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Rolls-Royce surges as turnaround plan boosts profits

Key Points
  • The aero-engine maker said it was on track to meet its 2020 goals, after it beat forecasts last year and promised further cost-savings.
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Rolls-Royce said it was on track to meet its 2020 goals, after it beat forecasts last year and promised further cost-savings, showing that CEO Warren East's plan to rebuild one of the biggest names in British manufacturing was working.

Shares in aero-engine maker Rolls gained 15 percent to 948 pence, hitting their highest level since November, after its 2017 pretax profit rose 25 percent to £1.071 billion, beating a consensus forecast of £878 million.

East has been trying to reshape Rolls during his three years in charge after declines in some of its older aero-engine programs and plunging demand for oil equipment caused profit to crumble. It recorded a record loss for 2016.

"Looking at today's announcement, we sense the Rolls-Royce story is finally coming of age," said Jefferies analyst Sandy Morris, who has a "Buy" recommendation on the stock.

Rolls on Wednesday also announced a further cost-cutting program, after East's initial plan saved about £200 million over the 2015-2017 period by cutting layers of management and shortening manufacturing times.

He declined to put a figure on savings from this latest plan but told reporters it would remove duplication within the group and its impact would be significant.

The strong performance in 2017 was driven by a jump in engine deliveries and higher maintenance volumes plus rising sales in its power systems business, which makes engines for use in trains, agriculture and mining.

"We're seeing this as an encouraging set of results," East said.

Engine repairs

Rolls-Royce also stuck to a goal of generating free cash flow of £1 billion by around 2020, despite the impact of a costly program to repair its Trent 1000 aero-engine.

"Clearly the engine issues are significant," said East.

"However, we are being transparent with our customers, we're being transparent with the market. We're prioritising resolving the situation for our customers. We have our arms around the solution."

The company has said that 400 to 500 Trent 1000 engines were affected by problems with components wearing out earlier than expected, needing extra inspection and maintenance.

Air New Zealand, British Airways, Virgin Atlantic and Japan's ANA Holdings are amongst those affected.

Rolls would take a hit of about £340 million this year to account for the cost of carrying out repairs on existing engines, primarily the Trent 1000 installed on Boeing 787s.

For 2018, Rolls forecast group underlying operating profit of about £400 million, give or take £100 million. At the lower end of expectations that would represent a decline from its 2017 level of £321 million.

That broad guidance was issued under a new accounting standard, which changes how the company books earnings on long-term contracts.