Rolls-Royce Holdings plc regained some confidence among the London Stock Market, where its stock value has fallen by 14 per cent this year, by maintaining the guidance issued on July 6. However, underlying profit, used by analysts as they strip out certain foreign exchange and revaluation effects, fell by 32 per cent to £439m (H1 2014: £646 million) Pre-tax profits fell by 57 per cent to £310m in the six months to 30 June. Underlying revenue was down 3 per cent to £6.3bn (H1 2014: £6.5bn). Despite the decline, the dividend was increased by 3 per cent to 9.27p.

The order book increased by £2.8bn to £76.5bn. The record £6.1bn order from Emirates for Trent 900 engines for 50 Airbus A380 aircraft was the main factor contributing to a 61 per cent increase in order intake and a 4 per cent increase in the order book. At the same time, there was a sharp decline in new order intake in the Marine business, driven by significant market deterioration in offshore. Defence and Nuclear also had a lower level of new orders, in markets regarded as broadly stable.

Warren East, Chief Executive, said: “Despite the disappointment of our recent update, our second half outlook remains positive and full-year guidance for revenue, profit and cash issued on July 6th remains unchanged, with the exception of an improved tax rate, now 23%, down from 24% and net R&D spend which we also expect to be modestly higher than the £750m we previously guided.The continued growth in our order book demonstrates the long-term demand for our innovative products and services, and underpins my confidence in the fundamental strength of our business.”

BAE Systems PLC reported flat profits in the first six months of the year – operating profit increased slightly from £689m to £700m – but overall its figures were stronger than expected after a £21m boost from favourable currency exchange rates. Revenues rose by 11.3 per cent to
£8.47 bn.

Ian King, Chief Executive, said: “Overall, the business performed well during the first half of 2015 during which we have leveraged our capabilities in adjacent growth markets and maintained disciplined cost control. We have also continued to invest in developing skills and new technologies for the future. These actions have provided resilience through an extended period of reduced defence spending in some key markets and ensured that BAE Systems is well positioned to benefit from a generally improving market environment.”

At Rolls-Royce, Mr East, who succeeded John Rishton as Chief Executive earlier this month, said: “In the near term, we are managing a significant transition from mature engines to newer, more fuel efficient ones, such as the Trent XWB, Trent 7000 and Trent 1000. At the same time, we are taking appropriate actions to mitigate the effects of weakness in our offshore marine markets.

“While these create a profit headwind in the near term, it is critical we successfully deliver our product launches, complete our supply chain transformation and sustain investment in our businesses to strengthen their competitive positions. The initial phase of my ongoing operational review has and will continue to concentrate on how we drive improvements and sharpen our focus to make us a more resilient and sustainable business.”

New products are transforming the group’s Civil Aerospace business. Some of the older, more profitable programmes are now peaking or starting to decline. As outlined in the guidance update on 6 July 2015, the recent changes in demand and pricing for the Trent 700 programme, now approaching the later stage of its delivery lifecycle for the Airbus 330, combined with the reduced demand for business jet engines and a softer regional aftermarket, are expected to create a £300m net Civil Aerospace profit headwind into 2016.

The transition to new engine programmes creates near-term challenges as newer programmes typically see lower pricing for launch customers and higher initial costs.

However, said Rolls-Royce, the roll-out of new engines – such as the Trent XWB for the Airbus A350, the Trent 7000 for the A330neo and Trent 1000 for the Boeing 787 Dreamliner – will significantly grow market share, working towards a 50 per cent share of the installed widebody passenger market, and the installed base of engines that will deliver aftermarket revenue for decades to come.

At the same time, said the Group, it is important to sustain investment R&D in future market-leading products. As a result, Rolls-Royce is currently undertaking a major investment programme in new technology, focused on next generation Aerospace designs, Advance and UltraFan©, to provide a suite of technologies that will have applications across the portfolio.

Mr East said: “To realise our ambitions for these new designs we are investing in advanced manufacturing capability and critical testing facilities, including a composite technology hub in Bristol and a new power gearbox test facility in Dahlewitz, Germany.

“We are also strengthening existing partnerships and establishing new relationships to realise our ambition. In the first half, we strengthened our ITP turbines joint venture with Sener Grupo de Ingenieria SA and agreed a 50:50 joint venture with Liebherr-Aerospace to develop manufacturing capability and capacity for power gearboxes.”

