Lockdowns and the economic slowdown have hit industrial customers hardest, Rolls-Royce noted, “particularly those with exposure to oil & gas and mining. Power Generation activity also slowed down markedly in the second quarter, especially in the U.S.
“We experienced a reduction in demand for smaller yacht engines,” Rolls-Royce said, though “long-term demand growth for reliable power solutions is expected to remain intact with demand in data centre mission critical applications increasing above pre-COVID levels. “
In developing markets Rolls-Royce manage to grow market share despite the global health pandemic. Demand rebounds “particularly in China,” the company noted, “where we continue to expect growth in our revenues in 2020.”
Mitigation measures to brace against shortfall in cash
In Rolls-Royce larger aviation business, there has been a free cash outflow of approximately £3 billion due to a £1.1 billion slump in invoices related to engine flying hours (EFH) and a £1.1 billion one-time impact as the company ceased invoice factoring.
“Due to the deterioration in the medium-term outlook caused by COVID-19, absent mitigating actions, we forecast a shortfall of US$ denominated cash receipts over the next seven years compared to our hedged position,” said Rolls-Royce CEO Warren East.
“We have therefore reduced the hedge book from $37 billion to approximately $27 billion. This will result in cash settlement costs totalling approximately £1.45 billion comprising approximately £100 million of cash costs in 2020 (incurred in the first half), £300 million in each of 2021 and 2022, and £750 million spread over 2023 to 2026,” he explained.
Pro-forma liquidity currently stands at £8.1 billion which includes an undrawn revolving credit facility of £1.9 billion and commitments for a new 5-year term-loan facility of £2.0 billion, underwritten by a syndicate of banks.
Cost mitigation measures of £1.0 billion are “on track,” the CEO stressed, with approximately £300 million achieved in the first half of this year. The aim is to deliver at least £1.3 billion in annual pre-tax cash savings by the end of 2022, which will involve a 17% reduction of the company’s workforce, equivalent to more than 9,000 roles worldwide, mostly in the civil aerospace segment.