Photographer: Chris Ratcliffe/Bloomberg

Rolls Profit on Hold Until Second-Half Gain in Engine Deliveries

  • Aerospace giant struggling to break even in first six months
  • CEO East says 2016 `challenging' amid shift between products

Rolls-Royce Holdings Plc said it may not make a profit in the first half of 2016 as earnings are weighted toward an upturn in deliveries of larger jet engines later this year, as well as the impact of restructuring steps.

Rolls said in a statement Thursday that it expects to be “close to breakeven” in the first six months, with profit before financing charges and tax improving “significantly” in the second half, while adding that trading so far this year has matched expectations and affirming its annual earnings outlook.

Chief Executive Officer Warren East reiterated that 2016 will be a “challenging year overall” as London-based Rolls transitions between products and responds to weaker demand at its marine unit, which mainly serves the oil industry.

Rolls-Royce shares fell as much as 6.7 percent, the most since Nov. 12. The stock had its biggest gain in 12 years on Feb. 12 as East ended a run of six profit warnings and said restructuring efforts and cost cuts were bearing fruit.

The CEO today reiterated full-year guidance that envisages a 650 million-pound ($944 million) hit against earnings from slowing business-jet sales, slumping revenue from maintaining regional aircraft and the marine-engine issue.

Cash Flow

Free cash flow will also be significantly more weighted toward the second half than in 2015, he said, while the outlook excludes foreign-exchange effects that could boost revenue by 450 million pounds and improve pretax profit by 50 million pounds.

Sandy Morris, an analyst at Jefferies Equity Research, said that while he’d estimated underlying earnings before interest and tax at 268 million pounds in the first half, the new guidance doesn’t change anything “fundamental,” with Rolls subject to so many variables including its restructuring, research spending, evolving engine programs and long-term contracts.

Rolls-Royce said it’s well on track to delivering targeted cost saving of 30 million to 50 million pounds this year, and that the restructuring of its civil aerospace, defense and marine arms is also proceeding as planned.

The stock was trading 4.7 percent lower at 615 pence as of 9:35 a.m. in London, paring gains this year to 8.2 percent and valuing the company at 11.3 billion pounds.

Rolls-Royce delivered the update ahead of its annual shareholder meeting in Nottingham, close to its main manufacturing site in Derby, England.

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