Rolls-Royce has said its restructuring plans are on track to deliver their targeted £1.3bn cost savings by 2022; at least £1bn of near-term cash cost mitigations confirmed for 2020, with Power Systems end markets seeing some early signs of improvement, and Civil Aerospace large engine flying hours gradually recovering; year-to-date 42% of 2019. It added that Defence remains resilient with strong order cover for 2021, and £5bn package completed in November to increase resilience, strengthen the balance sheet and support long-term strategy. It noted further expected 2020 FCF of approximately £(4.2)bn, subject to timing of year-end working capital cash flows; resulting in year-end net debt £1.5bn – £2.0bn and liquidity £8.5bn – £9.0bn.
“We expect to turn cash flow positive at some point during H2 2021, target at least £750m free cash flow (excluding disposals) as early as 2022 and at least £2 billion from disposal proceeds,” the company stated.
Warren East, CEO, said: “We have taken decisive actions to protect and reposition our business in difficult and uncertain trading conditions, including the impact from a second wave of COVID-19. We have made rapid progress on our restructuring programme and the consolidation and reorganisation of our Civil Aerospace footprint is well underway. Our £5 billion recapitalisation package in November was well supported and has increased our resilience and strengthened our balance sheet. The outlook remains challenging and the pace and timing of the recovery is uncertain. However, our actions have given us a strong foundation to deliver better returns as our end markets improve and we continue to drive our ambition of delivering more sustainable power to support the creation of a net zero carbon economy.”
“Prior to COVID-19 we were reaching a pivotal point in Civil Aerospace. Following a period of rapid growth and new engine programme launches, R&D investment demands were falling and returns improving as we began to benefit from our large and growing installed base and reduced losses on new installed engines,” Ro;;s-Royce said, noting that the benefits from this have been delayed due to COVID-19, “but the fundamental drivers of having a more efficient business with stronger margins and better returns remain intact and position us well for the eventual rebound.”
Rolls-Royce noted also that in the 11-month period to end November, large engine LTSA invoiced flying hours (EFH) were approximately 42% of their prior year level. EFH have gradually improved since the trough in April although more recently the pace of recovery has slowed due to the second wave of infections in some geographies.
“In October and November combined, EFH increased to approximately 33% compared to 2019. In Q3 our EFH were 29% of the prior year, an improvement versus the 24% seen in Q2. We have reduced the pace of production for our large engines and our full-year guidance for approximately 250 deliveries is unchanged,” Rolls-Royce said.
According to the company, business aviation has continued to see less of an impact than scheduled commercial flights with flying hours holding up relatively well, despite border restrictions being in place in many parts of the world.
The company said its Defence business has remained resilient with good cash conversion. “We have a strong order book and 2021 forecast sales are well covered,” it also said, noting: “We continue to focus on key growth opportunities for our core products in the US and the UK. In addition, we are innovating in adjacent products and growing our aftermarket revenues from our large installed base.”
Furthermore, it stated that Power Systems has experienced a significant fall in demand in most non-governmental end markets this year. The activity declines seen in the second quarter caused by the pandemic continued into the second half of the year, except in China where economic activity has recovered more quickly and we have continued to grow our market share.
“In recent months, we have seen some early indications of order intake levels picking up and year-to-date our net book:bill ratio has been approximately 1x. In November, at the China International Import Expo, we announced provisional agreements with six Chinese companies for almost 1,000 MTU engines and systems,” Rolls-Royce said.
In line with the challenging Civil Aerospace market trends, ITP Aero has seen a continued negative impact on trading. Defence, which represents 25% of ITP Aero volumes, benefited from the Eurofighter order from the German Airforce for 56 EJ200 engines.
According to Rolls-Royce, “the pandemic is causing a reduction in demand for our Civil Aerospace products and services that we expect will take several years to recover and as a result we announced, on 20 May, a major reorganisation programme. We have made good progress towards our target for £1.3 billion of pre-tax cash cost savings and a reduction of at least 9,000 roles by the end of 2022.”
More than 5,500 roles will have been removed by the year end, Rolls-Royce explained, ahead of our prior expectation of over 5,000, with a significant proportion achieved through voluntary severance. It also noted that the company is in consultation regarding the next phase of our Civil Aerospace footprint review, “which includes a proposal to transfer our facility and workforce in Hucknall, UK, which manufactures a range of aero-engine parts, into ITP Aero.”
Rolls-Royce further said they are also proposing to consolidate the manufacture of aero-engine structures into ITP Aero, adding that these difficult but necessary decisions will help generate efficiency savings for the Group and strengthen ITP Aero’s capabilities.
“Our mitigating actions to preserve cash in 2020 are on track to deliver more than £1 billion of in-year savings in 2020. We expect approximately £4.2 billion free cash outflow in 2020, reflecting the impact of the second wave on flying hours in the fourth quarter. The actual outturn will be influenced by the timing of significant working capital cash flows around the year-end, in particular for original equipment concession payments which depend on the timing of new aircraft deliveries to airlines,” the company said.
“Rebuilding our balance sheet and increasing our financial resilience are key to our ability to position our company for the future,” Rolls-Royce noted, explaining that “Our £5 billion recapitalisation package, completed in November, comprised £2 billion of new equity, £2 billion in new bonds with maturity in 2026/2027 and a £1 billion 2-year bank facility that remains undrawn. This extended and replaced shorter term facilities including an undrawn £1.9 billion revolving credit facility which was cancelled when the new financing was finalised. As a result, we expect to end the year with net debt of between £1.5 billion and £2.0 billion, excluding lease liabilities of approximately £2.1 billion, and liquidity between £8.5 billion and £9.0 billion,” it further explained.
“As we look ahead, we are confident in our plans to position the business for the recovery as we deliver our reorganisation programme in Civil Aerospace to align to future demand and realise the opportunities for future growth as our end markets recover. The fundamental drivers behind long-term growth in global commercial flights remain intact.”
According to Rolls-Royce, “While many of our end markets continue to be significantly affected by COVID-19, we will continue to actively respond to any changing timing of recovery and the recent news on effective vaccines is encouraging. Commercial air travel looks likely to recover slowly in the first half of 2021, reflecting the reduced winter schedules planned by the airlines and continuing the trends seen in the second half of 2020. We anticipate an improvement in the second half of 2021 as vaccination programmes support the further reopening of borders and economic recovery.”
“We continue to expect the Group to turn cash flow positive at some point during the second half of 2021, as we mitigate the uncertainty of the timing and shape of the recovery through cost-saving and capital allocation actions. Our target to deliver at least £750 million free cash flow (excluding disposals) as early as 2022 is also unchanged,” it concludes.
Our 2020 Full Year results announcement will be published on 11 March 2021, the company said.