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mayohoo
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 4:56 pm

what are the implications for its aerospace division?

http://www.bbc.com/news/business-34795769

WIll R and D be cut? Capital expenditures?
 
jacobin777
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 5:39 pm

Yikes..its stock price certainly doesn't look too good lately.      

[Edited 2015-11-12 09:39:42]
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Egerton
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 5:40 pm

Quoting mayohoo (Thread starter):

RR do not have financial issues, they have a lower profit forecast for 2016. They have plenty of cash and sales. They are intending to do something about their organisational structure. It is all in

http://www.rolls-royce.com/news/pres...-11-11-2015-third-quarter-ims.aspx
 
kurtverbose
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 6:31 pm

'Analysts' wonder why RR isn't just an aero-engine maker, as that side of the business is more profitable than the marine diesel business.
 
lancelot07
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 6:33 pm

Quoting kurtverbose (Reply 3):

if someone wonders about the cars, they are wrong here. Rolls Royce cars is owned by BMW.
 
na
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 6:41 pm

Quoting lancelot07 (Reply 4):
if someone wonders about the cars, they are wrong here. Rolls Royce cars is owned by BMW.

BMW also holds some stakes in the engine manufacturer.
 
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clickhappy
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 6:48 pm

Quoting Egerton (Reply 2):
RR do not have financial issues

From their CEO:

On Thursday, Rolls Royce delivered a stunner of a profit warning as new CEO Warren East said the company will take a hit of some $990 million on expected “sharply lower” sales of corporate jets along with headwinds facing the offshore oil market where the company’s customers use vessels powered by Rolls Royce engines.

So, 1 billion dollars lost, but not a financial issue. And, 1,000 job cuts from one division (Marine). Analyst coverage predicts '70%-80% decline in share price.'

I would hate to see what a real financial issue looks like.
 
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Revelation
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 6:54 pm

The BBC article has an interesting analysis:

Quote:

Rolls-Royce has been badly affected by a decline in its main aircraft engine business. It says that although demand for new engines for large passenger aircraft remains unchanged, many airlines have been sidelining their older planes in favour of modern, more fuel efficient models.

As a result, profits from supplying spare parts and servicing have fallen significantly. In addition, sales of engines for corporate jets have declined sharply.

Meanwhile the low price of oil has taken a heavy toll on Rolls-Royce marine engine business, largely because of falling demand from offshore energy companies.

So while one might think the big uptake of A330, A330NEO, 787 and A350XWB would be good for RR, it is known that they don't make much if any profit when they sell the engine, they make the profits on spare parts for the engines and on servicing the engines. They're actually better off when there's lots of old clunkers flying around. Add to that the dip in oil prospecting which means less offshore rigs being built/deployed, and the result is poor profits for RR.
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Amiga500
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:00 pm

Folks, its a change in accounting practice that is resulting in the change in expected profit.

RR were using a deferred system, so that future profits from maintenance could be counted as actual profit the moment the engine sale+maintenance deal was signed.

(Kinda similar to Boeing with the way they are accounting the 787 program.)


Now however, new guidelines mean they cannot do this, so the only profit counted now is the sale profit of the engine; the maintenance profits will be gained in each individual year of the maintenance program.


Of course, its got idiotic analysts in a tizzy as they don't understand what is going on (particularly the clown analyst who doesn't grasp that the marine unit couldn't run without the R&D offshot from the aerospace unit and that profit is still profit - even Teal Group's resident Nils Bohr wouldn't make that mistake).
 
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nighthawk
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:06 pm

Quoting clickhappy (Reply 6):
I would hate to see what a real financial issue looks like.

Accountants are strange people - they like to consider changes in the value of an asset as a profit/loss. e.g - you have an asset you think is worth 1m, but then realise in the current economic climate its probably worth half that. To an accountant, that's a 500k loss.

A large chunk of the $1bn quoted will probably in writing down the cost of assets.

Additionally, a "financial crisis" implies running out of money. We don't know how much cash RR are sitting on. If they are sitting with 10bn in the bank, then it's far from a crisis, they've got 8-9 years before it becomes a crisis.

So it's bad news, but it is far from a "financial crisis".
 
SteinarN
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:11 pm

Well, when the fniancial situation is so dire that they will CONSIDER if it might be necessary to cut the stock dividend....

