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Why Rolls-Royce shares nudged higher today

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UK-based engineering company Rolls-Royce Holdings (LSE: RR) released its full-year results report today. And the shares nudged higher in early trading.

The power and propulsion systems maker said the impact of Covid-19 on the performance of the business in 2020 was “severe”. The Civil Aerospace division has been hardest hit. And the pandemic continues to affect the near-term outlook. However, the firm expects positive free cash flow in the second half of 2021 and “at least” £750m as early as 2022. Before the coronavirus crisis in 2019, Rolls-Royce reported underlying core free cash flow of £911m.

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The hard-hitting Rolls-Royce restructuring programme

The directors said their positive expectation depends on the pace of recovery in engine flying hours and the firm’s ongoing restructuring programme. In 2020, the firm saved more than £1bn from “in-year cash mitigations”, compared to its pre-Covid plans. And there’s a target to raise “at least” £2bn from disposals. On top of that, new debt and equity strengthened the firm’s liquidity by £9bn. The figure comprises £3.5bn cash and £5.5bn undrawn credit facilities.

Rolls-Royce reported “strong” progress with its fundamental restructuring programme. And that includes cutting 7,000 permanent and contractor job roles, mostly from Civil Aerospace. The company expects the number of terminations to rise to more than 9,000 roles by the end of 2022. Chief executive Warren East reckons its actions have enhanced the resilience of the overall business and improved operational efficiency “permanently”.

Today’s figures show the Civil Aerospace business produced an underlying operating loss of almost £2.6bn in 2020. However, operating profit from other divisions reduced the overall loss to just under £2bn. In 2019 before the pandemic, Civil Aerospace delivered an underlying operating profit of £44m and the overall figure from all divisions came in at £808m. But Rolls-Royce said the pandemic has altered the outlook for the civil aviation industry in the short and medium terms.

A mixed outlook

Looking ahead, the company expects a rebound in global GDP and the lifting of travel restrictions to drive recovery in the business. The directors think engine flying hours in 2021 will rise to around 55% of 2019 levels in the industry. But the global vaccination programmes should enable the lifting of travel restrictions. And the firm’s “base case” assumption is engine flying hours could rise to 80% of 2019 levels during 2022. However, the directors expect large engine deliveries to remain at the current lower levels “for the next few years”.

In the Power Systems division, the outlook is more optimistic. The company said the shorter-cycle nature of the business means many of its end markets should recover by the end of 2021. The directors expect revenues to recover in the division by 2022. And the Defence division has a “strong” order book suggesting the potential for “steady growth” in the medium term. However, the company has no immediate plans for restarting shareholder dividend payments.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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