30th Jul 2015 11:46
LONDON (Alliance News) - Aerospace and engineering group Rolls-Royce Holdings PLC posted a sharp fall in first half profit on Thursday, hit by weakness in its offshore marine markets due to low oil prices, as revenue increased and the group edged up its dividend payout.
FTSE 100-listed Rolls-Royce said its pretax profit in the six months to the end of June fell to GBP310 million, down 57% from the GBP713 million it posted a year earlier. Revenue rose to GBP6.37 billion from GBP6.25 billion, but profitability is taking a heavy hit from the slowdown in the oil and gas industry, which has hit revenue in Rolls-Royce's offshore marine business, and by a margin squeeze related to the transition to new jet engine programmes.
Still, Rolls-Royce shares were up 2.2% to 746.335 pence on Thursday morning, one of the best performers in the FTSE 100.
Robert Stallard, an analyst at RBC Capital Markets, suggested the share price rise was driven by investors showing their relief that no further cuts to Rolls-Royce's guidance were issued in the earnings report. The company has issued a slew of profit warnings in the past year, hit by declining engine volumes on some key programmes and by squeezes on global military budgets.
Rolls-Royce said its order book at the end of the first half was GBP76.5 billion, up GBP2.8 billion from the start of the year, but said its return on sales fell to 7.3%, down 3.2 percentage points due to an adverse revenue mix and a higher research and development charge.
The order book increase was almost entirely down to the USD9.2 billion engine order the group won from Emirates Airlines back in April.
The company said it will pay a 9.27 pence interim dividend, up 3% from a year earlier.
"In the near term, we are managing a significant transition from mature engines to newer, more fuel efficient ones, such as the Trent XWB, Trent 7000 and Trent 1000. At the same time, we are taking appropriate actions to mitigate the effects of weakness in our offshore marine markets," said Warren East, Rolls-Royce's chief executive.
"While these create a profit headwind in the near term, it is critical we successfully deliver our product launches, complete our supply chain transformation and sustain investment in our businesses to strengthen their competitive positions. The initial phase of my ongoing operational review has and will continue to concentrate on how we drive improvements and sharpen our focus to make us a more resilient and sustainable business," East added.
Warren East only started his role at the beginning of July, following the retirement of his predecessor John Rishton, who had been at the helm since 2011. East is the former chief executive of ARM Holdings PLC, the FTSE 100-listed chip designer, and had to deliver a profit warning within a week of taking the helm.
In that profit warning earlier this month, Rolls-Royce downgraded its underlying profit forecast for the full year, as it faces more challenges in its Civil Aerospace and Marine divisions, and said it expects to take a significant hit in 2016 from the transition of its Trent 700 engine programme, while adding it will halt its GBP1 billion share buyback amid deteriorating free cash flow.
The group said said its revenue guidance for 2015 remains unchanged but said its underlying profit guidance has been downgraded to GBP1.33 billion from GBP1.48 billion, compared to GBP1.4 billion to GBP1.55 billion previously, primarily due to the deterioration in the offshore unit of its Marine division.
And while its revenue guidance for its Civil Aerospace division 2015 remained in place, the group said it now expected to take a GBP300 million hit in 2016, due to the changes in demand and pricing for the Trent 700 programme, which is transitioning to the Trent 7000 engine, along with business jet and regional aftermarket weakness.
Rolls-Royce held firm with that guidance on Thursday, saying that while it expects its aerospace business to improve in the second half thanks to higher deliveries and benefits from its restructuring actions, the Land & Sea division will continue to take a heavy hit from weakness in the offshore marine business, which will be partially offset by better revenue and profit from power systems.
The downturn for the marine business was stark in the half, with order intake falling 46%, its order book declining 16% and underlying revenue down 15%, reflecting a 16% fall in original equipment sales and a 14% drop in services revenue. Underlying profit in the division dropped by 90% on the back of volume reductions, pricing pressure and an adverse revenue mix. Rolls-Royce has also booked a GBP90 million goodwill impairment charge on the business due to the weaker outlook.
The marine business has been hit hard by the cuts to capital expenditure plans by oil and gas companies globally in the face of the falling oil price, as they work to cut costs in order to ensure the projects they are working on remain economically viable.
A report published by Wood Mackenzie, the energy consultancy, over the weekend estimated that oil and gas companies have shelved around USD200 billion in spending on new projects since the oil price began its decline in summer last year.
Roll-Royce said underlying revenue in the civil aerospace business rose by 3%, driven by good service revenue growth and a strong performance for widebody aftermarket revenue, despite modest falls for the RB-211 and Trent 500 engine platforms. Original equipment revenue was down 2% in the half, with lower deliveries for the Trent 700, Trent 900 and some business jet engines, which was partially offset by higher deliveries of Trent 1000, Trent XWB and BR725 engines.
But underlying profit in the civil aerospace business fell by 39% in the half, driven by the transition to newer products, a reduction in "linked" accounting and a higher research and development charge, the latter related to spending on the Trent 7000 and Trent XWB-97 engines.
Underlying figures exclude the impact of mark-to-market adjustments in Rolls-Royce's hedge book, post-retirement financing and the effects of acquisition accounting.
Underlying revenue for defence aerospace fell by 1% in the half, driven by flat services revenue and a 2% decline in original equipment sales. The business also benefited from the stronger dollar and, without that, revenue would have dropped by 5%, thanks to weaker helicopter engine and trainer engine demand.
Rolls-Royce said underlying revenue in its power systems business, which makes engines for land, rail and defence vehicles, fell by 14% in the half thanks to lower sales to naval customers. Underlying profit also plunged lower, down 73%, courtesy of volume reductions and an adverse revenue mix.
Underlying revenue in its nuclear business increased, however, up by 6% on the back of higher original equipment sales from the first units being delivered for the French nuclear reactor fleet. Services revenue in the division also rose thanks to its submarines business.
By Sam Unsted; [email protected]; @SamUAtAlliance
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