31st Jul 2014 07:33
LONDON (Alliance News) - Aircraft and marine engine maker Rolls-Royce Holdings PLC Thursday reported lower profit for the first half of the year as it had predicted, blaming lower defence spending and weaker trading in marine, and said its recovery would take time as it invested in revamping its plants and delivering its order book.
The company saw its shares fall sharply in mid-February after it surprised markets by warning that it expected a pause in overall profit and revenue growth in 2014 due to falling revenue in its defence businesses and lower marine unit revenue.
Its prediction is proving correct. Its profit before tax and financing fell GBP491 million for the six months to June 30, from GBP848 million a year earlier, as revenue dropped to GBP6.63 billion, from GBP7.35 billion. It actually swung to a net profit for the period of GBP544 million, from a loss of GBP385 million a year earlier, but this was almost completely down to a GBP1.4 billion increase in the mark-to-market value of derivative contracts it holds.
Chief Executive John Rishton said the company is maintaining its reduced guidance, even though it is expecting an improved profit in the second half of the year driven by cost cutting and higher revenue. He cautioned investors that the company has short-term challenges, but reminded them that Rolls-Royce ""is a long term business".
"The prospects for long-term growth remain outstanding across the group and in particular in
civil large engines where our market share of engines on order is over 50%. However, we will
experience growing pains. For example, we are investing in new capacity ahead of delivering
our order book and restructuring existing facilities to improve efficiency,? Rishton said in the earnings statement.
Rolls-Royce, like peers in the defence sector, has been hit hard by a slowdown in defence spending, particularly in the UK and US. Defence budgets have come under pressure as governments tightened purse strings in the wake of the financial crisis and massive bank bailouts. and as recent conflict zones like Iraq and Afghanistan were wound down.
Rolls-Royce had managed to offset this with the work it gets from the commercial aerospace market, where it competes mainly with General Electric Co to fit engines to planes made by Airbus and Boeing Co and then to win contracts to service and maintain those engines.
However, it recently lost two commercial engine contracts, although it won several more deals at the recent Farnborough Air Show. In early June, Emirates airline decided to cancel an order for 70 Airbus A350 aircraft, which had been due to be fitted with Rolls-Royce Trent XWB engines. That wiped about 3.5%, or GBP2.6 billion, off the Rolls-Royce order book. Earlier this week, Airbus terminated an order for six A380 aircraft from Skymark airlines of Japan, a move that hit the Rolls-Royce order book by another GBP351 million.
Overall, Rolls-Royce said its order book stood at GBP70.44 billion at the end of the first half, down 2% from GBP71.61 billion a year earlier. Order intake in the first half was GBP6.5 billion. Critically, it said its defence order book had grown for the first time since 2010, while its marine order book grew for the first time since 2012, boding well for the future.
The company said it was concentrating on driving down costs. "We have 600 engineers
working to reduce cost, with 400 focused on original equipment and 200 on aftermarket. This is
yielding benefits," it said.
Rolls-Royce shares were down 1.8% at 1,035.66 pence early Thursday, one of the biggest declines on the FTSE 100.
By Steve McGrath; [email protected]; @stevemcgrath1
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