Rolls-Royce burns £3bn of cash in first half

Rolls-Royce said it burnt through £3bn of cash in the first half as widebody engine flying hours halved because of the "historic shock" caused by Covid-19.

The FTSE 100 engine maker said it expected performance to improve in the second half and that annual free cash outflow would be about £4bn. It said settling the cost of settling unneeded dollar cash hedges would cost it £1.45bn over the next seven years.

The company warned that the civil aviation industry would take several years to recover from the crisis but said its defence business was holding up. Rolls-Royce shares were the biggest fallers in the FTSE 100 index, dropping 8.7% to 262.76p at 09:52 BST.

Free cash flow in the six months to the end of June was hit by £1.1bn less inflow from lower receipts linked to engine flying hours and lower engine deliveries. Rolls-Royce makes lots of money from maintaining its engines and these fees are linked to how much the engines are used. Cash burn also increased because of a £1.1bn one-off impact from scrapping invoice factoring.

Rolls-Royce Chief Executive Warren East said: "These are exceptional times. The Covid-19 pandemic has created a historic shock in civil aviation which will take several years to recover. We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs to protect Rolls-Royce during the pandemic."

The company said the rate of outflow should ease in the second half from spending cuts, the timing of working capital movements and an expected recovery in commercial aviation. It is targeting free cash flow of at least £750m in 2022.

Russ Mould, investment director at AJ Bell, said: "Cash, the very lifeblood of any business, [is] draining away alarmingly in the first half of the year. The numbers are stark and will do little to stem recent speculation that the company might need to issue shares or even offload a part of the group to generate cash."

East announced more than 9,000 job cuts, covering over 17% of the workforce, in April to cut costs and shrink the business for a weaker outlook as airlines fly and buy fewer planes. About a third of those jobs will go in the UK and Rolls-Royce said it had received more than 3,000 expressions of interest for voluntary redundancy from British workers.

The company said its cost-cutting plan was going well and was on track for at least £1.3bn of annual savings by the end of 2022.

Rolls-Royce said its defence business had stayed resilient during the crisis with continued demand from major government customers. The power systems division was disrupted by the crisis as customers felt the impact, particularly in oil and gas and mining, but long-term demand is set to grow, it said.