Rolls-Royce Jumps Most Since 2002 After East’s Profit Surprise

  • Shares surge close to 20 percent as CEO’s cuts take effect
  • Aero-engine giant’s earnings still 76% down on a year earlier

Rolls-Royce Holdings Plc surged after the aircraft-engine maker dogged by a succession of earnings shocks in recent years posted a first-half profit that beat estimates as Chief Executive Officer Warren East’s savings program kicks in.

Shares of London-based Rolls rose almost 20 percent Thursday, the most in close to 14 years, after it reported an adjusted pretax profit of 104 million pounds ($124 million) following analyst forecasts for a 19 million-pound loss.

The company, which previously endured five profit warnings in less than three years, has now gained more than 50 percent since the start of 2016 after its market value slumped by about one-third in each of the past two years.

East, who is cutting jobs and reorganizing the business after taking over last July, said he’s confident that a ramp-up in wide-body engine deliveries combined with higher service revenue will enhance gains in the second half. Savings benefits of 50 million pounds from the turnaround plan are expected this year out of 200 million pounds targeted through 2017, he said.

“We have taken some positive first steps,” said East, who had predicted the company would be close to break even in the first six months. “Order intake has been good and, although known headwinds constrained revenue and profit in the first half, the business remains well positioned.”

Cash Boost

Rolls-Royce’s adjusted pretax profit was still 76 percent lower than the 439 million pounds recorded a year earlier, while underlying sales fell 5 percent to 6.14 billion pounds.

While Rolls remained cash negative, the outflow was cut to 399 million pounds from 576 million pounds a year earlier, aided by contracts signed with key clients at the very end of the half, according to the company. Sandy Morris, an analyst at Jefferies International in London, said the trend was “comforting” and that the results may mark “a turning point, not least in sentiment.”

Rolls-Royce stock surged 143.5 pence or 19.6 percent, to 875.5 pence, the biggest intraday gain since Sept. 20, 2002, and was up 18 percent at 871 pence as of 10:48 a.m. in London, valuing the company at 16 billion pounds.

Management Cuts

Job cuts are continuing as part of a cull of up to 25 percent of the company’s 2,000 management positions, with 270 posts having been cut so far out of an expected total of around 400, East said in a telephone briefing.

Rolls-Royce has been grappling with a collapse in sales at its maritime engines unit linked to the oil-price slump, combined with slowing demand for travel on long-haul routes that has been weighing on maintenance revenue, which provides the bulk of profit.

The marine arm’s first-half performance was “less bad” than anticipated, with underlying revenue down 25 percent, East told analysts. The division is investing in new products while pursuing naval and merchant-marine sales to offset the reduced requirement for offshore oil and gas vessels.

Civil aerospace revenue slipped 5 percent as Airbus Group SE’s handover rate for the A350 wide-body jet, which accounts for 50 percent of Rolls’s engine backlog, was lower than planned amid issues with seat and cabin suppliers. Transitioning between the Trent 700 and 7000 engines for the current and future A330 models has also taken a toll, and sales of turbines for business aircraft remain down, Rolls said.

Rolls-Royce will get a 60 million-pound boost to earnings in the full-year on the back of Sterling’s decline against the dollar -- in which it prices its engines -- in the lead up to and immediate aftermath of Britain’s decision to exit the European Union, if exchange rates remain at current levels. That includes a 19 million-pound boost in the first half, Chief Financial Officer David Smith said.

Including items, Rolls posted a 2.15 billion-pound first-half loss that reflected a 2.2 billion-pound mark-to-market revaluation of its derivatives. The measure has no impact on the company’s business or cash position, East said.

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