I would say this is an example of financial analysts and stock holders having a completely unrealistic expectations to the continous and constant profit of a company. Of cource many if not most companies experiences very good years and some not so good years. One reason for declining profits is a significant reduction in sales of the very profitable trent 700 for the A330ceo. How can that come as a surprice? It has been fairly obvious for several years that T-700 production and sales could/would wind down.

So no sorry to get from me.
 
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clickhappy
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:13 pm

Actually we know exactly how much cash RR is sitting on. All we have to do is read their financials.

As of 30 Jun 2015

Cash And Cash Equivalents 1,581,000
Short Term Investments 7,000
Net Receivables 5,640,000
Inventory 2,930,000
Other Current Assets 49,000
Total Current Assets 10,208,000

So, 1.6 billion pounds in cash. Stock is down 22% today.
 
goosebayguy
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:19 pm

Quoting Amiga500 (Reply 8):
RR were using a deferred system, so that future profits from maintenance could be counted as actual profit the moment the engine sale+maintenance deal was signed.

This is precisely what ENRON did.

While a lot of Enron news centered around the method of hiding losses this mark to market technique of dealing with sales was the real problem. Massive profits but very little cashflow.

RR have problems because the new plants in Singapore etc are not as efficient as Derby. Also they bought marine companies at the height of the market and so write offs are now required.
 
Egerton
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:21 pm

Quoting clickhappy (Reply 6):
I would hate to see what a real financial issue looks like.

Maybe our two nations are separated by a common language?
Over here in UK, 'financial issues' suggests insufficient cash to pay next week's wages.
At the end of London trading this afternoon, RR had a stock market value of over £12 billion.

RR seem likely to make a lot less profit in 2016 than this year, which itself looks like being well over £1 billion.
The cash flow will not be as badly down - the reporting of profits are being adjusted to get into line with forthcoming international accounting rule revisions.

The main take-away is that the new chief is making it clear that for RR, it is not business as usual, and the excess and long standing fat will be removed over time.

Few are expecting R&D and the investment in efficient factories (including Indianapolis) will suffer. The former is the life blood of this business, the latter is the way to deliver the order book. I suspect the shareholder dividends may suffer before future value destruction is contemplated. Delivery of the order book will double the size of the firm.

Hope this helps

[Edited 2015-11-12 11:33:33]
 
ckfred
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:24 pm

While it's true that often the sale of a good is less profitable than the sale of spare parts and maintenance (car dealers make more on service and parts than on new car sales), one would think that RR would be having some issues, with GE getting so many sales.

Remember that every new 77W comes with GE90 engines, because GE talked Boeing into being the exclusive supplier for the 77W and the 77L.

If AA hadn't had the Chapter 11, I suspect that its 787s would have been delivered with RR engines. But with the bankruptcy and GE Capital undertaking a lot of financing, the belief is that there was pressure for AA to order GE engines, even though RR had an engine overhaul facility at Alliance Airport, near the AA maintenance facility.
 
mjoelnir
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:30 pm

Quoting Amiga500 (Reply 8):



IFRS is hitting profits and the new guy is furthermore cleaning the stable, writing off iffy assets and deferred cost . Cash flow is expected to stay unchanged. Showing less profit or loss is also good if you want to reduce labour cost by thinning out the workforce and cuting salaries.
 
tortugamon
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:30 pm

Quoting Revelation (Reply 7):
They're actually better off when there's lots of old clunkers flying around

I thought that was interesting as well. We certainly new this but it is interesting it could be this meaningful. Declining engines for the A330 should be referenced as well but I am surprised it isn't. Going from 10/month to 6 has to hurt.

Quoting Amiga500 (Reply 8):
Folks, its a change in accounting practice that is resulting in the change in expected profit./quote]
Well change it back! Quick! Stock is down 20%  

[quote=nighthawk,reply=9]We don't know how much cash RR are sitting on. If they are sitting with 10bn in the bank, then it's far from a crisis, they've got 8-9 years before it becomes a crisis.

Yeah we know how much they have and we also know how much they are burning through ~$1.3 Billion in the last 9 months. And when you only have $1.6 Billion on hand its not good.

RR.L+Balance+Sheet" target="_blank">http://finance.yahoo.com/q/bs?s=RR.L+Balance+Sheet

Quoting Egerton (Reply 13):
Delivery of the order book will double the size of the firm.

