LONDON Rolls-Royce (RR.L) is to focus on cutting "unacceptable" levels of costs after the firm's first-half profits rose by more than a third, helped by booming demand for aircraft engines.
Rolls, the world's second-largest maker of aeroplane engines behind U.S. group General Electric (GE.N), lags its major competitors in terms of managing costs and needs to narrow that gap, Chief Executive John Rishton said.
"While underlying profits were up 34 percent our costs are rising faster than revenues, which is not good enough and needs to change -- we have a lot more to do on costs and cash," Rishton told reporters. He said an increase of 261 million pounds in inventory was "disappointing".
U.S. rival GE has cut costs aggressively, including making layoffs. It has sliced expenses by $474 million at its industrial engine making unit so far this year.
"Margins in GE's civil aero unit are around 18 percent and Rolls' are roughly 12 percent so there's room for improvement by cutting costs in inventory, the supply chain and labor," said a source close to the company.
Rolls, a major British exporter dating back to 1884, said underlying pretax profit rose 34 percent to 840 million pounds ($1.29 billion) in the six months to the end of June, ahead of an average analyst forecast of 831.7 million pounds, according to a Thomson Reuters data.
Revenues jumped 27 percent to 7.3 billion pounds with sales rising across all of Rolls' divisions.
Rolls' cash outflow grew to 461 million pounds in the first half, up from 447 million in the same period a year ago. Consequently, its net cash position fell to 921 million pounds from 1.3 billion a year ago.
Revenues at its civil aerospace business, which accounts for around half of group sales, rose 6 percent, helped by soaring demand for more fuel-efficient engines for planes made by Europe's Airbus EAD.PA and U.S. rival Boeing (BA.N).
Global airlines will buy $4 trillion of planes over the next 20 years to meet demand for travel to and from emerging markets and renew ageing fleets, the world's big two plane makers have said.
Shares in Rolls-Royce, which have risen 37 percent so far this year, were 4.5 percent up at 1234 pence by 0820 GMT (4.20 a.m.ET), valuing the firm at around 22.5 billion pounds.
"While the results clearly provide plenty to cheer, the group is not resting on its laurels and is focusing on becoming ever more efficient and focusing on cash generation as this provides the lifeblood for future investment," said Edison analyst Roger Johnston. "While progress has been made, there is much more to go after."
The company, whose order book rose 15 percent to 69.2 billion pounds, increased its interim dividend by 13 percent to 8.6 pence per share.
Rolls, which has now assumed management control of German engine maker Tognum two years after buying it, maintained its full-year guidance.
It is expected to report an average 2013 pretax profit of 1.73 billion pounds, according to Thomson Reuters data.
Rolls did not provide an update into an ongoing review of compliance procedures after Britain's Serious Fraud Office (SFO) launched an investigation into claims that Rolls representatives paid bribes to win airline engine contracts in Asia.
($1 = 0.6512 British pounds)
(Reporting by Rhys Jones; editing by Keith Weir and Jane Merriman)