August 6, 2019 / 6:39 AM / 13 days ago

Rolls-Royce expects cash flow rise in second half as engines are delivered

LONDON (Reuters) - British engineer Rolls-Royce said a build-up of inventory such as the Trent 7000 engine that powers the Airbus A330neo would unwind in the second half and drive a “significant improvement” in cash flow.

Warren East, CEO of Rolls Royce, speaks at the Confederation of British Industry's (CBI) annual conference in London, Britain, November 19, 2018. REUTERS/Toby Melville/Files

Chief Executive Warren East said Rolls was on track to meet its guidance of 700 million pounds ($854 million), give or take 100 million pounds, in cash flow this year, despite its outflow in the first half jumping to 429 million pounds.

“We expect a significant improvement in cash in the second half as we unwind inventory built up to support customer deliveries and benefit from improved trading in both Power Systems and Civil Aerospace,” he said on Tuesday.

The company has also built up inventory to cope with any supply-chain disruptions caused by Brexit, East said, with the amount spent totalling about 100 million pounds.

Chief Financial Officer Stephen Daintith said Rolls had 50 new engines in its inventory, up from a typical 15. Fourteen of the engines are currently on the Airbus production line in Toulouse.

Airbus deliveries rose about 28% in the first half to just under 390 aircraft, putting it on course to beat crisis-hit Boeing, but it needs to hand over about 500 planes in the second half to meets its annual delivery goal of 880-890 airplanes.

East has been restructuring Rolls-Royce to ramp up civil aerospace production and cut losses on the sale of its engines, which it later aims to make up through maintenance programmes.

Rolls delivered 257 large civil aerospace engines in the six months to June 30, against 259 in the same period in 2018.

East said, however, it had made good progress in reducing average large engine unit losses, down by 200,000 pounds to 1.3 million pounds.

Rolls’ turnaround has been hampered by problems with its Trent 1000 engines, which has caused airlines to ground Boeing 787s while repairs are carried out.

The company would spend another 100 million pounds to tackle the issue, taking the total to 1.6 billion pounds, East said.

“We are confident in fixes to the compressor issue, which was what was causing the problem last year,” he said.

“This year we have had some further challenges with the turbine section with a small portion of the turbine fleet.”

He said a target of fewer than 10 aircraft on the ground at the end of the year might take a bit longer to achieve.

Shares in the company were trading down 1% at 806 pence at 0850 GMT, after falling to a seven-month low of 796 pence in early trade.

Warren East, CEO of Rolls Royce, speaks at the Confederation of British Industry's (CBI) annual conference in London, Britain, November 19, 2018. REUTERS/Toby Melville/Files

Analysts at Investec said the cash outflow in the period was worse than expected, resulting in a higher hill to climb in the second half. “More importantly, at least 1 billion pounds free cash flow in 2020 is reaffirmed,” they said.

Rolls-Royce said its first-half revenue rose 7% to 7.35 billion pounds and operating profit rose 32% to 203 million pounds. Reported pretax losses narrowed to 791 million pounds from 1.23 billion pounds a year ago.

($1 = 0.8200 pounds)

Editing by Kate Holton and Jason Neely

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