July 28, 2016 / 6:25 AM / 3 years ago

Rolls-Royce turnaround starts to take hold

LONDON (Reuters) - Rolls-Royce (RR.L) said on Thursday its turnaround plan was starting to pay off and stuck to its full-year profit forecast, sending its shares up as much as 18 percent.

A worker walks into a Rolls Royce site in Derby, Britain February 12, 2016. REUTERS/Darren Staples

The aerospace and engineering group’s outlook provided more evidence that its performance is starting to stabilise after a string of profit downgrades last year.

The company has been hit by cancelled orders from oil industry customers after an oil price plunge and a slowdown in aftermarket servicing for aircraft engines.

Chief executive Warren East said that the turnaround plan was beginning to deliver. He said the cost-cutting and simplification plan he started last November to help Rolls-Royce to cope with difficult trading conditions, was working and would help to boost profit in the second-half.

Rolls-Royce shares were up more than 15 percent by 1113 London time, having rising as much as 18 percent in their biggest one-day gain since November 1988, according to Thomson Reuters data.

“Sometimes just meeting expectations is good enough, and that has proved the case today with Rolls shares soaring as the company announced it is trading in line with its most recent guidance,” Hargreaves Lansdown analyst George Salmon said.

The group’s underlying first-half profit fell 80 percent to 104 million pounds but there was no further deterioration in performance so that the company remains on track for a pick-up in the second half.

The first-half profit compared with a consensus forecast for a 16 million pounds loss. Rolls-Royce had shocked investors last year when it warned 2016 profit would halve.

East put the better than expected first-half result down to timing, with some revenues expected in the second half coming before the end of June.

He said Rolls-Royce would cut costs by 50 million pounds this year, at the top end of a 30 to 50 million pound range. The company reduced senior management jobs by 200 more in June on top of 200 positions already cut.

East also said Rolls-Royce was reducing the time taken to build its engines across different programmes.

“On our Trent engines we’ve been able to make significant reductions in lead time for assembly,” East said. “It’s really quite significant time that is being pulled out. If the job takes them half the time then they can do twice as much.”

On a reported basis, Rolls-Royce took an almost 2 billion pound non-cash write-down related to its currency hedging after the value of the pound fell in the wake of Britain’s vote to leave the EU.

Analysts expect full-year pretax profit of 669 million pounds.

Reporting by Sarah Young; editng by Kate Holton and Jane Merriman

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