Aero-engine group Rolls-Royce had a worse than expected 2020, running at a £4 billion ($5,5 billion) loss, thanks to the grounding of most of the world’s aircrafts for the better part of the year.
In the financial statement released today, company Chief Executive Warren East pointed out the COVID-9 pandemic impact was most acutely felt by the company’s Civil Aerospace business. The business’ immediate response to address its cost base launched the largest restructuring in its recent history. Approximately 7,000 permanent and contractor roles have already been lost. They estimate that by the end of 2022 that number will have risen to at least 9,000, mostly in the civil aerospace division.
Rolls-Royce did not recommend a dividend payment to shareholders for 2019 and the Board will not be recommending payments until after the end of 2022.
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The company insists their strong liquidity position means they have enough funding to cover their operations, business development and near-term debt maturities. During 2020 $500 million (£358 million) of bonds matured and they secured $10,1billion (£7.3bn) of additional debt and equity funding to strengthen their liquidity. They also secured approvals for a $1,39 bn (£1.0bn) increase in March 2020, which they intend to leave undrawn, in addition to their existing $278 bn (£2.0bn) term-loan facility, which is supported by an 80% guarantee from UK Export Finance.
The company is targeting at least $2,79 bn (£2.0bn) from disposals by early 2022 and have already announced agreements to sell their Civil Nuclear Instrumentation and Control and Bergen Engines businesses. We expect the proceeds from the rights issue in 2020, together with business disposals and cash generated from operations over the next few years, to help return them to a net cash position in the medium term.
Company believes power systems will be the answer
“A positive albeit reduced contribution from Power Systems and growth in Defence were important to the Group’s overall performance, partly offsetting the severe impact to our Civil Aerospace business,” read the financial statement.
Rolls-Royce CEO Warren East: “We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well positioned to take advantage of the transition to a lower carbon economy and growing demand for more sustainable power solutions.”
The company’s near-term outlook remains uncertain and highly sensitive to the developments around the COVID-19 virus and related measures taken by governments around the world. Thus, the near-term environment for the civil aerospace remains highly uncertain. Rolls Royce will plan for a range of recovery scenarios, but their central assumption for now is for a gradual market recovery in 2021. They posit a slow start to the year but an acceleration in the second half as global vaccine roll-outs progress and travel restrictions ease.
Based on Power Systems’ short cycle exposure and the growth potential of key markets such as China, Rolls-Royce expects an improvement in the order intake during the first half of 2021, which should convert to a recovery in sales from the second half of the year. They believe revenue levels will return to approximately 2019 levels at some point in 2022.
Longer term, they do see growth opportunities for Power Systems across existing activities (such as back-up power and expansion in China) and in new low carbon solutions such as microgrids, hydrogen and hybrid-electric power solutions.
Rolls-Royce’s road to net zero is lined with R&D
In preparing their consolidated financial statements, Rolls-Royce management did consider the impact of climate change, in the context the company’s stated net zero targets. However, they don’t believe climate change is going to have a significant impact on the Group’s going concern assessment to September 2022, or the viability of the Group over the next five years.
They will though continue to invest in new technologies, including hybrid electric solutions in Power Systems and continue developing a more efficient UltraFan aero engine, testing of sustainable aviation fuels, SMRs and hybrid and full electric propulsion.
The Group will continue to invest in onsite renewable energy generation solutions for their facilities. This investment is included in their five-year forecasts to enable them to meet their 2030 target for zero greenhouse gas emissions from their operations and facilities.
Rolls-Royce publically affirmed its ambition to achieve net zero carbon by 2050 when it joined the UN Race to Zero campaign in 2020.
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During last year approximately 7% of their research and development (R&D) spending was related to low carbon technologies (2019: 4%) and 38% towards next generation engine development with the remainder spent on delivering or enhancing their current product portfolio.
“The engine programmes we launched in recent years are now maturing and our investment priorities are pivoting towards lower carbon solutions as well as a more equitable balance across our business units. We intend to dedicate approximately 20% of our annual R&D expenditure to low carbon solutions including small modular reactors (SMRs), hybrid, hydrogen and electric power technologies, by 2023,” the financial statement reads.