So back to how much it was worth in April? Sorry, couldn't help myself. They will pull through and if not the government is there to help them.

tortugamon
 
astuteman
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:37 pm

Quoting clickhappy (Reply 6):
So, 1 billion dollars lost, but not a financial issue. And, 1,000 job cuts from one division (Marine).

Not "1billion dollars lost".   
A reduction in profit from $2Bn to $1Bn.
Good news it ain't.
But it's still a positive number.   
Most importantly cashflow will still be positive in 2016

Quoting clickhappy (Reply 6):
Analyst coverage predicts '70%-80% decline in share price.'

A ridiculous prediction IMO

Quoting clickhappy (Reply 6):
I would hate to see what a real financial issue looks like.

Me too. Must be ugly

Rgds
 
trex8
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:40 pm

Nothing some Repayable Launch Investment from Her Majestys Treasury can't help fix.
 
Amiga500
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:44 pm

Quoting tortugamon (Reply 16):
Yeah we know how much they have and we also know how much they are burning through ~$1.3 Billion in the last 9 months. And when you only have $1.6 Billion on hand its not good.

RR.L+Balance+Sheet" target="_blank">http://finance.yahoo.com/q/bs?s=RR.L+Balance+Sheet

Link didn't work....
 
Egerton
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 7:49 pm

Quoting tortugamon (Reply 16):
They will pull through and if not the government is there to help them.

Come off if. Agreed, the UK government owns a 'golden share' which prevents a take over. But this is a headwind for the share price. Remember the rescue of both RR and Lockheed by their respective governments in 1971. And the insurance giant IAG by the US govt, more recently. We are nowhere near this situation now with RR, although you know my views on the way Boeing reports 'profits'.

What is absolutely required of RR is to get rid of its historic fat.
As with any old established UK firm, it needs a 'crisis' not to be wasted but taken full advantage of.

[Edited 2015-11-12 12:00:48]
 
lancelot07
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 8:29 pm

Quoting Amiga500 (Reply 8):

Folks, its a change in accounting practice that is resulting in the change in expected profit.

RR were using a deferred system, so that future profits from maintenance could be counted as actual profit the moment the engine sale+maintenance deal was signed.

(Kinda similar to Boeing with the way they are accounting the 787 program.)

afaik, Boeing used Percentage of Completion to account for the development cost of the 787, a very common practice for huge projects. This method gets costs on the balance sheet as assets which can be written off later against revenue from the project.
No problem so far. But a large problem in case the program fails - then a huge write-down is the consequence, potentially busting the company.

Somehow, i have a problem with using this method for future maintainance revenues. Seems fishy to me. Where is the coresponding asset ?
 
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Revelation
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 8:36 pm

Quoting Egerton (Reply 13):

Few are expecting R&D and the investment in efficient factories (including Indianapolis) will suffer. The former is the life blood of this business, the latter is the way to deliver the order book

It does make one wonder if this is the reason that the talk of an immanent RR engine for a A380neo that was so hot and heavy a year ago (when the 'old guy' was still running RR) has now changed to talk of an "inevitable" A380neo with no definitive time line specified (now that a 'new guy' is cleaning house at RR). Hopefully the house cleaning clarifies things.

Quoting Egerton (Reply 13):
Hope this helps

It does.

Quoting astuteman (Reply 17):
Not "1billion dollars lost".
A reduction in profit from $2Bn to $1Bn.
Good news it ain't.
But it's still a positive number.
Most importantly cashflow will still be positive in 2016

As does these comments from the always-reliable astuteman.
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lightsaber
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 8:47 pm

Quoting clickhappy (Reply 6):

Sharply lower sales of corporate jets is hitting BMR side of the house hard. The Global Express production is dropping alongside G550/G450 sales. That has hurt BMR-710 sales. Yes, the BMR-725 is doing well, but the cuts are notable in deliveries.

Overall, more a news event than a crisis (unless your job is lost). $1 billion profit is not the cash flow crisis implied in the title.

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speedbored
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 8:56 pm

Quoting lancelot07 (Reply 21):
Where is the coresponding asset ?

Well you could say exactly the same about the 787 deferred accounting. Spent costs on frames that have already been delivered doesn't leave much of an "asset" behind.

I'm pretty sure that RR is only doing this for maintenance and spares that they are contracted to deliver, not by speculating about what they might be able to achieve. In that case, the maintenance contract should be considered an "asset" with a quantifiable value.

