16th Nov 2016 08:49
LONDON (Alliance News) - Engineer Rolls-Royce Holdings PLC on Wednesday said the outlook for its end markets remains mixed, but it remains on track to meet its financial and restructuring targets.
The group also outlined how the change in its accounting standards due to come into force in 2018 will impact its profit and revenue, though said it does not expect any change to its cash flow expectations from the new rules.
Shares in the group were down 0.1% at 754.00 pence on Wednesday morning.
The jet engine and power turbine maker, beset by profit warnings in recent years, is in the midst of a massive restructuring programme designed to simplify the business and increase its efficiency. At the group's interim results in July, Chief Executive Warren East said Rolls-Royce was "removing wasteful activity" in the business, including cutting lead times on engine development and reducing production cycle times, partly by reducing the number of internal meetings.
On Wednesday, Rolls-Royce said demand in its Civil Aerospace division remains strong, reflecting a robust order backlog for its XWB engines. Demand for business aviation original equipment has weakened further, however, it said.
The outlook for the Defence business remains positive overall, boosted by aftermarket opportunities, but Rolls-Royce said the outlook for its Power Systems unit is mixed, with weaker demand for industrial engines offsetting stable marine and power generation markets.
No signs of recovery have yet emerged from its Marine business in the oil and gas industry, however, with the order book very weak and further revenue softness expected in 2017. The nuclear business is expected to benefit from improved submarine activity, the company said.
Rolls-Royce said its restructuring plans are on track to achieve annualised cost savings at the upper end of its GBP150.0 million to GBP200.0 million a year guidance, with these to flow through fully by 2018. Exceptional costs for the programme to be booked in 2016 remain on track with the company's expectations.
"We have made steady progress in 2016 to date, delivering a ramp up in large engine production and implementing the first stage of our transformation programme. At the same time we have managed well mixed markets for our Marine and Power Systems businesses. Overall, we remain comfortable that our expectations for profit and free cash flow remain achievable," said Warren East, Rolls-Royce's chief executive.
In 2018, Rolls-Royce will adopt new accounting standards which will specify how and when the company should recognise sales and losses. In the past, the company has brought forward earnings from its long-term service contracts in order to mitigate the fact many aerospace engines are often sold at an initial loss.
But from 2018, Rolls-Royce only will be allowed to recognise the revenue when services are delivered.
Rolls-Royce provided details on Wednesday of how this would impact its Civil Aerospace division. It said the new rules would not change the cumulative profit and cash flow recognised by the company over the life cycle of a product.
But the changes in recognising revenue and profit would, in 2015, have resulted in Civil Aerospace revenue and operating profit taking a GBP700.0 million hit on original equipment and a GBP200.0 million hit on aftermarket services.
"The new standard provides a number of benefits to the business. As it brings profit performance for OE more in line with cash generation, it will put a sharper focus on improving productivity across our manufacturing activities," said David Smith, Rolls-Royce's chief financial officer.
"At the same time, the change to aftermarket accounting, particularly in Civil Aerospace, reinforces our focus on cash flows, as we look to improve further our strong reputation for customer service by maximising engine availability while minimising cost," he added.
Rolls-Royce is hosting a capital markets day on Wednesday, and CEO East outlined a series of strategic pushes within the business designed to improve performance.
In the Power Systems business, Rolls-Royce is focusing its product development work more keenly, including on gas engines and growing its integrated system capabilities. In the Nuclear unit, the group is investing in research and development work and broadening its civil nuclear offering to broaden its potential end markets.
At Civil Aerospace, investments are being made in production capacity and advanced manufacturing, in addition to cost cutting across the business and a wider push to increase efficiency.
The Marine arm, hit hard by the downturn in the oil and gas industry, is seeking to trim its fixed cost base and making targeted investments to support potential growth opportunities in its markets.
By Sam Unsted; [email protected]; @SamUAtAlliance
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