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Rolls-Royce Holdings CEO Warren East unveiled lacklustre first-half results in his final earnings presentation on Thursday, while saying a mounting recovery in long-haul travel means the jet-engine maker should still hit its full-year financial targets.

The UK engineering giant posted an underlying operating profit of £125m for the first six months, down from £307m a year earlier and lower than predicted by analysts. 

Shares of London-based Rolls fell as much as 8% and were trading 6.9% lower as of 9.37am, extending their decline this year to 31%.

Rolls-Royce has endured a slow recovery from the Covid crisis as lingering barriers to international travel hold back flights with the long-haul aeroplanes it powers, depressing both new sales and revenue from shop visits. East, who exits at the end of 2022, pointed to a £1.1bn drop in cash outflow as a sign of progress and said he sees demand accelerating later into the year.

Flying hours for wide-body engines, a key metric for vital overhaul activity, are still down 40% on pre-pandemic levels, while Rolls-Royce continues to struggle with supply-chain disruption and faces challenges including rising inflation.

Still, East reiterated full-year financial targets of low-to-mid-single digit underlying revenue growth, an unchanged operating margin and modestly positive free cash flow this year, weighted towards the second half.

Cost concern

Agency Partners analyst Nick Cunningham said in a note that Rolls-Royce’s revival has been a slow one, and that while the first-half results should represent a “crossover point” from loss to recovery, there’s a risk that challenges could “crystallise as real costs in the meantime”.

The company sees large- and business-engine deliveries at 309 for the full-year, the same as in 2021. It issued fresh guidance for the defence business, saying it expects a low double-digit margin as it boosts investment to support future growth and recent orders.

Rolls-Royce also got a boost this week from Spanish approval for the sale of its ITP Aero arm, set to generate proceeds of €1.7bn.

East declined to specify challenges for successor Tufan Erginbilgic, who spent 20 years at BP before joining private equity firm Global Infrastructure Partners, saying he inherits “sustainable” foundations to build on.

UK aerospace and defence supplier Meggitt separately reported a 27% gain in adjusted first-half operating profit to £78.6m. CEO Tony Wood, a former Rolls executive who was tipped for the top job before East got the role, said he was “encouraged by the strong recovery in passenger demand”.

The company said its £6.3bn takeover by US rival Parker-Hannifin remains on track for completion in the third quarter after UK authorities cleared it in July.

Bloomberg News
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