Rolls-Royce posts £4.6bn loss, expects 'modest' improvement in 2017
Rolls-Royce posted a record £4.6bn pre-tax loss but revealed a better than expected underlying profit and that efforts to cut costs as part of its transformation programme were at the top end of expectations.
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For 2017 the engine maker said it expected "modest" improvement in sales and targeted free cash flow to be "similar to 2016".
The pre-tax loss, which is one of the biggest in corporate history, reflects a £671m corruption fine but more so the collapse of the pound, which led to a £4.4bn non-cash write-down of the company's derivatives contracts.
Revenue for the calendar year of £14.96bn was up 9% on a reported level, though underlying sales falling 2% to £13.78bn due to a weakness in the marine market coming from the oil-price slump.
At the underlying level profits at constant exchange rates were down 49% to £813m, with profits down in all its segments, including a 280% fall in marine and 60% for civil aerospace.
However, this was much better than the consensus £685m profit forecast by City analysts, though in early reactions there were differing opinion around whether the company had truly turned a corner.
On cost-cutting, chief executive Warren East said so far more than £60m of 'incremental in-year' costs had been removed, having initially guided to around £50m.
A £80-110m further in-year cuts are expected in 2017 as the company keeps on track for around £200m annualised run rate by end 2017.
"2016 has been an important year as we accelerated the transformation of Rolls-Royce," East said.
"Despite the significant market and aerospace product transition challenges identified in 2015, we have made operational progress and performed ahead of our expectations for the year as a whole.
"At the same time we have delivered major changes to our management and processes and, while we have made good progress in our cost cutting and efficiency programmes, more needs to be done to ensure we drive sustainable margin improvements within the business."
The massive loss, which was well known by the market in advance, did not affect the dividend, with a full year payout of 11.7p per share, down from 16.4p in 2015.
Shares in the FTSE 100 group dived 3% on opening on Tuesday, and were down 1.5% at 728p after around half an hour of trading.
But the result was not as bad as it looks, said analyst Neil Wilson at ETX Capital, when the effect of the pound and the corruption fines were stripped out.
"The loss hasn’t affected the dividend but concerns about the marine business remain. There are lots of questions for the business about where it’s going but this huge loss shouldn’t blind investors to some solid fundamentals."
Jefferies was encouraged that underlying civil large engine aftermarket revenues returned to growth in the second half, which "is the key as we expect cash receipts from flight-hour payments to grow much faster than spend on overhauls".
With the 2017 free cash flow guidance of £100m, and R&D and capex sustained, this made it clear to Jefferies that positive cash flow is happening for operational reasons, not due to lower investment. So while the turnaround "may be slow in financial terms... operationally and fundamentally it is faster".