Rolls-Royce to exceed target of £1bn in free cash flow by 2020

Rolls-Royce surged on Friday after it said it should exceed its target of £1bn of free cash flow by 2020 following its announcement a day earlier that it was cutting 4,600 jobs.

Ahead of its Capital Markets Event, the company outlined the details of its restructuring plans and said its mid-term ambition is to exceed £1 per share of free cash flow generation, up from 15p in 2017 and to reach a cash flow return on invested capital of 15% through the cycle, versus 9% last year.

The aerospace and defence giant also stuck by its FY18 guidance for free cash flow despite an additional £100m in costs from issues related to its Trent 1000 engines.

At the time of its FY17 results in March, the group reckoned that the cash costs associated with in-service issues on both the Trent 1000 and 900 would double from the £170m incurred in 2017. It now believes that the further issues encountered with Trent 1000 since the March announcement could lead to combined additional 2018 cash costs of around £100m.

However, Rolls said it has "successfully" enacted a number of short-term discretionary cost mitigation actions separate to, and outside of, the proposed restructuring plan, which it expects to offset these incremental costs. As a result, its FY18 free cash flow guidance remains unchanged at around £350m to £550m.

The company said that the restructuring announced on Thursday, which is expected to cost £500, should deliver net cost savings of £400m a year by the end of 2020.

Chief financial officer Stephen Daintith said: "We are coming out of a significant investment cycle and are poised to deliver much improved returns. To achieve this we must focus on reducing further the original equipment cash deficit per engine, increasing our aftermarket cash margins and 'bending the fixed cost curve' by focusing on R&D, capital expenditure and commercial and administration costs.

"The restructuring programme is a key enabler to delivering reductions in our fixed costs while allowing our businesses to be more accountable for their own costs."

At 0900 BST, the shares were up 11.4% to 983.40p.

Mike van Dulken, head of research at Accendo Markets, said this was "all good noise to help the shares reverse strongly from lows of 820p and break above May highs".