Rolls Royce(US:RYCEY)2021-08-06 05:05Financial Data and Key Metrics Changes - The underlying operating profit increased significantly to £307 million, compared to an underlying operating loss of £1.6 billion in the previous year, which included £1.2 billion of one-off charges related to COVID-19 [30][23] - Free cash flow improved to a cash outflow of just under £1.2 billion, a significant improvement from the £2.9 billion outflow in the previous period [40][22] - The company ended the period with net debt before leases of £3.1 billion, expecting to reach around £4 billion by year-end [46] Business Line Data and Key Metrics Changes - Civil Aerospace revenue was £2.2 billion, down 13% year-on-year, but operating profit returned to £39 million [34] - Defence revenue increased by 17% year-on-year to £1.7 billion, with operating profit rising to £269 million from £210 million [35] - Power Systems saw stable revenues with an operating profit of £41 million, up from £33 million in the first half of 2020, and order intake increased by 19% to £1.4 billion [38][39] Market Data and Key Metrics Changes - Large engine long-term service agreement flying hours were at 43% of 2019 levels, up from 34% in the second half of 2020 [33] - Domestic flying activity in regions like China has returned to 2019 levels, indicating a recovery in business aviation [32][90] Company Strategy and Development Direction - The company is focused on achieving net zero emissions by 2050, with plans to develop new technologies and accelerate the use of sustainable fuels [17][60] - A restructuring program is on track, aiming for a reduction of at least 9,000 roles, with around 8,000 already removed [18] - The company is exploring new growth opportunities in electrical and small modular reactors (SMRs) as part of the energy transition [71][77] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving a positive cash flow in the second half of the year, despite uncertainties in international travel recovery [50][96] - The outlook remains sensitive to the timing of original equipment (OE) concession outflows, with expectations for a gradual recovery in engine flying hours [51][52] - The company anticipates that the recovery in international travel will accelerate once border restrictions are lifted, with a return to 2019 levels expected around 2024 or 2025 [109] Other Important Information - The company has a strong liquidity position of £7.5 billion, with no debt maturities before 2024 [24][47] - The disposal program is progressing well, targeting proceeds of at least £2 billion [48][81] Q&A Session Summary Question: What is the expected benefit to free cash flow this year from the deferred payments on the Trent 1000? - Management indicated variability in concession payments and reiterated guidance for a £2 billion outflow this year, considering both concessions and engine flying hours [85][89] Question: What proportion of engine flying hours were from Asia Pacific, ex-China, pre-COVID? - Approximately 20% of 2019 levels of engine flying hours were exposed to international flights in that region [93] Question: Have you seen any impact from the retirement of older aircraft? - No significant changes were noted in the patterns of older aircraft retirements compared to the previous year [99] Question: What is the breakeven rate for engine flight hours for free cash flow? - Management stated that achieving breakeven is dependent on various factors, including engine flight hours, and expects to reach positive cash flow in the second half of the year [105][106] Question: What is the impact of disposals on targeted free cash flow? - The impact of disposals on free cash flow is not significant, and management expects to see some outflow related to concession payments [113][115] Question: How do you view the balance sheet and the complexity of financial reporting? - Management aims to improve the balance sheet towards an investment-grade credit profile while maintaining a comfortable business model that supports customer retention [118][122]