Rolls-Royce CEO's New Confidence Quells Concerns Over 787 Engine

(Bloomberg) -- Rolls-Royce Holdings Plc is riding a wave of optimism as the benefits of job cuts and management changes overshadow investor concerns about glitches with engines that power Boeing Co.’s 787 jet.

The stock rose as much as 7.3 percent Thursday as Chief Executive Officer Warren East’s declared his “growing confidence” in an improved earnings outlook, even as the hit from the Trent 1000 turbine that powers the U.S. jet is set to reach 1.3 billion pounds ($1.7 billion).

East has eliminated thousands of jobs, reorganized Rolls to make it more responsive to demand and struck deals to sell fuel-injection and ship-design arms. The company outlined plans in June to cut another 4,600 management and back-office posts to help it reach a 1 billion-pound cash-flow target and blunt the impact of the 787 problems, which have forced airlines to ground planes while their engines receive emergency repairs.

“The Trent 1000 bad news is outweighed by good progress on the metrics that really matter to the equity story,” Jefferies International analyst Sandy Morris said in a note to clients.

Rolls-Royce slumped as much as 2.2 percent as investors mulled East’s update before rebounding to trade 6.9 percent higher as of 2:57 p.m. in London. The stock has gained 26 percent this year, valuing the group at 19.7 billion pounds.

Earnings Beat

East predicted that underlying operating profit for the full-year will be between 400 million pounds and 500 million pounds -- higher than prior expectations for a range of 300 million to 500 million pounds.

Rolls posted a pretax profit of 81 million pounds for the first half after analysts forecast a loss, aided by higher revenue from servicing turbines for wide-body planes and surging sales at a diesel-engine business. It also pared losses on new-engines, which it sells at a deficit in anticipation of lucrative profits from through-life maintenance.

The company will book a charge of 554 million pounds against increased Trent 1000 costs through 2022, with expenses higher in both 2019 and 2020. That will amount to 40 percent of the total provision, with the remainder set to be absorbed through regular servicing contracts over the next 15 years.

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