February 14, 2017 / 7:49 AM / 10 months ago

Rolls-Royce pays high price for past sins, weak pound

LONDON (Reuters) - Rolls-Royce said it would step up efforts to boost performance after a bribery fine and a blow from the plunge in the pound pushed the aero-engine maker to a record annual loss of 4.6 billion pounds ($5.8 billion).

FILE PHOTO - Rolls Royce Trent XWB engines, designed specifically for the Airbus A350 family of aircraft, are seen on the assembly line at the Rolls Royce factory in Derby, November 30, 2016. REUTERS/Paul Ellis/Pool/File Photo

Chief Executive Warren East, appointed in 2015 to revive the ailing British industrial icon, is grappling with falling revenue from older engine programs and the need to invest more in new technology, for example to power the A330neo aircraft.

After announcing that full-year underlying pretax profit halved to 813 million pounds, East said on Tuesday that further change was required and promised to set out his long-term vision for the business in the coming months.

“While we have made good progress in our cost cutting and efficiency programs, more needs to be done to ensure we drive sustainable margin improvements within the business,” he said.

Rolls-Royce, which makes engines for wide-body civil jets, and defense and marine customers, said it expected “modest performance improvements” this year and would aim to keep its free cash flow at a similar level to 2016.

Last year, after a string of profit warnings, Rolls halved its dividend to 7.1 pence a share, the first cut for 24 years.

It maintained the final payout at the same level this time. Chief Financial Officer David Smith said it “wasn’t appropriate” to increase it given the demands for cash on the business.

Rolls is developing new engines for the Airbus A350-1000 and A330neo, and it is targeting a more than 50 percent share of the widebody installed base by the early 2020s.

East said the group had made good progress in ramping up production, increasing rates to around 500 large engines in 2017 from 357 last year.

MARINE BUSINESS SINKS

One top-five investor in Rolls, Baillie Gifford, backed East’s strategy, which achieved 60 million pounds in savings in 2016.

“We are heartened to see that he is as focused on the culture of the business as on the strategy,” a spokeswoman said, also welcoming efforts to turn the page on bribery allegations.

“We are confident that the company will now put these issues behind them and the strategic turnaround of Rolls Royce will remain firmly on course.”

All of Rolls’s divisions posted a drop in underlying profit, including a 60 percent slump in civil aerospace, while its marine business fell into the red.

The company has been hit by a slowdown in high-margin aircraft engine servicing, in part caused by the reduced use of older aircraft, and lower sales of its Trent 700 engine that powers the Airbus A330, which is being superseded by the A330neo.

However, East said growing demand for long-haul air travel and the roll-out of new engines such as the Trent XWB, 1000 and 7000, gave him confidence in his civil aerospace strategy.

Prospects are not as bright for its marine business, which has been hit by weak demand from shipping and energy customers. It took a 200 million pound goodwill impairment on the unit.

East said there was no “immediate will” to exit the marine sector, but the business needed to be “right sized” to break even when demand was low.

BIG CHARGE

The drop in the pound against the dollar led to a 4.4 billion pound non-cash hedging charge. Most aircraft deals are priced in dollars, forcing Rolls to hedge future income.

The headline loss also included the 671 million pounds it agreed to pay to settle bribery investigations in Britain, the United States and Brazil last month. The sum is payable over five years, but Rolls-Royce has taken the full charge now.

Shares in the company, which have risen 50 percent from the five-year-lows hit in early February 2016, reversed early gains to trade down more than 4 percent at 709 pence at 1625 GMT.

Analyst Andy Chambers at Edison Investment Research said that ignoring the headline loss, the underlying performance of Rolls-Royce was ahead of both its own and market expectations.

On the dividend decision, he said “this might be considered a little conservative following the pain shareholders have suffered in the last few years”.

Editing by Keith Weir

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