3-7-18 6:21 AM EST | Email Article
By Robert Wall 

LONDON--Rolls-Royce Holdings (RR.LN) shares surged Wednesday after the British blue-chip stuck to a closely watched 2020 earnings target despite problems with two of its highest-profile plane engines powering Boeing Co. (BA) and Airbus SE (AIR.FR) airliners.

Demand for commercial airplanes has been booming as more passengers take to the sky, packing planes and helping airlines deliver record profits. That has spurred orders for new planes and boosted stocks in plane makers Airbus and Boeing to record highs.

Rolls-Royce is the latest aerospace giant to benefit from the optimism about long-term demand for more fuel-efficient planes, even as the company struggles with component flaws on engines powering some Boeing 787 Dreamliners and Airbus A380 superjumbos. The blades are breaking more quickly than expected, forcing the company to repair them more frequently than expected, and resulting in airline operators idling planes.

"This is causing significant disruption to some of our customers and obviously we regret that disruption," Chief Executive Warren East told reporters.

He said the company is making "good progress" on devising fixes for the parts on the Trent 1000, used by some carriers on Boeing 787 Dreamliners, and the Trent 900 engines powering some Airbus A380 double-deckers.

Rolls-Royce on Wednesday said the cash costs associated with the problem will double this year compared with the 170 million pounds ($235.8 million) free cash-flow impact recorded in 2017. Despite this, Mr. East said the company is sticking to its free cash-flow target of delivering about GBP1 billion around 2020.

Shares in Rolls-Royce rose around 13% in mid-morning London trading.

Rolls-Royce has made a big bet on powering long-range airplanes after exiting the market to power more numerous single-aisle planes six years ago. It expects to power about half the world's long-haul planes by 2020.

Rolls-Royce, which is no longer affiliated with the luxury car maker, reported GBP4.2 billion net profit in 2017 compared with a GBP4 billion loss, reflecting non-cash accounting adjustments to its currency hedges. The more closely watched underlying pretax profit, a figure that strips out one-time items and currency fluctuations, rose 31% to GBP1.07 billion.

Rolls-Royce said it will take until 2022 for the Trent 1000s and Trent 900s to be fully upgraded with more durable components.

Mr. East said the company will continue restructuring plans and will shed white-collar jobs after a previous round of cuts saw 600 managers exit the company. The company hasn't set a cost-savings target or defined, yet, how many jobs may go, he said.

"There is more simplification we need to do to make ourselves truly competitive and fit for the future," Mr. East said.

Rolls-Royce has been under pressure to act after activist investor ValueAct Capital Management LP in 2015 became its largest shareholder. Bradley Singer, a ValueAct executive, became a Rolls-Royce non-executive board member in 2016. That appointment is being extended three years, Rolls-Royce said.

Rolls-Royce and ValueAct also are changing their relationship, effectively allowing the latter to alter its shareholding. The hedge fund, which owns almost 11% of Rolls-Royce shares, previously was limited to owning 12.5% in the company and faced restrictions on reducing its position. Foreigners such as ValueAct can't own more than 15% in Rolls-Royce stock.

As part of his efforts to revamp the company, Rolls-Royce in January announced the potential sale of its commercial-marine business, joining rival industrial giants such as General Electric Co. (GE) in taking steps to reinvent itself. Chief Financial Officer Stephen Daintith said an update on the marine strategic review should come no later than mid-June.

London-based Rolls-Royce, which makes aircraft engines also in the U.S., said it could shield itself from potential tariffs on steel and aluminum imports in the U.S. being threatened by the Trump Administration.

"We will be able to adjust where we produce things to make sure we are not paying unnecessarily high prices for raw materials," Mr East said.


Write to Robert Wall at robert.wall@wsj.com


(END) Dow Jones Newswires

March 07, 2018 06:21 ET (11:21 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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