The Defence order book declined 3 per cent in the first half. Net order intake declined 39 per cent, as a significant long-term order for engines to power C130-J aircraft did not repeat. However, significant orders in H1 2015 included:
A 10-year agreement with Robinson Helicopter Company to supply at least 1,000 RR300 engines to power R66 aircraft.
US defence service contracts valued at up to $224m to support US military branches and global air forces supplied by the US Department of Defense.
A long-term agreement with Bell Helicopter for the installation of upgraded M250 engines in new Bell 407GXP helicopters, boosting power and fuel efficiency.

In addition, the LHTEC CTS800 engine, produced under a 50:50 partnership with Honeywell, was selected to power the new Turkish Light Utility Helicopter; the T56 Series 3.5 engine enhancement package completed its first flight with the National Oceanographic and Atmospheric Administration, and the new advanced LiftWorks repair facility was opened in Indianapolis as a centre of excellence for the repair and overhaul of components for the Rolls-Royce LiftSystem® for F-35 Lightning II aircraft.

The F-35 Lightning II programme also featured in the BAE Systems half-year results, with UK-based production of rear fuselage assemblies set to increase significantly over coming years, driven by demand from the US armed forces and international customers.

BAE Systems remains on track to deliver sales growth – in the first half sales were up from £7.6bn in 2014 to £8.4bn – and, with an anticipated trading bias to the second half of the year, continues to expect underlying earningsper share for 2015 to be marginally higher than in 2014. The order backlog fell from £39.7 bn to £37.3bn.

Earnings guidance remains conditional upon anticipated aircraft orders and a review of options for the Williamstown shipyard in Melbourne, Australia, where, following the run-off from a high volume of activity on the Landing Helicopter Dock programme, the business is seeing an increasing gap in workload.The guidance also assumes an average exchange rate of $1.55/£.

Among its Reporting Segments, BAE Systems highlighted the following;

Platforms & Services (US): Sales are expected to reduce by around 10 per cent, in line with previous guidance. Margins are expected to be in a 6 to 8 per cent range, reflecting continued margin dilution from sales trading at the Radford Army Ammunition Plant, Virginia, where it is the operating contrator, and commercial shipbuilding contracts.

Platforms & Services (UK): Sales are expected to increase by close to 10 per cent, with higher sales from Salam Typhoon deliveries to the Royal Saudi Air Force and UK Typhoon Tranche 3 equipment deliveries.

The Astute and Successor submarine programmes more than offset reducing trading on the Queen Elizabeth Class carrier programme. Margins are expected to be at the lower end of a 10 to 12 per cent range, reflecting the impact of increased UK pension service costs due to the lower discount rate and the margin dilution on Tranche 3 equipment trading.

Platforms & Services (International): Sales in 2015 are expected to be approximately 10 per cent higher than in 2014 from higher volumes of weapon systems. Margins are expected to be at the lower end of a 10 to 12 per cent range.

Other operational and strategic highlights include:
£859m demonstration phase contract agreed for the UK Royal Navy’s Type 26 frigate programme.
Good momentum continues in progressively expanding the Typhoon aircraft’s capabilities, including the integration of the Captor E-Scan radar and the integration of additional weapons.
The award of a contract to supply remote electronic units for the Boeing 777X aircraft means BAE Systems will provide the complete suite of flight control electronics for the aircraft’s fly-by-wire system

BAE Systems said the defence market outlook in the US is improving, with recent indications of a return to growth in defence budgets. The current 2015 fiscal year appropriations legislation included stable Department of Defense funding and support for major programmes, including F-35 Lightning II aircraft. There are signs of potential improvement as fiscal year 2016 defence budget proposals continue to seek funding above previously imposed spending caps.

The Group’s UK business is described as stable, with much of the business subject to long-term contracts. The recent UK budget announcements are supportive of defence and the announcement in June of a £500m reduction in the current year defence budget is not expected to materially impact programmes on which the Group is engaged.

A Strategic Defence and Security Review is anticipated later this year; the current expectation is for stability across the Group’s large platform and support programme activities. Typhoon aircraft deliveries to the Royal Air Force and the Royal Saudi Air Force continued alongside airframe major unit and equipment deliveries to European partner nations. BAE Systems continues to provide extensive support and upgrade capability for aircraft in service with the Royal Air Force.

