Rolls-Royce on course, but warns of greater near-term market uncertainty

26th January 2021 By: Rebecca Campbell - Creamer Media Senior Deputy Editor

UK-based global industrial technology group Rolls-Royce issued a trading update on Tuesday. It covered the group’s 2020 unaudited results and its preliminary expectations for this year. (Full year results for 2020 will be released on March 11.)

“Trading in December was broadly in line with expectations across all business units and we delivered good progress on our restructuring programme,” stated Rolls-Royce.

“Full year 2020 Group free cash outflow was in line with previous guidance, and in-year cash cost savings of more than £1-billion were achieved from our mitigating actions. Year-end liquidity was approximately £9-billion, at the upper end of the previously guided range.”

The prospects for the medium-term recovery of air passenger traffic and the wider economy were encouraging because of the continuing progress in Covid-19 vaccination programmes. However, in the short term, greater uncertainty had been created by the emergence of more contagious strains of the virus. These had resulted in greater restrictions which were delaying the recovery of long distance air travel.

This situation had increased the financial stress on the group’s clients and on the aviation industry in general. And this was affecting Rolls-Royce’s 2021 cash flows. The group now expected that widebody engine flying hours this year would amount to some 55% of those achieved in 2019. In October, Rolls-Royce had predicted that widebody engine flying hours this year would come to 70% of the 2019 figure.  

“In this environment, financial forecasts remain highly sensitive to changes in external conditions and, while we are continuing to drive cost reduction, our current forecasts indicate a free cash outflow in the region of £2-billion in 2021,” it reported. “Though significant uncertainty remains over the precise shape and timing of the recovery in air traffic and the phasing of engine concession payments, free cash outflow this year is forecast to be heavily weighted towards the first six months. We continue to expect to turn cash flow positive at some point during the second half, reflecting our forecasted [sic] profile of flying hours as they recover from today’s low base.”

Rolls-Royce was confident that, with liquidity of £9-billion, it was well situated for the future, despite short-term market conditions being more challenging than previously expected.

The group continued to be focused on executing its restructuring programme, including the consolidation of its facilities, and controlling costs and ensuring capital discipline.

Last year, the company cut 7 000 jobs, out of a planned total of 9 000 job cuts by the end of 2022. This restructuring was a major step in achieving a free cash flow (excluding disposals) of £750-million as soon as early next year, assuming the anticipated recovery in engine flying hours happens.