TIDMRR.
RNS Number : 5611S
Rolls-Royce Holdings plc
07 November 2019
7 November 2019
ROLLS-ROYCE HOLDINGS PLC TRADING AND TRENT 1000 UPDATE
Trading update:
-- Improved trading since the Half Year, however we now expect
Full Year operating profit and FCF outcome towards the lower end of
guidance ranges
-- At least GBP1bn FCF in 2020, underpinned by restructuring
benefits, operational efficiency improvements, further efforts to
reduce inventory and disciplined approach to capital allocation
-- Confident in mid-term ambition of GBP1 per share of FCF as Trent 1000 costs subside
Trent 1000 review provides greater certainty to customers and
clarity to investors:
-- Progress in resolving Trent 1000 issues with only one major design fix remaining
-- Improved high pressure turbine (HPT) blade for Trent 1000 TEN
- the final fundamental issue to address - postponed to 2021. Based
upon recent testing and our detailed technical evaluation we are
resetting financial and operational expectations for the Trent 1000
TEN based on a more conservative estimate of final HPT
durability
-- Total expected in-service cash costs of around GBP2.4bn
across 2017-2023. This includes GBP1.6bn as previously guided, the
GBP400m increase announced today, and GBP400m of Trent 1000 TEN
costs previously included within normal programme contingency
-- To minimise the impact on customers, further actions underway
including accelerated investments in additional maintenance
capacity and spare engines to reduce disruption
-- Full financial analysis of Trent 1000 TEN results in a likely
exceptional charge of c.GBP1.4bn to operating profit in FY 2019.
This represents the additional near term costs of customer
disruption and remediation shop visits highlighted above, and
provisions against future losses on a small number of contracts due
to our new estimate of HPT durability
-- No material cash or profit effect anticipated on the Trent 7000 following impact assessment
Warren East, CEO, Rolls-Royce said: "In spite of improved
trading since the Half Year, we now expect Full Year operating
profit and free cash flow to be towards the lower end of our
guidance ranges. In Civil Aerospace, while the Trent 1000 costs
remain a headwind, the vast majority of our installed fleet of
widebody engines is performing well, with the Trent XWB surpassing
our expectations. We have seen growth in ITP and steady sales in
Defence. In Power Systems, while trading remains healthy, a small
number of larger projects have been deferred and as a result we now
expect sales growth for the Full Year in the low- to
mid-single-digit range.
"My top priority is improving customer confidence in the Trent
1000. We are today announcing additional action to further expand
our maintenance capacity and increase our stock of spare engines.
We deeply regret the ongoing disruption caused to customers. These
steps, which build upon progress made to date, will further reduce
disruption to our airline customers and give them the certainty
that they need.
"We have completed a detailed technical evaluation of our work
on an improved high pressure turbine blade for Trent 1000 TEN, the
last major redesign activity required for the issues which we have
identified with the engine. Although we regret that the blade will
not be ready when we had originally planned, our understanding of
the technical issues has significantly improved. As a result we are
now able to reset our financial and operational expectations for
the engine based on a blade design with a prudent durability
estimate that we are confident we can deliver. This will give our
customers and ourselves a higher degree of certainty as we plan for
the servicing of the fleet over the coming years.
"With this increased understanding we have been able to carry
out a full financial review of the Trent 1000. The result is a
revised assessment of cost and future profitability of the
programme to provide greater clarity for investors.
"We expect to deliver at least GBP1bn of FCF in 2020,
underpinned by the benefits of our restructuring programme,
operating efficiency improvements, further efforts to reduce
inventory and disciplined capital allocation. Longer term as the
Trent 1000 costs subside, we remain confident in our mid-term
ambition of at least GBP1 of FCF per share."
