Rolls-Royce to Drop Goals and Suspend Dividend

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Rolls-Royce will abandon profit, cash and delivery targets this week and suspend dividend for the first time since privatization in 1987, as most of the world’s large widebody aircraft weighs on the builder British aircraft engines.

The group, which is still in the midst of a major multi-year restructuring, also aims to announce new credit facilities of more than £ 1 billion to strengthen liquidity which, at the end of 2019, was close to £ 7 billion . An announcement could come as early as Monday, said two people aware of the situation.

Rolls-Royce, which manufactures engines for wide-body aircraft such as the Airbus A350 and A330, and the Boeing 787 Dreamliner, has been hit hard by global measures to contain the spread of the coronavirus. Border closures and national closures in several countries have resulted in the stopping of air travel.

The company’s civil aerospace division, which accounts for about half of Rolls-Royce’s £ 15.4 billion annual turnover, benefits from the hours flown by its engines. But two-thirds of the world’s wide-body aircraft are now in storage, according to Cirium, an aviation consultancy.

Engine flight hours in March were down about 40 percent, said someone close to the subject. The drop should be even more marked this month.

As a result, the group will drop a commitment, set in 2017 and restated only in February, to generate £ 1 billion in free cash by the end of this year. He also promised 15% growth in basic operating profit for this year. The dividend payment of 11.7p per share – frozen since 2016 – will be suspended.

Rolls-Royce decision comes as Airbus prepares to reduce production rate of twin-engine and single-aisle aircraft, hoping demand will drop significantly in the medium term as cash-strapped airlines struggle to recover from the crisis. Rolls-Royce will not give any new directions for this year until Airbus’s new wide-body fares are clear, said another person familiar with the matter. It could happen this week.

However, job losses are likely in the longer term if production is to decrease considerably due to declining demand.

The widebody market was slowing down before the virus hit. Rolls-Royce had reduced delivery expectations from 500 to 450 for this year and reduced expectations to 400-450 for 2021. These targets are also exceeded.

“We are monitoring the situation closely and are taking prudent steps to save money – such as reducing or deferring discretionary spending,” said a spokesperson. “Our good starting position and the measures we have taken and will continue to take give us confidence in the continued financial resilience of our business.”

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However, if the crisis continues into the fall, Rolls-Royce – which was nationalized in 1971 after a new engine program ran into problems – could be pressured into asking the government for tailored support. The government has said that any business seeking state support during the crisis should first exhaust trade options, such as new lines of credit.

The company will reopen its civil aerospace facilities in the UK on Monday with a fraction of the normal workforce. Derby, the historic home of Rolls-Royce and other UK sites, were closed last week to implement security measures to prevent the spread of the coronavirus. Two people aware of the situation said that around 50 percent of the 7,500 workers in UK workshops could potentially be put on leave, with wages supported by a government subsidy.

The Rolls-Royce facility in Dahlewitz, Germany will also be closed for two weeks starting Monday.

Rolls-Royce is expected to focus on stable defense this week, which generated around half of the group’s underlying operating profit of £ 808 million last year and solid performance in power systems, which is benefiting from demand for back-up generators and a recovery in orders from China. This division generated operating profit of £ 375 million in 2019.

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