BAE Systems holds a 37.5 per cent interest in MBDA, the world’s second largest missile company. The Group has seen a high level of order intake for equipment to support Tornado and Typhoon aircraft in service in Saudi Arabia. In addition, MBDA has been a major beneficiary of recent French aircraft sales in Egypt and Qatar. BAE Systems’ share of MBDA order intake from those two contracts is expected to total €1.2bn (£0.9bn), of which €0.3bn (£0.2bn) has been booked in the first half of the year.

Chief Executive Ian King said: “We continue to win significant new business with over £10 billion of new orders from the UK and US for the third successive year. As a result, the large order backlog of £40.5 billion continues to provide good, multi-year visibility across many of our businesses.

“Looking ahead, defence spending remains a high priority in a number of international markets. In the UK, we benefit from long-term contracts, notwithstanding continued pressure on public spending. We believe US budgets are now relatively stable, with some early indications of a modest improvement in 2016.

“These are competitive times and we will continue to invest in and develop the technology, skills and market positions needed to drive the business forward. The Group is well positioned to continue to deliver shareholder value.”

The Group forecast that underlying earnings per share in 2015 are expected to be marginally higher than in 2014, largely due to anticipated naval and aircraft orders.

But it said the economic environment in the UK remains challenging, placing further pressure on many areas of public spending, including the UK defence budget. Despite this,Typhoon production and the Group’s extensive in-service military aircraft support and upgrade business in the UK provide a strong core of high-performing business.

2014 saw a significant acceleration of capability expansion on to the Typhoon combat aircraft platform. Activity is underway to integrate additional weapons and sensors onto the aircraft for the four European partner nations and international customers. In November, the formal launch of a funded, multi-nation development programme for an advanced, electronically-scanned radar was a key milestone in the Typhoon platform’s evolution.

BAE Systems’ participation in the F-35 Lightning II combat aircraft programme includes UK-manufactured rear fuselage and empennage assemblies as well as electronic systems content from the Group’s US-based business. The Group expects significant growth in production volume with the planned acceleration of aircraft deliveries.

US budgets are now relatively stable, with some early indications of a modest improvement in 2016. Only minor trading disruption was apparent in the last quarter of 2014 as the government operated under a Continuing Resolution until the mid-December passage of an omnibus appropriations bill for the 2015 fiscal year. This included stable Department of Defense funding compared with 2014, and included funding for ground vehicle programmes and for additional F-35 Lightning II aircraft.

Overall, 2014 saw signs of greater stability and improving clarity emerge in markets where budgets have been constrained in recent years by the wider economic picture.

“In this challenging, but stabilising environment, BAE Systems has delivered a solid overall performance, building on the good programme execution of recent years. Defence and Security continues as a high priority in a number of the group’s domestic and international markets, including the Kingdom of Saudi Arabia.”

A further 11 Typhoon aircraft were delivered to Saudi Arabia during the year under the current 72-aircraft Salam Typhoon contract, on which a February 2014 agreement was agreed on price escalation.

In the UK, Artful, the third of a planned series of Astute Class submarines, was launched in May. Alongside the build of of Astute Class boats, engineering work continues to accelerate as part of the assessment phase of the Successor submarine progamme, the potential replacement of Vanguard Class submarines intended to enter service towards the end of the next decade.

The build of two Queen Elizabeth Class aircraft carriers is progressing well. The first carrier was named on 4 July and subsequently floated out of her assembly dock, allowing the assembly of blocks for the second vessel to begin while outfitting of the first carrier continued. The Group welcomed the October announcement by Prime Minister David Cameron to commit to the operation of both vessels, providing a continuous-at-sea UK carrier capability.

Work continue on the Type 26 warship assessment phase.

The main factors in the fall in underlying revenue were a sharp decline in Defence aerospace OE revenue, due to lower volumes as government spending in many countries was scaled back, and lower Land & Sea revenue due to weaker end market, largely due to the downward oil price. These falls were partially offset by continuing growth in Civil aerospace deliveries as Trent 1000 engine production ramped up, and an improvement in Defence aerospace services.

