Rolls-Royce Aims to Sustain Profit Gain on Airliner Demand

Rolls-Royce Holdings Plc, the world’s second-largest maker of commercial aircraft engines, predicted rising profit for this year, extending its streak of annual gains into a second decade as airliner demand booms.

The company projects “modest growth in underlying revenue and good growth in underlying profit with cash flow around break even” for this year, Rolls-Royce said today as it reported earnings. Commercial aircraft engine profit should grow strongly, with defense profit falling on “modest” revenue growth, it said.

Chief Executive Officer John Rishton said he’ll continue honing the portfolio after disposing of assets including tidal-power generation and a stake in a fuel-cell business. Rolls-Royce has benefited from sustained demand for new, more fuel-efficient aircraft that has helped boost turbine sales and offset sluggish demand in areas such as marine sales.

“The strength of our order book demonstrates the confidence our customers have in our products and services,” said Chief Executive Officer John Rishton, who joined in 2011. “Our priorities remain: delivering on the promises we have made; deciding where to grow and where not to; and improving financial performance.”

Rishton said there has been no effect on deal flow from a review by the U.K. Serious Fraud Office into potential wrongdoing in business dealings in Asia. The company’s order book increased 4 percent last year to 60.1 billion pounds. The SFO is reviewing data to determine whether to start a formal probe of Rolls-Royce.

“We haven’t heard anything explicitly from them about their plans,” Rishton said.

SFO Review

Rolls-Royce named David Gold last month to review anti-corruption procedures. Rishton said that Gold has taken up his duties and declined to say when he may issue a first report.

The company named Simon Robertson as chairman today, who succeeds Ian Davis, 61, and will be charged with defending Rolls-Royce in case of a widening probe. Davis is a senior adviser at private equity firm Apax Partners LLP. BAE Systems Plc, in its own battle with the SFO two years ago, leaned heavily on chairman Dick Olver to defend the company.

Rolls-Royce rose as much as 20.5 pence, or 2.1 percent, to 1,005 pence in London. The stock has advanced 15 percent in six months, valuing the company at about 18.54 billion pounds. General Electric Co. is the world’s largest maker of aircraft engines.

Possible Headwinds

Challenges for this year include a fall in defense profit and achieving first flight of its newest aircraft engine, the TrentXWB, on the Airbus SAS A350 long-range jet. The growing marine business should see profit increase while energy activities also should see improvement, Rolls-Royce said.

Pretax profit excluding currency hedging and some one-time items advanced 24 percent to 1.43 billion pounds ($2.2 billion) from 1.15 billion pounds last year, the London-based company said. Analysts predicted 1.48 billion pounds, according to estimates compiled by Bloomberg.

Rishton declined to say what disposals may be considered on a call with journalists. The grounding of the Boeing Co. 787 Dreamliner, for which Rolls-Royce provides engines, isn’t affecting the business, Rishton said, adding he’s confident the U.S. manufacturer will overcome the technical issues on the jet. Rolls powers 22 of the 787s delivered before flights were halted by regulators.

Commercial Growth

Talks continue with Air France-KLM over support arrangements for TrentXWB engines, he said. Air France wants to service the engine to bolster its maintenance arm and has held off on placing a firm order for the A350 until negotiations are completed. Rishton would not say when talks may conclude.

Commercial aircraft engine sales last year increased 31 percent and revenue from support of existing powerplants, which lagged in the first six months, grew 5 percent over the full year. Total underlying revenue reached a record 12.2 billion pounds.

Results include gains from Rolls-Royce’s stake in Tognum AG, a joint venture with Daimler AG. They exclude a $1.5 billion one-time payment the company received for its share in the International Aero Engines joint venture while including sales it continues to generate as a supplier to the consortium.

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