Rolls-Royce Jumps as CEO Sees an End to Dreamliner Engine Woes
Rolls-Royce Reins In Cost of Engine Glitches as Market Toughens
(Bloomberg) --
Rolls-Royce Holdings Plc surged as Chief Executive Officer Warren East said he’s getting a grip on Boeing Co. 787 engine glitches that have blighted earnings and cash flow.
Rolls rose the most in 18 months and was the biggest mover among Europe’s top 600 stocks after it reported good progress in resolving the last outstanding issue with the 787’s Trent 1000 turbine and said one-time charges won’t exceed the 2.4 billion pounds ($3.1 billion) estimated through 2023.
East is seeking to draw a line under faults that have burdened Rolls-Royce through much of his tenure, triggering a succession of profit warnings, souring relations with customers like British Airways as they’ve had to ground planes, and pushing orders in the direction of rivals. The CEO said the company is also delivering cost improvements needed for the step-change in performance he’s been seeking since taking over in 2015.
“Rolls-Royce sounds rather confident,” Jefferies International analyst Sandy Morris said in a note. “The key long-term drivers were powerfully positive.” Both earnings and cash flow exceeded estimates in 2019, while flying hours for Rolls engines, a predictor for maintenance revenue, rose 7%, Morris said.
Rolls-Royce rose as much as 6.6%, the biggest intraday gain since August 2018, and traded 4.9% higher as of 9:33 a.m. in London. That made it the best performer on a Stoxx 600 index that was 4.5% lower as companies warned that the coronavirus outbreak would disrupt business.
Rolls’s Chief Financial Officer Stephen Daintith said on a call that the company is currently testing a design to fix the Trent 1000’s final issue with a high-pressure turbine blade, and will provide an update mid-year. All glitches should be resolved by 2021, Rolls predicted.
The number of 787s idled for engine repairs should also drop to fewer than 10 by the end of the second quarter, in line with previous projections, the company said.
That should help bolster confidence in the Trent 1000 after 787 customers began to turn away from the engine in favor of a rival powerplant from General Electric Co. Japan’s ANA Holdings Inc. earlier this week said it would switch to the GE model for a follow-on order for the Dreamliner.
Rolls-Royce expects to deliver 450 of the wide-body engines in which it specializes this year, a drop of about 12% from 2019 as both Boeing and Airbus SE trim build rates for some larger planes. That’s unlikely to immediately impact earnings as turbine makers generally make a loss on new sales, deriving the bulk of profit from through-life maintenance.
East said the coronavirus may hurt air-traffic growth in the near term but that long-term trends most affecting Rolls-Royce remain intact. Some suppliers in China did briefly close, but Rolls was able to rely on existing inventory, and those are now back up and running, he said.
The company excluded any possible viral impact from 2020 projections that see a 15% gain in underlying operating profit that jumped by a quarter in 2019.
To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper, Andrew Noël
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