Rolls-Royce warns of significant revenue drop over next 7 years
Aero-engine maker aims for £750m of free cash by 2022 by closing currency hedges
Rolls-Royce pledged to generate £750m of free cash by 2022 even as it signalled significantly lower income from its wide-body engine business over the next seven years as a result of the coronavirus pandemic.
The aero-engine maker said in a trading statement on Thursday that the number of hours its wide-body engines flew — the source of more than half the income of its civil aerospace business — had fallen by 75 per cent in the second quarter.
Warren East, chief executive, said the virus had created a “historic shock in civil aviation which will take several years to recover”.
The group said it would close out a third of its dollar hedges taken to mitigate currency risk, after its cash position was severely hit by the collapse in global aviation as a result of the crisis. Rolls-Royce now expects to see some £4bn in cash flow out of the business this year, £3bn of which would come in the first half. That compares with a promise two years ago to deliver more than £1bn in free cash by the end of 2020.
In May, Rolls-Royce announced plans to cut 9,000 jobs from its 52,000-strong workforce. A voluntary redundancy plan in the UK had already achieved 3,000, most of whom would leave the business this year.
Mr East said he expected wide-body engine flying hours to be down 55 per cent this year, recovering to about 70 per cent of 2019 levels in 2021. But sales of engines — on which Rolls-Royce makes losses — were likely to remain subdued. With US dollar-denominated cash receipts now expected to be substantially lower than the hedged position, Rolls-Royce was closing out $10bn of the $37bn hedges no longer required, resulting in cash costs of about £1.45bn over the next seven years. Shares fell 6 per cent in early trading.
However, the radical restructuring already under way gave the group confidence that it would return to generating positive cash and Rolls-Royce said it expected to deliver £750m within two years. It was on track to deliver £1bn in savings this year.
The group also said its liquidity position had improved after securing a new £2bn five-year term loan, backed by a guarantee from UK Export Finance, which has not yet been drawn. The cash balance was £4.2 billion at the end of June.