Profits Make Grim News For UK Leaders.

LONDON, UK – The UK’s two leading aerospace and defence groups both reported their 2015 first-half results on July 30.

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.

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