficult period.
We have implemented measures to protect against the spread of the
virus at our sites around the world and increased our focus on
employee mental health and wellbeing. Furthermore, we have been
providing practical assistance to aid the recovery for the
countries and communities in which we operate. This included
launching the Emergent Alliance, a global community with over 140
members that is using data analytics to assist the global economic
recovery.
Financial update
Our cashflows have been significantly affected by COVID-19 and
as a result our free cash outflow in the first half was
approximately GBP3 billion. The main impacts in the period
included:
-- approximately GBP1.1 billion less cash inflow due to lower
receipts associated primarily with widebody engine flying hours
together with lower engine deliveries
-- approximately GBP1.1 billion one-off adverse impact from the
cessation of invoice factoring, an industrywide practice which in
the past has been used to align the timing of cash receipts with
engine deliveries
-- increased inventory and debtor balances in addition to the
typical seasonal working capital outflows, which averaged
approximately GBP200 million outflow per year over the last two
years
-- positive impact of approximately GBP300 million from savings
related to the mitigating actions achieved in the first half.
Our rate of cash outflow is expected to ease in the second half
supported by increased benefits from cash mitigation actions, the
timing of working capital movements and the anticipated ongoing
recovery of commercial aviation from the trough reported in
April.
Due to the deterioration in the medium-term outlook caused by
COVID-19, absent mitigating actions, we forecast a shortfall of US$
denominated cash receipts over the next seven years compared to our
hedged position. As a result, it is financially prudent to mitigate
the future risks of this hedge book by closing out hedges that are
no longer required. We have therefore reduced the hedge book from
$37 billion to approximately $27 billion. This will result in cash
settlement costs totalling approximately GBP1.45 billion comprising
approximately GBP100 million of cash costs in 2020 (incurred in the
first half), GBP300 million in each of 2021 and 2022, and GBP750
million spread over 2023 to 2026. The related underlying financing
charge will be recognised in our first half 2020 underlying income
statement.
We have pro-forma liquidity of GBP8.1 billion including an
undrawn revolving credit facility of GBP1.9 billion and commitments
for a new 5-year term-loan facility of GBP2.0 billion underwritten
by a syndicate of banks and to be supported by a partial guarantee
from UK Export Finance, which has not yet been drawn. Our cash
balance was GBP4.2 billion at the end of June. During the first six
months of the year we accessed GBP300 million under the Bank of
England's Covid Corporate Financing Facility (CCFF) and drew GBP2.5
billion under our revolving credit facility.
Actions to reduce cash expenditure and ongoing cost base
We have made good progress executing the one-off actions
announced in April to address our discretionary expenditure in
2020. We delivered around GBP300 million of these in the first
half, with savings expected to accelerate in the second half of the
year. We remain on track to deliver in-year cash savings in 2020 of
up to GBP1.0 billion.
Separately, our major reorganisation to right-size the Group,
which was announced on 20 May 2020, is progressing well and is
forecast to deliver at least GBP1.3 billion in annual pre-tax cash
savings by the end of 2022 (including remaining savings of around
GBP100m from the restructuring programme announced in 2018). We
expect a reduction of over 17% of our workforce, equivalent to more
than 9,000 roles across the Group worldwide, including
approximately 8,000 in our Civil Aerospace business which we are
reducing by about a third to adapt to the new level of market
demand we are expecting . Last month we opened voluntary severance
in the UK, including an enhanced early retirement scheme. To-date,
we have received more than 3,000 expressions of interest for
voluntary severance in the UK with approximately two-thirds of
these currently expected to leave by the end of August.
Operational update
Our Civil Aerospace business has experienced a significant
reduction in demand due to the effects of COVID-19. Widebody engine
flying hours fell by approximately 50% in the first half, compared
to the prior year period with an approximate 75% decline in the
second quarter. Since the low point in April, when flying hours
were down 80% compared to April 2019, we have seen early signs of
recovery with a marginal improvement in May and June led by an
increase in flights in China, Asia Pacific and the Middle East.
Business jet and regional flight activity has been recovering more
quickly due to lower exposure to cross-border routes.
MRO (Maintenance, Repair and Overhaul) activity in the first
half was broadly stable compared to the prior year period but lower
than the pre-COVID-19 first half schedule. We have completed the
backlog of overhauls related to the Trent 1000 durability issues
and have achieved our target to reduce the number of related
aircraft on the ground (AOG) to single digits. We are progressing
well with the type test of the replacement high pressure turbine
blade for the Trent 1000 TEN, the final durability issue to be
fixed, and remain on track for its incorporation into the fleet by
the end of H1 2021.
The deterioration in the medium-term market outlook for the
commercial aviation industry will need to be reflected in our
contract accounting assumptions and we will also be assessing the
carrying value of our engine programmes and deferred tax assets. We
are currently undertaking a review of these matters, the impact of
which may result in non-cash accounting adjustments in our first
half results.
Output of new widebody engines was consistent with our revised
guidance of 250 engines for the full year, with 130 engine
deliveries in the first half.
