Rolls-Royce: Covid-19 A ‘Significant Disruption’

Civil aviation business hardest hit, but power, defense

Covid-19 has caused “significant disruption” across all of Rolls-Royce business segments, CEO Warren East told shareholders in an earnings update.

The pandemic has throttled the global aviation industry, a segment that accounts for about half of Rolls-Royce’s business.

“The diversity of our business units makes us more resilient, with almost half of our sales coming from non-Civil Aerospace end markets,” East told shareholders in prepared remarks. “Year to date, our Defense business has been robust, although the impact of social distancing and self-isolation on our operations and those of our suppliers represents a potential risk to activity levels. We are closely monitoring our supply chain and taking actions, where possible, to mitigate the impact on our productivity.”

Power Systems, however, has experienced weaker trading since the first quarter due to extended shutdowns in local markets and ongoing travel bans the effects of which have only been partly mitigated by the company’s diverse end market exposure and cost savings, East said. As a result, while the company expects a meaningful positive contribution to full year profit and cash flow from Power Systems, its performance in 2020 is likely to show a material deterioration compared to the prior year. The pandemic has particularly impacted industrial end markets, most notably oil & gas and mining, as well as causing lower services activity and the temporary closure of several yacht production facilities. In power gen, delays to construction projects are currently impacting sales of backup power solutions, however looking ahead the company continues to anticipate the higher data traffic resulting from Covid-19 to drive greater demand for mission-critical backup power for data centers.

“In this unprecedented period of uncertainty we have rapidly adapted our business to safeguard its future for all of our stakeholders,” East said in prepared remarks. “We have implemented heightened safety procedures to protect our people and we are providing practical assistance to combat the impact of Covid-19 on the countries in which we operate. In the UK, for instance, we have put our manufacturing and supply chain expertise to use in the drive to increase the supply of ventilators for hospitals. We have also strengthened the financial resilience of the group to ensure we are well positioned to weather the pandemic. We are working hard to mitigate the near-term disruption caused by Covid-19 and are making stronger than expected progress on our mitigating actions, giving us confidence that we can now deliver up to £1.0 billion of savings this year. However, we must also take the difficult but necessary decisions to ensure the group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover. I am proud of the dedication and commitment of my colleagues and thankful for the continuing support of our shareholders and other stakeholders during this challenging time.”

The company has taken a number of immediate actions to adapt to the current market conditions, including working with its supply-chain to reduce direct procurement as well as placing over 4000 employees in the UK on furlough.

“Our strategic choices over the last few years, including streamlining our portfolio, investing in our management systems, and building a culture of agility – have helped us to respond quickly to COVID-19 with actions to mitigate the immediate impact,” East said. “Once the recovery begins, the shape of our portfolio and the synergies between our divisions will leave us well placed to capitalize on the long-term potential of our markets, and to fulfil our vital role in the world’s transition to a low-carbon power future.

“The transition to low carbon power was always going to be an opportunity that we could seize through increasingly efficient engines and our world class innovation; becoming a disruptor in new markets. Now opportunities may come even sooner than we originally anticipated. We must – and we will – emerge from this period ready to pioneer the power that matters.”

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