Quoting astuteman (Reply 17):
Not "1billion dollars lost".
A reduction in profit from $2Bn to $1Bn.
Good news it ain't.
But it's still a positive number.
Most importantly cashflow will still be positive in 2016

When you put it like that, it doesn't sound even half as bad as some analysts are making it out to be.

I suspect that this "storm in a teacup" is either due to the outgoing CEO deferring some of the bad news until after he left, so as to artificially inflate his own past performance, or due to the incoming CEO exaggerating the bad news now, so as to artificially inflate his own future performance. Perhaps a bit of both.

Are things a bit tough at RR right now? Yes, IMO. Are RR in serious trouble? Not at all.

Quoting astuteman (Reply 17):
A ridiculous prediction IMO

Mine too. Though it does look to me like sometime in the very near future could turn into a very good time to buy some RR shares  
 
Planesmart
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 9:15 pm

If there were serious professional qualifications required to be a published financial analyst, there wouldn't be many news items.

For those who bother to read, and understand the audited financials, the new pair of hands on the wheel is tidying up, especially in respect to marine and small aero engines, where sales compared to forecast are below expectations. They are writing off goodwill. And a one-off change to accounting treatment as well.

In medium and large aero engines, RR sales are performing well, and prospects are excellent, especially as the correlation between sales and maintenance contracts is well into the 80's. Proactive R&D, great customer communication, and market leading owned monitoring, pricing and predictive maintenance software tools, provide a strong future base.

Expect a bounce back, as funds managers and canny private investors see the opportunities.
 
Bongodog1964
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 9:47 pm

Quoting ckfred (Reply 14):
one would think that RR would be having some issues, with GE getting so many sales.

Remember that every new 77W comes with GE90 engines, because GE talked Boeing into being the exclusive supplier for the 77W and the 77L.

On the other hand every A350 is RR powered, as will be every A330neo

I don't have the exact figures to hand, but it seems to me that GE and RR are roughly equal on widebody engine sales. Which for RR is as good as it has ever been
 
kurtverbose
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 9:49 pm

Quoting lancelot07 (Reply 4):
if someone wonders about the cars, they are wrong here. Rolls Royce cars is owned by BMW.


Don't quote someone and make out they have it wrong whey you clearly haven't read their post. As I made clear I was talking about the marine diesel business - specifically Tognum as it was known until last year.

Everyone knows the car company is nothing to do with RR the engine maker apart from name.
 
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LAXintl
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 10:04 pm

The big issue for RR (and some others in industry as well) is that the big money is made in service and support, not initial sales.

As older frames and engines are retired, RR is seeing reduced parts and overhaul work pool and revenues.

Its great that customers are getting shinny new planes, but with them come honeymoon periods where potential earnings are diminished.
From the desert to the sea, to all of Southern California
 
lancelot07
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Thu Nov 12, 2015 10:33 pm

Quoting speedbored (Reply 24):
Well you could say exactly the same about the 787 deferred accounting. Spent costs on frames that have already been delivered doesn't leave much of an "asset" behind.

Tools, patents, even knowledge without patents - that are assets, no doubt. The frames that have been delivered are (past) revenue.

Quoting speedbored (Reply 24):
I'm pretty sure that RR is only doing this for maintenance and spares that they are contracted to deliver, not by speculating about what they might be able to achieve. In that case, the maintenance contract should be considered an "asset" with a quantifiable value.

The spares they have in their inventory are an asset, sure. But revenue usually is recognized upon delivery, not with contracting. If for some reason you enlarge current earnings by adding discounted future earnings from contracts to your assets it will diminish your future earnings, since you obviously can't have them twice from the same contract. And future earnings is what the stock market is all about.
 
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clickhappy
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Thu Nov 12, 2015 11:01 pm

I would say the biggest takeaway from this news, and the reason for the plunge in share price and the analyst downgrades, are that are that RR guide a few months ago that the figure would be -300 million in revenue, now it is a billion, so, the question becomes, how do we know this number is correct? Note the 300 million figure was only four months old.

And yes, before you write that 22% isn't a plunge, it is, so save the keystrokes.
 
fruitbat
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 11:25 pm

Quoting clickhappy (Reply 30):
I would say the biggest takeaway from this news, and the reason for the plunge in share price and the analyst downgrades, are that are that RR guide a few months ago that the figure would be -300 million in revenue, now it is a billion, so, the question becomes, how do we know this number is correct? Note the 300 million figure was only four months old.

