Rolls-Royce pulls dividend, guidance as Covid-19 travel bans bite
By Frank Prenesti
Date: Monday 06 Apr 2020
(Sharecast News) - Aircraft engine maker Rolls-Royce pulled its dividend and full year guidance as it moved to mitigate the impact of the coronavirus pandemic.
The company on Monday said flying hours for widebody jets such as such as the Airbus A350 and A330, and Boeing's 787 Dreamliner, halved in March and fell by 25% during the first quarter with a further deterioration expected in April as airlines grounded their fleets.
Roll-Royce has been hit hard as airlines ground aircraft in response to the slump in passenger demand and government travel bans. The company is paid according to the number of hours planes fly.
The aircraft engine maker said it would cut salary costs across its global workforce of 52,000 employees by at least 10% in 2020. Salaries for senior managers and the executive team would be reduced by 20% comprising a cut and deferral.
Chief executive Warren East and chief financial officer Stephen Daintith will also defer their annual bonuses with a corresponding reduction in fees for non-executive directors of the board for the rest of the year.
The final shareholder payout of 7.1p a share was scrapped, saving ?137m. The company added it had also secured an extra ?1.5bn revolving credit facility, bringing overall liquidity to ?6.7bn.
Elsewhere Rolls-Royce said it continued to make progress on fixing technical issues on its Trent 1000 engines, cutting the number of aircraft grounded due to faulty fan blades reduced to the mid 20s from mid 30s reported at the end of February.
The Trent 1000 powers the Boeing 787 Dreamliner and suffers from premature wear on the turbine blades. Management have estimated that approximately 300 aircraft are at risk of being affected and has allocated an extra ?1.5bn for costs related to the problems that will persist until 2023.
"Design work remains on schedule to resolve the last remaining technical issue, a new high pressure turbine blade for the Trent 1000 TEN engine, with ground testing of the new blade progressing through the second quarter," Rolls-Royce said.
"We continue to expect the new design to be ready for incorporation into the fleet by the end of (the first half of) 2021."
Morningstar equity analyst Joachim Kotz said the Trent issues, a corporate restructuring program including a 10% cut in head count, annual cost savings of ?400m from 2020, multiple profit warnings and the lack of a narrow-body engine program, had left the market "skeptical of Rolls-Royce's ability to execute on its strategy and drive shareholder returns".
"While we agree that the poor track record and current issues facing the business warrant a heavy dose of skepticism, we believe the firm is well positioned to capitalize on growth and profitability over the medium- to long-term," he said.
Kotz said Rolls-Royce's Trent XWB engine, the sole-source engine to the Airbus A350, constituted 60% of the company's order backlog.
"Successful delivery will significantly increase the in-service engine fleet and generate high-margin aftermarket revenue. Sufficient installed capacity and no major engine development program underway lowers the need for capital, improving the outlook for free cash generation. We believe higher returns will persist for close to a decade because of the long cycles in the aerospace industry," he said.
"Improvement in civil aerospace profitability is the key driver of the investment case, which steady profit and cash flow generation from the defense and power systems segments underpin."
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