Group trading update
In the coming weeks we expect to reach a significant milestone
in our Civil Aerospace business with our widebody installed fleet
surpassing 5,000 engines - this is a 50% increase over the past
decade. The vast majority of our installed fleet is performing well
with continued growth in widebody engine flying hours in the third
quarter. The Trent XWB, which is around 15% of our fleet today, and
will be more than half of our new deliveries in the coming years,
is surpassing our expectations for in-service reliability. Visual
inspections and positive engine health monitoring data have allowed
us to keep the fleet leader Trent XWB-84 engines flying for longer
than initially expected. As a result, we are increasingly confident
that the engine will meet and potentially exceed the initial
expectations we had for durability and performance. The Trent 700,
which represents around one third of our installed fleet today,
also continues to deliver excellent performance. We recently
announced the launch of the Pearl 700 business jet engine to power
the new Gulfstream G700. Along with the Pearl 15 announced last
year, this secures our market-leading position in business
jets.
In Defence, we continue to expect steady sales and modest margin
decline in 2019. Investment is progressing well on next generation
programmes to underpin the long term success of our Defence
business in both the UK and US markets.
In Power Systems, the diversified nature of our business and our
globalisation strategy has supported continued growth in the third
quarter, despite challenging conditions in certain end markets.
However, due to delivery deferrals on a small number of larger
projects, we now expect revenue growth in the low- to
mid-single-digit range for the Full Year, versus prior expectations
for mid-single-digit growth.
While we are progressing with our efforts to reduce year-end
inventory from the elevated levels seen at the Half Year results,
the pace has been slower than planned. We now expect Full Year
inventory to be at a broadly similar level to December 2018. We
have made strong progress in our efforts to improve working capital
efficiency, with increased discipline around overdue debt
collection and pursuing contractual entitlements. Defence has
continued to benefit from better-than-expected deposit flows. Along
with discretionary cost control, this strong contribution from
working capital is helping to offset the material Trent 1000 cash
costs we are currently absorbing.
We have continued to deliver on the restructuring plan we
announced on 14 June 2018. The result will be a simpler, leaner and
more agile organisation. The focus to date has been on establishing
our new operating model and on delivering the targeted 4,600
headcount reduction by the end of 2020. We updated on 6 August 2019
that we had delivered one third of these reductions and we expect
to deliver more than half of the total programme reductions by the
end of this year.
Trent 1000 technical update
Returning the Trent 1000 fleet to the level of service which our
customers expect is the top priority of senior management and the
Board. We have been dealing with three significant technical issues
which have affected each of the three variants of the Trent 1000
(Package B, Package C and TEN). Of the nine fixes therefore
required, we have so far designed eight and certified seven which
are now being incorporated into the fleet.
A new HPT blade for the Trent 1000 TEN variant is the final
modification required. Ahead of our plans to start incorporating
this into the fleet in early 2020, we have completed a detailed
technical evaluation of our proposed HPT redesign. We have now
identified that it will not deliver a sufficient level of enhanced
durability and as such we are being prudent in assuming that an
improved blade is unlikely to be ready before the first half of
2021. Through our work we have significantly improved our
understanding of the issue. We are now able to reset our financial
and operational expectations for the Trent 1000 TEN on the basis of
a subsequent final HPT design, with a more conservative durability
estimate that we are confident we can deliver. This estimate is
lower than our initial target but sufficient to meet the needs of
our customers, and allows us to update our forecasts of future shop
visits and maintenance costs. This work will provide customers with
a clearer view of their fleet's servicing requirements and provide
investors with a clearer view of future costs.
Additional action to accelerate the recovery of the Trent 1000
fleet
We are determined to reduce the unacceptable level of disruption
we are causing customers and to bring the number of aircraft on
ground (AOG) down to single digit levels by the end of Q2 2020 - as
stated in our update of 20 September 2019. In light of the
engineering and financial work described above and the regrettable
postponement of the new HPT blade design, we are today announcing
further action to provide customers with greater aircraft
availability:
-- We will invest significantly to increase our stock of spare
engines which will be deployed to dramatically reduce the time it
takes to get aircraft flying again. This helps ensure that we can
keep AOG levels low. We aim to offset the significant majority of
this capital expenditure as we reprioritise spend and deliver
savings elsewhere.
