Rolls-Royce sticks to cash flow target after £4bn loss

(Sharecast News) - Rolls-Royce reported a £4bn annual loss that was worse than expected but stuck to its prediction that it would start to generate cash in the second half of 2021.
The company swung to a £4bn underlying pretax loss in the year to the end of December from a £583m profit a year earlier as underlying revenue fell to £11.8bn from £15.5bn.

Analysts had on average expected a £3.1bn underlying pretax loss. The group's reported operating loss widened to £2.1bn from £852m.

The company's shares rose 1.6% to 114.8p at 09:37 GMT. The shares have more than halved since the start of 2020 and dropped below 40p at the peak of the company's troubles in October.

Rolls-Royce burned through £4.2bn of cash in 2020. The company predicted it would take a further £2bn cash flow hit in 2021 based on engine flying hours reaching 55% of 2019 levels. Cash flow will turn positive in the second half and reach at least £750m as early as 2022, Rolls-Royce said.

Rolls-Royce's civil aerospace business was hammered by the Covid-19 crisis as the airline industry faced the greatest emergency in its history. The business makes most of its money from payments based on the flying hours of its jet engines and with fleets grounded worldwide revenue crumbled.

The operating loss included £1.4bn of impairments and write-offs, £489m for restructuring, and a £620m provision release on the Trent 1000 engine programme. The pretax loss also included a £1.7bn for a foreign exchange hedge book reduction.

Rolls-Royce said it cut about 7,000 jobs during 2020 and cut more than £1bn extra costs compared with pre-pandemic plans. The group raised £7.3bn of debt and equity to survive including £2bn from a rights issue.

Chief Executive Warren East said: "The impact of the Covid-19 pandemic on the group was felt most acutely by our civil aerospace business. In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost reduction measures.

"We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce."

Civil aerospace posted a £2.6bn underlying operating loss as revenue fell 37% to £5.1bn. Defence revenue rose 4% and profit increased 8% to £448m and power systems' profit halved to £178m as revenue dropped 14% to £2.75bn.

Michael Hewson, chief market analyst at CMC Markets, said the company's projections appeared optimistic because air travel is unlikely to return to anything like normal in 2021 and the UK government is planning a slow reopening.

"This morning's numbers are a sobering reminder of how much damage the pandemic has done to an iconic brand, and also illustrate how hard the long road back will be," Hewson said.

"With normal service in civil aviation likely to take years to return to normal it will be more important than ever that Rolls Royce steps up in other areas of its business to offset the revenue hit to civil aviation over the next few years, and get greater returns there."