At the risk of being sent to pedants corner, you're mixing your currencies; £300m revenue headwind in 2016 has become a £650m headwind, so ~$450m has become ~$1bn.

Although your point about the "correctness" of the new figure is well made. I'd say that the new CEO is betting his job and the company on it being right; any more profit warnings from RR and things for the company could get very difficult indeed.
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RickNRoll
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Rolls Royce Faces Profitability Issues...

Thu Nov 12, 2015 11:45 pm

Quoting lancelot07 (Reply 21):
Somehow, i have a problem with using this method for future maintainance revenues. Seems fishy to me. Where is the coresponding asset ?

The maintenance contract?
 
prebennorholm
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Thu Nov 12, 2015 11:58 pm

Aaaarch, this is so predictable. Warren East took over as CEO four months ago. He will probably sit 3-4-5 years or such just like his predecessor John Rishton (four years and 100 days).

Any new CEO must always begin with making things look as dark as possible. That's easy in today's business environment with all those artificial accounting methods. Often the only thing needed is to abandon a few of the most crazy accounting methods.

By making first year look dark, then the opportunity for "progress" during the next 2-3-4 years is much better.

Then in the end Warren East does the same thing as John Rishton did. In 2018-19-20 he invents some new artificial accounting methods which skyrockets one year profit, then walks away with an eight digit bonus, mostly in company shares, which he sells immediately.

Game over.

It is so predictable since it happens in most large and fairly successful businesses these days. In this country it is called "Boston Disease". Boston? It is said that the virus was spread from some professor at a Boston business school in the latter part of 20th century, but I have no proof for that.
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enzo011
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Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 12:31 am

Quoting mjoelnir (Reply 15):
Showing less profit or loss is also good if you want to reduce labour cost by thinning out the workforce and cuting salaries.

Ah...the old efficiency savings required from the workforce...
 
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crimsonchin
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Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 1:07 am

Quoting clickhappy (Reply 30):
And yes, before you write that 22% isn't a plunge, it is, so save the keystrokes.

Thank heavens Astuteman didn't "save the keystrokes" correcting your intellectually deficient £1bn loss comment above.
 
jacobin777
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Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 2:48 am

Quoting Amiga500 (Reply 8):
Of course, its got idiotic analysts in a tizzy as they don't understand what is going on (particularly the clown analyst who doesn't grasp that the marine unit couldn't run without the R&D offshot from the aerospace unit and that profit is still profit - even Teal Group's resident Nils Bohr wouldn't make that mistake).

IMHO the stock price of RR the past two years has told a different story.

Quoting astuteman (Reply 17):
Quoting clickhappy (Reply 6):
Analyst coverage predicts '70%-80% decline in share price.'

A ridiculous prediction IMO

Actually the stock is down 50% during the past 5-6 months and down almost 60% the past two years. Something doesn't "add up".

Quoting Bongodog1964 (Reply 26):
On the other hand every A350 is RR powered

  

Quoting Bongodog1964 (Reply 26):
as will be every A330neo

Not too many sales right now however.

Quoting prebennorholm (Reply 33):
Any new CEO must always begin with making things look as dark as possible. That's easy in today's business environment with all those artificial accounting methods. Often the only thing needed is to abandon a few of the most crazy accounting methods.

That doesn't reflect as to why the stock has been doing poorly the past two years.   
"Up the Irons!"
 
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DocLightning
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 4:25 am

Quoting lancelot07 (Reply 4):
Rolls Royce cars is owned by BMW.

I knew that Rolls Royce Motorcars was no longer (for some time now) in any way affiliated with Rolls Royce, the power systems company. I did not know that they are owned by BMW. That's interesting.

Quoting lightsaber (Reply 23):
Sharply lower sales of corporate jets is hitting BMR side of the house hard. The Global Express production is dropping alongside G550/G450 sales. That has hurt BMR-710 sales. Yes, the BMR-725 is doing well, but the cuts are notable in deliveries.

Why is there this decline? RR is one of the leading manufacturers for business jets, this is true. I also notice that they have been strangely quiet on the market for aircraft engines under 50,000 lbf. I would have thought that the 737/A320 market would be big enough to be split by all three engine OEMs. I wonder why RR didn't throw in?
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Chaostheory
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 5:41 am

Quoting DocLightning (Reply 37):
I would have thought that the 737/A320 market would be big enough to be split by all three engine OEMs. I wonder why RR didn't throw in?

