Rolls-Royce has said it would generate £750m of free cash by 2022. This was even as it signalled significantly lower income from its wide-body engine business over the next seven years due to the coronavirus pandemic.
The company said that it was closing out a third of its $37bn dollar denominated hedges in a sign of the expected reduction in both aero-engine sales and engine flying hours.
The cash costs of closing the hedges would amount to £1.45bn over seven years, the group said.
Trade Rolls-Royce Holdings PLC - RR. CFD
Due to the pandemic engine flying hours had fallen by 75 per cent in the second quarter. For the full year, the decline was expected to be 55 per cent, and roughly 30 per cent lower than 2019 levels in 2021.
But sales of engines were likely to remain subdued, the group said. The news led to shares falling 9 per cent to 262.6p by mid-morning in London trade.
While aircraft makers Boeing and Airbus have said they expect recovery to take four to five years, Rolls-Royce’s focus on large engines for wide-body aircraft has put it at a disadvantage.
Rolls-Royce also announced that it had further bolstered its access to cash with a new £2bn five-year-term loan, which was backed by a guarantee from UK Export Finance.
The facility had not yet been drawn, but its liquidity stood at £8bn. The cash balance was £4.2bn at the end of June. The group was reviewing options to strengthen its balance sheet but no decisions had yet been taken.
Rolls-Royce now expects to see some £4bn in cash flow out of the business this year, £3bn of which would come in the first half. That compares with a promise two years ago to deliver more than £1bn in free cash by the end of 2020.
In May, Rolls-Royce announced plans to cut 9,000 jobs from its 52,000-strong workforce.