-- We are further accelerating plans to grow our MRO network,
with several major projects underway to deliver a near term
increase in capacity for the Trent 1000. These include the
announcement today that part of our existing sites in Dahlewitz and
Montreal will transition to become service hubs with the capability
of handling Trent 1000 engine overhauls. We have secured the use of
an additional test bed at Dallas Fort Worth to support Trent 1000
engine tests. Additionally, we are investing to expand our capacity
in Derby and double our overhaul capacity at Heathrow. This
investment marks a step-change in our MRO expansion plans and will
assist us over the longer term in meeting the servicing demands of
our growing installed base.
-- We will further step up our investment in engineering to
support the specialist team which has been assembled to focus on
resolving the final design and engineering challenges on the Trent
1000. This effort will be aided by a bespoke facility we have
created in Derby dedicated to Trent 1000 test engines, which is now
fully operational, enabling faster testing and validation of new
component designs.
Greater clarity on financial impact of Trent 1000
We have conducted a thorough review of the Trent 1000 programme.
Building on our increased understanding of the Trent 1000 TEN HPT
issue, Management and the Board now have a clearer view of the
costs associated with resolving the in-service issues. We now
expect total in-service cash costs of around GBP2.4bn across
2017-2023. This includes GBP1.6bn as previously guided at the Half
Year and a GBP400m increase in estimated costs across all Trent
1000 variants. It also now includes the GBP400m of Trent 1000 TEN
costs previously included within normal annual programme
contingency. In 2017-18 we incurred GBP550m of cost on the Trent
1000. We now expect the overall cash impact of dealing with the
in-service issues on all variants of the Trent 1000 to be c.GBP550m
in 2019. We expect costs of GBP450-550m in 2020 and a similar level
in 2021, before declining significantly thereafter.
Separately, as a result of this review, we expect to take an
exceptional charge on the Trent 1000 of c.GBP1.4bn in 2019. This
charge will primarily comprise:
-- Those additional cash costs associated with customer disruption and remediation shop visits.
-- The recognition of future contract losses from a small number
of customer contracts. The cash impact occurs over the 10-15 year
life of the contracts.
We continue to work through the full accounting treatment and
will provide further detail at our Full Year results.
Implications for the Trent 7000
The Trent 7000, which accounts for 1% of our fleet, shares much
of the same core design as the Trent 1000 TEN, but has a less
arduous usage profile in-service. As a result we continue to expect
a materially improved in-service durability of the HPT relative to
the Trent 1000 TEN. It has always been our intention to introduce
the new Trent 1000 TEN HPT blade to the Trent 7000 fleet when it
becomes available. The postponed Trent 1000 TEN HPT blade redesign
will therefore result in later introduction into the Trent 7000.
However, we do not expect a material financial impact, due the
younger and smaller Trent 7000 fleet, together with its less
arduous usage profile. We have also been able to plan our
maintenance capacity and spare engine provision appropriately to
safeguard against customer disruption.
Conference call and presentation details
We will be hosting a conference call and WebEx for analysts and
investors at 8.30am GMT on November 7. To dial-in to the call,
including Q&A participation, please use the dial-in details
below:
United Kingdom Toll-Free: 08003589473
United Kingdom Toll: +44 3333000804
URL for international dial in numbers:
http://events.arkadin.com/ev/docs/NE_W2_TF_Events_International_Access_List.pdf
PIN: 42945821#
To view the corresponding presentation via WebEx please use the
link below:
https://exostar.webex.com/exostar/e.php?MTID=m3494d458448e1d5e84abb27465073660
Disclosures
All commentary in this release relates to the performance of the
core business at underlying FX rates.
Full Year 2019 results
Our 2019 Full Year results will be announced on 28 February
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 billion in 2018, around
half of which came from the provision of aftermarket services.
4. In 2018, Rolls-Royce invested GBP1.4 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. The Group has a strong commitment to apprentice and graduate
recruitment and to further developing employee skills.
For further information, please contact:
Investors:
Peter Lapthorn
Investor Relations Manager
Tel +44 (0)7717 811 069
Peter.Lapthorn@Rolls-Royce.com
Media:
Richard Wray
Director of External Communications
Tel +44 (0) 7810 850 055
Richard.Wray@Rolls-Royce.com
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END
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