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Rolls-Royce narrows operating loss but Trent woes continue

By Frank Prenesti

Date: Saturday 29 Feb 2020

(Sharecast News) - Aircraft engine maker Rolls-Royce narrowed full year operating losses but still took an exceptional charge of ?1.36bn on its troubled Trent 1000 engine.
Reported group operating losses came in at ?852m from a loss of ?1.1bn a year earlier. Underlying operating profit rose 25% to ?808m after a strong fourth quarter.

Revenue rose 7% to ?15.5bn and free cash flow to ?873m from ?568m, driven by underlying profit improvement.

Rolls-Royce has seen the issues caused by faulty fan blades on the Trent 1000 eat into profits as it works to resolve the issue. The company said it expected to reduce the number of customer aircraft grounded to below 10 by the end of the second quarter of 2020.

"We have fixes designed for all but one of the issues identified and are well advanced on certification and rolling them out into the fleet. As the year drew to a close, we carried out a detailed technical re-evaluation of our progress on the final fix, a new high pressure turbine blade for the Trent 1000 TEN," said chief executive Warren East.

"Based upon that work and test activity, we reset our financial and operational expectations for the engine in November, based on a revised estimate of final blade durability, in order to provide certainty for customers and greater clarity for investors. Since then, we have made good progress on the design of this blade, and continue to expect certification of this component in the first half of 2021."

Rolls said it expected total in-service cash costs across all Trent 1000 variants of around ?2.4bn between 2017-2023. It incurred ?578m of cash costs during 2019 partly offset by a ?173m insurance receipt.

"We continue to expect cash costs of ?450m - ?550m in 2020 and a similar level in 2021, before declining significantly thereafter. These primarily comprise the cost of replacing affected parts as well as customer disruption related compensation," the company said.

The company added that its guidance for 2020 excluded any material impact from the coronavirus. "We are monitoring developments, taking mitigating actions, and will update the market as appropriate," it said.

Hargreaves Lansdown analyst Sophie Lund Yates said the Trent 1000 engine issues were "a blot on Rolls' copy book, but full year results have landed well".

"We're also seeing better trends in the group's largest division, civil aerospace. The group makes a lot of its money from servicing its engines and not just from making them. Services revenue rose nicely in 2019, and there was also a record delivery of engines used for bigger, long-haul commercial planes," she said.

"Unsurprisingly Rolls Royce is monitoring coronavirus closely. Any major disruptions to travel trends would have an impact on the group, but right now it's simply not possible to say what will happen."

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