February 28, 2020 / 7:36 AM / a month ago

Revival gives Rolls-Royce confidence despite coronavirus

LONDON (Reuters) - Rolls-Royce has got to grips with a long-running engine problem and enjoyed a strong end to 2019, leaving it well placed to cope with any disruption caused by the coronavirus outbreak, it said on Friday.

Shares in the British engines maker jumped as much as 6.6%, one of the few increases among European blue-chips, as the upbeat tone contrasted with the gloom gripping many other companies - including Rolls’ airline customers - about the potential for coronavirus to trigger a global recession.

Rolls has been battling to improve the durability of its Trent 1000 engine, which powers Boeing’s 787 Dreamliner, with the blades in the TEN variant proving particularly problematic.

Airlines have had to ground the aircraft for repairs.

However, Chief Executive Warren East said on Friday the roll-out of fixes was progressing and he had increased confidence in a new blade design due next year. The number of aircraft on the ground for repair would fall to a single-digit by end of the second quarter, in line with forecasts, he said.

Rolls reported a 852 million pound ($1.1 billion) operating loss for 2019, largely due to a 1.4 billion pound charge for the Trent 1000. Excluding that charge, core underlying profit rose 25% to 810 million pounds.

Analyst Robert Stallard at Vertical Research Partners said the latter came in above the top end of Rolls’ 600-800 million pound guidance, and noted there were no additional Trent 1000 charges in the results.

Cash flow increased to 911 million pounds, led by higher profit and 173 million pounds worth of Trent 1000 insurance receipts.

East said Rolls delivered a record 510 widebody aircraft engines in the year and secured about two out of three orders for new widebody engines.

“Building on the strength of our performance into the end of 2019, we are looking forward to 2020 with some degree of conviction and confidence,” he told reporters.

Shares in Rolls, which fell to a three-and-a-half year low on Thursday, were up 6% to 636.6 pence at 1200 GMT.

‘UNKNOWN UNKNOWN’

Rolls, which also has defence and power systems businesses, said the coronavirus outbreak was likely to hit air traffic growth, but long-term trends remained intact.

British Airways owner IAG and Finnair said on Friday the virus would hurt their profits.

East said the situation was “an unknown unknown”, in reference to both the geographical scale and the duration of the outbreak, and Rolls was not currently able to quantify any impact on its guidance.

However, he said all of the company’s facilities were up and running, and its supply chain had not been disrupted, including from China, the source of the virus outbreak where suppliers were going back to work.

“Delivery of widebody engines continues as normal,” he said, adding that in its power systems business trading in China was already returning to normal.

He said the disease would impact flying hours, noting that 20% of invoiced flying hours in 2019 touched greater China, but added the company would take measures such as cost controls to mitigate any hit.

FILE PHOTO: A man looks at Rolls Royce's Trent Engine displayed at the Singapore Airshow in Singapore February 11, 2020. REUTERS/Edgar Su/File photo

“But we are confident given our performance in the second half of 2019, ... so we think we are better placed than ever to deal with a situation like this,” East said.

Rolls currently expects core operating profit to grow by about 15% this year, with at least 1 billion pounds of free cash flow.

($1 = 0.7696 pounds)

Editing by Costas Pitas and Mark Potter

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