UPDATE: Rolls Royce Lifts Outlook After Steady First Half

29th Jul 2010 08:17

(Adds detail and comment.) By Steve McGrath Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. aircraft engine manufacturer Rolls-Royce Group PLC (RR.LN) Thursday said it expects profits before financing to rise moderately this year due to cost-cutting and a strong performance from its marine business. Rolls-Royce, the world's second-largest maker of commercial and military jet engines after General Electric Co. (GE), said it was benefiting from growth in the Middle East and Asia and its wide geographic spread as some customers reduce orders due to the economic downturn. Chief Executive John Rose said the company was talking with the U.K. and U.S. governments about likely defense spending cuts, although he noted that defense was only 25% of Rolls-Royce's business, with the U.S. accounting for half of that, and more than half of the revenues from that sector came from service contracts. Both the U.K. and U.S. governments are expected to cut defense spending going forward as they seek to reduce budget deficits. Rose said Rolls-Royce had factored its expectations of the forthcoming cuts into its forecasts for this year, noting that the company has lots of customers in the sector and isn't heavily reliant on any one project. Overall, the company reported profit excluding certain financial items, the preferred measure of the company's operational performance, of GBP594 million in the six months to June 30, up from GBP593 million a year earlier. Revenue rose 5.4% to GBP5.42 billion from GBP5.14 billion and its order book was also steady, at GBP58.4 billion from GBP58.3 billion a year ago. Signalling its confidence in its long-term prospects, it increased its interim dividend by 6.7% to 6.40 pence a share. Average net cash for the period rose to GBP915 million, from GBP760 million, and it had GBP1.39 billion of net cash on its balance sheet at the end of June. The company posted a net loss of GBP334 million for the half, compared with a GBP1.86 billion profit a year earlier due to its financial instruments. The company has a huge hedge book of GBP20.8 billion as it seeks to offset the impact of currency moves on its financial performance. Based in the U.K., the company reports in pounds and has a large cost base there, but sells its products in dollars and other currencies. Regulatory requirements meant it reported net financing costs of GBP1.07 billion in the first half of this year compared with income of GBP1.92 billion a year earlier, mainly made up of mark-to-market revaluations of its hedging book. In addition to aircraft engines, the company makes electric propulsion systems for the shipping industry, gas turbine engines and automation and control systems for the energy sector and instrumentation and control systems for the nuclear industry. Its business proved resilient during the global economic downturn and it continues to benefit from long-term contracts to service the engines it provides to airlines and the military. However, cuts in defense spending on both sides of the Atlantic could hurt suppliers of military equipment. Still, its shares have gained 23% in value since the start of the year, and at 0705 GMT, the stock was up 14 pence, or 2.5%, at 602 pence. Wednesday, the company got a GBP200 million order to supply engines to Hawk trainer jets the Indian military is buying from BAE Systems PLC (BA.LN). It also won $1.7 billion of orders during last week's Farnborough International Air Show, including orders worth more than $1 billion for its Trent 700 engines to power Airbus commercial airliners bought by Russia's Aeroflot and Indonesia's Garuda. -By Steve McGrath, Dow Jones Newswires; 44-20-7842-9284; [email protected] (END) Dow Jones Newswires July 29, 2010 03:17 ET (07:17 GMT)