August 2, 2018 / 6:38 AM / 19 days ago

Rolls-Royce upgrades forecasts despite engine trouble

LONDON (Reuters) - British engine maker Rolls-Royce (RR.L) upgraded its 2018 guidance on a stronger than expected performance across its business, saying that it could cope with the rising cost of fixing a problem with its Trent 1000 engines.

FILE PHOTO: Rolls Royce Trent XWB engines, designed specifically for the Airbus A350 family of aircraft, are seen on the assembly line at the Rolls Royce factory in Derby, November 30, 2016. Paul Ellis/Pool via REUTERS/File Photo

The company, which makes engines for large civil aircraft, military planes, ships, trains and for other industrial uses, said that both profit and cash flow would come in at the upper half of a guided range this year.

Shares in Rolls gained 4.4 percent to 1,031 pence at 0827 GMT, having reversed earlier losses to reach their highest level for over four years. They are up 24 percent in the year to date against a 0.9 percent fall in Britain's bluechip index .FTSE.

The upgrade to guidance comes despite the huge costs Rolls is incurring from durability issues with parts on its Trent 1000 engine which powers the Boeing (BA.N) Dreamliner 787 jet and that has left some planes grounded, angering airline customers.

Chief Executive Warren East has said Rolls was working to fix the problem.

FILE PHOTO: A view of one of two Rolls Royce Trent 1000 engines of the Boeing 787 Dreamliner during a media tour of the aircraft ahead of the Singapore Airshow in Singapore February 12, 2012. REUTERS/Edgar Su/File Photo

He has spent the last three years overhauling Britain’s best known engineering business, restructuring, selling-off parts and cost-cutting, most recently announcing in June that 4,600 jobs would be axed, and in July that it would sell its commercial marine unit.

His plan to make the business more profitable appears to be working.

The company said on Thursday that it now expected 2018 free cash flow to come in between 450 and 550 million pounds, compared to previous guidance for 350 to 550 million pounds, and operating profit to come in between 400 and 500 million pounds, up from 300 to 500 million pounds.

“Basically what we’re seeing is good performance across all of our business,” East told reporters on Thursday.

Rolls confirmed it was on track to meet the mid-term targets it laid out at its capital markets day in June, including a plan to exceed a target of generating free cash flow of 1 billion pounds ($1.3 billion) by 2020.

“Our immediate reaction to the first-half results is that the Trent 1000 bad news is outweighed by good progress on the metrics that really matter to the equity story,” Jefferies analyst Sandy Morris said.

COSTLY TRENT 1000 PROBLEMS

The company raised its estimates of how much fixing the Trent 1000 problem and compensating airlines would cost next year. It had said that costs would fall next year, but its new estimate put the hit at 450 million pounds, the same level as this year.

Rolls estimated that in total up until 2022, the Trent 1000 and related issues will cost it about 1.3 billion pounds, with it stating on Thursday that it would recognize 554 million pounds of that as an exceptional charge.

“This is just how we account for those cash costs,” said CFO Stephen Daintith.

“Forty percent of that we’re accounting now as one off exceptional cost in 2018 as a multi-year provision.”

Despite the Trent 1000 challenge, the civil aerospace division, the company’s largest unit which accounts for half of all revenues, posted improving results in the first-half.

Airlines flying more hours boosted the division, as well as a reduction in the cash loss it incurs from selling engines.

An improving defense margin also helped results, as did strong growth across all the target markets for its power systems business, which sells engines used on ships, yachts, trains, trucks, mining, nuclear power stations and in providing back-up power for data centers and hospitals.

Reporting by Sarah Young; Editing by Susan Fenton and Keith Weir

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