The commercial aerospace activities of ITP Aero, which account
for approximately 75% of its business, have experienced a similar
deterioration in end market demand as our Civil Aerospace business
unit. Its defence related activities remained stable.
Our Power Systems business experienced varying levels of
COVID-19 related disruption and utilisation with low double-digit
percentage revenue decline compared to the prior year period. Our
customers in industrial markets were the most impacted by lower
activity levels, particularly those with exposure to oil & gas
and mining. PowerGen activity also slowed down in the second
quarter, most notably in the US. We experienced a reduction in
demand for smaller yacht engines with some marine yards closed for
much of the second quarter. Defence related activities and the rest
of our Marine business performed relatively robustly. Long-term
demand growth for reliable power solutions is expected to remain
intact with demand in data centre mission critical applications
increasing above pre-COVID levels. We are growing market share in
developing markets, particularly in China where we continue to
expect growth in our revenues in 2020.
Our Defence business has remained resilient with continued
demand from key government customers. We have not experienced any
material operational or financial disruption as a result of
COVID-19. We remain committed to the development of new products
and programmes in Defence including Tempest in the UK. In the US,
we are poised to submit our RFP for the new B-52 engine opportunity
and the consortium of which we are a member recently went through
to the next round in the competition for the US Army's Future Long
Range Assault Aircraft.
Outlook
We currently anticipate a gradual recovery of our end markets as
travel restrictions ease in the coming months, while acknowledging
the elevated level of uncertainty in the industry outlook. We
currently forecast widebody engine flying hours to be down in the
region of 55% this year, with more long-haul routes opening up in
the fourth quarter. We continue to plan for about 250 widebody
engine deliveries in 2020, based on announced build rates from our
airframer customers.
As a result of our cash mitigation actions and supply chain
management we expect our rate of cash consumption to significantly
reduce in the coming months, resulting in a full year free cash
outflow of approximately GBP4 billion. This reflects an unwind of
inventory in the second half along with a gradual improvement in
engine flying hour receipts and an acceleration of cash savings. We
have strengthened our liquidity position to absorb the near-term
cashflow pressures and continue to review our options to strengthen
our balance sheet and position ourselves for the recovery.
We remain positive about the long-term outlook for sustainable
power solutions. We expect Defence to continue to experience good
demand. In Power Systems, many of our impacted end markets are
forecast to recover by the end of 2021. We currently expect our
widebody engine flying hours to recover to approximately 70% of
2019 levels in 2021 with OE deliveries likely to remain subdued.
The steps we have taken to substantially resize and restructure our
Civil Aerospace business will help deliver a sustainably lower cost
base for the future and ensure it is well positioned for the
recovery in demand. As a result, even after the additional cost
associated with de-risking our currency exposure, we are targeting
at least GBP750 million Group free cash flow in 2022 and growth in
our returns into the medium-term.
Our first half 2020 results announcement and webcast will be
published on 27 August 2020.
This announcement has been determined to contain inside
information.
About Rolls-Royce Holdings plc
1. Rolls-Royce pioneers cutting-edge technologies that deliver
clean, safe and competitive solutions to meet our planet's vital
power needs.
2. Rolls-Royce has customers in more than 150 countries,
comprising more than 400 airlines and leasing customers, 160 armed
forces, 70 navies, and more than 5,000 power and nuclear
customers.
3. Annual underlying revenue was GBP15.3 billion in 2019, around
half of which came from the provision of aftermarket services.
4. In 2019, Rolls-Royce invested GBP1.45 billion on research and
development. We also support a global network of 29 University
Technology Centres, which position Rolls-Royce engineers at the
forefront of scientific research.
5. Rolls-Royce Holdings plc LEI: 213800EC7997ZBLZJH69
For further information, please contact:
Media
Richard Wray
Director of External Communications & Brand, Rolls-Royce
plc
Tel +44 (0) 7810 850055
Richard.Wray@Rolls-Royce.com
Investors
Isabel Green
Head of Investor Relations, Rolls-Royce plc
Tel +44 (0) 7880 160976
Isabel.Green@Rolls-Royce.com
www.Rolls-Royce.com
Note on forward-looking statements
This press release may contain projections and forward-looking
statements. The words "believe", "expect", "anticipate", "intend"
and "plan" and similar expressions identify forward-looking
statements. All statements other than statements of historical
facts included in this press release, including, without
limitation, those regarding the Company's financial position,
potential business strategy, potential plans and potential
objectives, are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance
or achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Such forward-looking statements are
based on numerous assumptions regarding the Company's present and
future business strategies and the environment in which the Company
will operate in the future. Further, certain forward-looking
statements are based upon assumptions of future events which may
not prove to be accurate. The forward-looking statements in this
press release speak only as at the date of this press release and
the Company assumes no obligation to update or provide any
additional information in relation to such forward-looking
statements.
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previously issued or issued in future by the Company for any
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alia, an assessment of the legal, tax, accounting, regulatory,
financial, credit and other related aspects of the transaction in
question.
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END
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