The order book rose 5 per cent to a record £73.7 billion, with increases in Civil Aerospace, Defence Aerospace and Power Systems. The order intake of £19 billion included net orders of £11.7bn in Civil aerospace, £2.5bn in Defence aerospace, £1.8bn in Marine, £0.6bn in Nuclear and £2.6bn in Power Systems. Orders are spread around the world, with 44 per cent in Asia and the Middle East, 25 per cent in North America, 25 per cent in Europe, with South America and the Rest of the World accounting for 4 per cent and 2 per cent respectively

Chief Executive Officer John Rishton, said: ”We have met guidance for 2014 revenue and profit in challenging conditions while continuing to build strong foundations for future growth.”

He attributed the fall in underlying revenue to reduced spending by defence customers, macroeconomic uncertainty, and falling commodity prices.

“In response to these headwinds, we are taking decisive action to improve the Group’s financial performance and accelerating our focus on the 4Cs: Customer, Concentration, Cost and Cash. This includes a major restructuring programme in our Aerospace Division and continued rationalisation of our Land & Sea Division,” he said.

The restructuring programme in the Aerospace Division and central functions is expected to reduce headcount by 2,600. By the end of 2014, 545 people had left the business, with the majority of the reductions expected in 2015. This programme is expected to result in restructuring charges of around £120 million, of which £56 million was recognised in the 2014 results. The company expects annualised cost benefits of around £80 million from 2016 onwards, with £50 million in benefits expected in 2015.

Rolls-Royce also said there are a number of headwinds in the Civil aerospace business associated with future growth. For example, the Group has invested in the capacity required to meet the record order book, but delay in a number of customers’ major programmes has resulted in the new capacity coming on stream before it is needed, leaving the Group with under-utilised production facilities. Coupled with the construction of a number of new, world-class facilities to replace older, less productive plants, it means the Group is carrying the cost of both the old and new facilities.

Research & development net spend increased in 2014 to £819 million, reflecting increased spending on the higher thrust Trent XWB-97k, due to enter service in 2017, and on the Trent 1000-TEN, due to enter service in 2016. Rolls-Royce continue to invest in research for its Advance and UltraFan programmes, which will create opportunities for the next generation of gas turbine engines.

On 1 December, the sale was completed of the Energy gas turbines and compressor business to Siemens for £785 million cash consideration and a further £200 million for a 25-year licensing agreement. The sale proceeds of around £1 billion are being returned to shareholders by way of the share buyback programme initiated in December 2014.

Strategically, said Rolls-Royce, its two divisions address growing markets. Strong growth in the demand for air travel is widely forecast and is reflected in the £63 billion Civil Aerospace order book. The delivery of the first Airbus A350XWB, powered by the Trent XWB engine, was described as “a significant milestone in our most important programme.’

Focus on the customer has helped enable the Rolls-Royce Trent-powered Boeing 787 Dreamliner to achieve and industry-leading 99.9 per cent engine dispatch reliability rate after more than 500,000 flying hours in service. Since launch, the Group has doubled the time on wing for both the Trent 700 (Airbus A330) and Trent 800 (Boeing 777) fleets. The Corporate and Regional business achieved a 57 per cent improvement in response times to business jet customers.

Future growth in world trade, of which 90 per cent is carried by sea, urbanisation, population growth and tighter environmental regulation places the Land & Sea division well-positioned to meet the increasing requirements for cleaner power. In 2014, the Land & Sea division introduced a new family of medium-speed reciprocating engines.

“Since we last gave guidance, the external environment has deteriorated in some of our major markets. In particular, oil prices have halved over this period, creating increased uncertainty for many of our markets and customers, particularly in Marine Offshore. As a consequence, our full-year guidance is framed within a broad range and excludes the effects of foreign currency translation.”

The Group’s guidance for the full year 2015, expects total revenue to fall from £13.9 billion to £13.4-£14.4bn; underlying profit before tax to fall from £1.6 billon to between £1.4 bn to £1.55 bn.

Mr Rishton said: “We expect near-term headwinds on cash as we invest in doubling of Trent engine deliveries and the transformation of the business. Full-year free cash flow in 2015 is expected to be impacted by the cash costs of the restructuring programmes and higher working capital as engine volumes ramp up, particularly for programmes in the launch phase.

“There will be a first-half bias in the cash cost of our restructuring efforts; we expect the benefits of restructuring to begin to be seen later in the year.”

Mr Rishton added: “Our record order book demonstrates the faith our customers continue to place in our technology and underpins our confidence in future growth.”