(Bloomberg) — Rolls-Royce Holdings Plc Chief Executive Officer Warren East unveiled lackluster first-half results in his final earnings presentation while saying a mounting recovery in long-haul travel means the jet-engine maker should still hit its full-year financial targets.
The UK engineering giant posted an underlying operating profit of 125 million pounds ($152 million) for the first six months, down from 307 million pounds a year earlier and lower than predicted by analysts.
Shares of London-based Rolls fell as much as 8% and were trading 6.9% lower as of 9:37 a.m., extending their decline this year to 31%.
Rolls-Royce has endured a slow recovery from the Covid crisis as lingering barriers to international travel hold back flights with the long-haul planes it powers, depressing both new sales and revenue from shop visits. East, who exits at the end of 2022, pointed to a 1.1 billion-pound drop in cash outflow as a sign of progress and said he sees demand accelerating later into the year.
Flying hours for wide-body engines, a key metric for vital overhaul activity, are still down 40% on pre-pandemic levels, while Rolls continues to struggle with supply-chain disruption and faces challenges including rising inflation.
Still, East reiterated full-year financial targets of low-to-mid-single digit underlying revenue growth, an unchanged operating margin and modestly positive free cash flow this year, weighted toward the second half.
Cost Concern
Agency Partners analyst Nick Cunningham said in a note that Rolls’s revival has been a slow one, and that while the first-half results should represent a “crossover point” from loss to recovery, there’s a risk that challenges could “crystallize as real costs in the meantime.”
The company sees large- and business-engine deliveries at 309 for the full year, the same as in 2021. It issued fresh guidance for the defense business, saying it expects a low double-digit margin as it boosts investment to support future growth and recent orders.
Rolls-Royce also got a boost this week from Spanish approval for the sale of its ITP Aero arm, set to generate proceeds of 1.7 billion euros ($1.8 billion).
East declined to specify challenges for successor Tufan Erginbilgic, who spent 20 years at BP Plc before joining private equity firm Global Infrastructure Partners, saying he inherits “sustainable” foundations to build on.
Narrow-Body Decision
One decision facing Erginbilgic will be whether to re-enter the market for narrow-body plane engines. East said that Rolls is “of course” interested in powering such aircraft, which represent the biggest sector in aviation, but lacks industrial capacity to address demand alone and would need a partner.
Rolls-Royce previously made turbines for single-aisle jets with Pratt & Whitney via the International Aero Engines joint venture. Pratt currently competes with the CFM International alliance of General Electric Co. and Safran SA.
Rolls said that parts and raw-material shortages are less severe in the wide-body engine sector, given its lower volumes. The company is managing to source sufficient titanium, though semiconductors used by its power-systems arm are more of an issue.
UK aerospace and defense supplier Meggitt Plc separately reported a 27% gain in adjusted first-half operating profit to £78.6 million. CEO Tony Wood, a former Rolls executive who was tipped for the top job before East got the role, said he was “encouraged by the strong recovery in passenger demand.”
The company said its £6.3 billion takeover by US rival Parker-Hannifin Corp. remains on track for completion in the third quarter after UK authorities cleared it in July.
(Updates shares in third paragraph, adds engine flying hours in fifth, analyst comment in seventh, CEO comments on narrow-body market, supply-chain issues from 11th)
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