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Rolls-Royce Results and a New Director

Rolls-Royce Plc published their full year results today (13/2/2015). How does this champion of British industry and one of the FTSE mega caps (market cap £17bn) now look?

Like all such large companies one could spend hours analysing the accounts because the initial “headline” data provided by the company in the announcement tends to err on the positive side. So the “highlights” are given as “Record order book of £73.7bn (that’s slightly up at 3% on the prior year), underlying revenue and profit in line with guidance (what that actually means is that they are just as bad as forecast with revenue down and profits non-existent), free cash flow of £254m (yes that’s 67% down on the prior year) and a reported profit before tax of £67m (that’s minus 96%).

But the CEO said that in challenging conditions the company has continued “to build strong foundations for future growth”. That’s the kind of phrase all defensive CEOs have in their kitbag.

They have sold the Energy business to Siemens for £1bn and are returning cash to shareholders by way of a share buy-back programme. Why not a tender offer or special dividend instead one might ask? The dividend yield is only 2.5% at present even after recent share price falls.

They are cutting costs to try and improve profitability, but this comment in the announcement is worth highlighting: “There are also a number of headwinds in our Civil aerospace business associated with our future growth. For example, we have invested in the capacity required to deliver our record order book, but delay in a number of our customers’ major programmes has meant some of this new capacity has come on stream before it is needed, leaving us with under-utilised production facilities. We have also constructed a number of new world-class facilities to replace older, less productive plants. For a period of transition we are carrying the cost of both the old and new facilities”. This does not suggest that matters are particularly well managed.

Cash flow  has “near term headwinds” and was impacted in 2014 by lower volume and lower deposits received.

One thing you can say about Rolls-Royce though is that their guidance on the future numbers is extensive. But the 2015 guidance is for flat revenue, lower profit before tax, flat or lower e.p.s. and even weaker cash flow than in 2014.  It looks to be a case of a record order book not turning into improved revenue and profits in the short term.

The share price fell initially, but then rose during the day of the announcement to finish 3% up at the time of writing. My view: it may be a great business with great products but they need to do a lot better than this. I have to admit to being a holder of the shares, but I sold some after reading this announcement.

Another announcement by Rolls-Royce today contained some changes in the directors. One of the NEDs has retired and been replaced by Irene Dorner who “brings a wealth of experience from international banking along with a passion for driving cultural change in large organisations” as the announcement says. She spent 29 years at HSBC and is “a passionate advocate of diversity and inclusion“. She left HSBC after having to apologise to the US Senate for HSBC’s money laundering activities.

Irrespective of the latter, personally I prefer non-executive directors to have a relevant business background. How much does she know of the engineering business or how to flog engines to airlines and plane manufacturers? Not a lot I suspect. Tesco was a good example of what happens when you fill the board with worthies who don’t know much about the trade the company is in.

Not a positive sign for Rolls-Royce I suggest.

Roger Lawson

One comment
  1. […] by 32%. This is basically the same story as was evident at the full year results in February -see for our comments on those. In essence aero engine orders up, but they seem unable to deliver them. […]

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