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Rolls-Royce set to ditch targets and suspend dividend

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Via Financial Times

Rolls-Royce will this week abandon targets on profits, cash and deliveries, and suspend its dividend for the first time since privatisation in 1987, as the grounding of most of the world’s widebody aircraft takes its toll on the UK aero-engine maker.

The group, which is still in the throes of a wide-ranging, multiyear restructuring, is also aiming to announce new credit facilities in excess of £1bn to bolster liquidity that at the end of 2019 was close to £7bn. An announcement could come as early as Monday, said two people with knowledge of the situation.

Rolls-Royce, which builds engines for widebody aircraft such as the Airbus A350 and A330, and Boeing’s 787 Dreamliner, has been hard hit by global measures to contain the spread of coronavirus. Border closures and national lockdowns in several countries have led air travel to be all but halted. 

The company’s civil aerospace division, which accounts for roughly half of Rolls-Royce’s £15.4bn annual revenue, makes its profit from the number of hours its engines fly. But two-thirds of the world’s widebody aircraft are now in storage, according to Cirium, an aviation consultancy.

In March engine flying hours were some 40 per cent down, said one person close to the subject. The drop is expected to be even steeper this month.

As a result the group will ditch a pledge, set in 2017 and restated only in February, to generate £1bn in free cash by the end of this year. It had also promised 15 per cent growth in core operating profit for this year. The dividend payment of 11.7p per share — frozen since 2016 — will be suspended.

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Rolls-Royce’s move comes as Airbus prepares to slash the rate of production on twin and single aisle aircraft, in the expectation that demand will fall substantially in the medium term as cash-strapped airlines struggle to recover from the crisis. Rolls-Royce will give no new guidance for this year until Airbus’s new rates for widebody aircraft are clear, said another person close to the subject. This could come as early as this week.

But job losses are likely in the longer term if production has to scale back significantly because of reduced demand.

The wide-body market had been slowing before the virus hit. Rolls-Royce had cut expectations for deliveries from 500 to 450 for this year and scaled back expectations to 400-450 for 2021. Those targets are also defunct.

“We are closely monitoring the situation and taking prudent measures to conserve cash — such as reducing or deferring discretionary spend,” a spokesperson said. “Our good starting position and the measures we have taken, and will continue to take, give us confidence in the ongoing financial resilience of our business.”

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Nevertheless, if the crisis continues into the autumn, Rolls-Royce — which was nationalised in 1971 after a new engine programme ran into trouble — may be pushed to ask the government for bespoke support. The government has said that any company seeking state support during the crisis should first exhaust commercial options, such as new credit lines.

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The company on Monday will reopen its civil aerospace facilities in the UK with a fraction of the normal workforce. Derby, the historic home of Rolls-Royce, and other UK sites were closed last week to implement safety measures aimed at hindering the spread of coronavirus. Two people with knowledge of the situation said some 50 per cent of the 7,500 UK shop-floor workers could eventually be furloughed, with wages supported by government subsidy.

Rolls-Royce’s facilities in Dahlewitz, Germany will also be closed for two weeks from Monday.

Rolls-Royce is expected this week to emphasise stability in its defence business, which delivered roughly half the group’s £808m underlying operating profit last year, and a solid performance in power systems, which is benefiting from demand for back-up generators and a recovery in orders from China. That division generated operating profit of £375m in 2019.

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