The margins are very low on small commercial turbofans (CFM56 and V2500). Also, RR still builds the V2500 for Pratt.

I don't know why they haven't developed their corporate engine line up though which historically was one of their most profitable.

Either way, RR will be fine.
 
astuteman
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 6:39 am

Quoting jacobin777 (Reply 36):
Actually the stock is down 50% during the past 5-6 months and down almost 60% the past two years. Something doesn't "add up".

Indeed. And IMO, as stock prices usually do, has rapidly factored in/predicted bad news, and probably over-reacted, as they usually do.

They are £5.19 this morning. do you think they are going to go another 70% and end up at £1.50?   

I just don't see it when the fundamentals of the business are so sound (a predicted 5% op margin in 2016 on £14Bn revenue, whilst maintaining cashflow AND investing £750m in R+D is a bad year )

Quoting jacobin777 (Reply 36):
Something doesn't "add up".

indeed

Rgds
 
Ruscoe
Posts: 1747
Joined: Sun Aug 22, 1999 5:41 pm

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 7:18 am

Quoting Amiga500 (Reply 8):
RR were using a deferred system, so that future profits from maintenance could be counted as actual profit the moment the engine sale+maintenance deal was signed.

(Kinda similar to Boeing with the way they are accounting the 787 program.)

That's not correct, where Boeing is concerned. I have not studied RR financials.
The program costs per unit are added back as a cost of sales, and therefore deferred costs per unit are applied against each frame, and taken off any profit on the sale of the unit, thus being reflected in the bottom line.

While this keeps a lid on extreme losses it also keeps an equal lid on extreme profits. eg the 350 program

However RR, Boeing or Airbus cannot hide these costs. Most have already been paid for, and so where did the money come from?

For example if a company claim to be paying off program costs as they go, then that money has to come from somewhere, and it does not have to be from profits.
So it is reflected in lower profits, increasing borrowings, Capital Raisings, Asset sales and so on. Airbus and probably Boeing and others, are quite up front about it, and convert some of these costs into intangible assets. So you convert the cost into an asset. Actually, for what it is worth, I don't have a problem with this if it is done honestly and conservatively, to properly reflect the value to the company of development, which will assist the company in general in the future.
So in a nutshell if you just look at what the accountants tell you, you may not get a clear picture of what is happening. You have to be able to interpret, what is reported.
There is only room in an organisation for one level to interpret, and this is at a senior level. If two levels interpret then you run the risk of compounding one problem on another.
That is why accountants are some times thought to be a bit pedantic in their thinking. They have to be, it is the correct position for them to take.
So with regard to Rolls Royce, the information given in the financials has to be interpreted to see what it is really saying, and senior management have quite clearly done this for us in their profit warning.
Ruscoe
 
r2rho
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 8:49 am

RR is fine. The fundamentals are sound. They have a de-facto monopoly on any new Airbus widebody. Admittedly they are out of the narrowbody market, and the bizjet engines will suffer. But they are investing in R&D to be back in there when the next new aircraft cycle comes.
This is just the typical short-term fixation on quarterly results by analysts and investors who do not understand the long business cycles of a high tech manufacturing company. Move along, nothing to see here.
 
Amiga500
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 9:13 am

Quoting Ruscoe (Reply 40):
That's not correct, where Boeing is concerned. I have not studied RR financials.
The program costs per unit are added back as a cost of sales, and therefore deferred costs per unit are applied against each frame, and taken off any profit on the sale of the unit, thus being reflected in the bottom line.

Which means Boeing are dependent on future sales of the aircraft to pay the (already paid) fixed costs.

Not wholly unlike Rolls being dependent on future part/maintenance sales to meet profit guidelines.


Both sides of the same coin - and both are unrealistic. Although would agree that program accounting has a purpose; its purpose is not on the annual profit and loss sheet.
 
Egerton
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RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 9:35 am

[quote=DocLightning,reply=37]

I would have thought that the 737/A320 market would be big enough to be split by all three engine OEMs. I wonder why RR didn't throw in?

Good question.

RR had 32.5% shareholding in IAE JV (International Aero Engines) along with P&W, and IAE achieved a 50% market share on the A320 series. But zero market share on the 737 series. The A320 and 737 shared the narrow body market.

So RR had 32.5% of a quarter of that market, i.e. RR had 8%.

At the time when IAE started, RR has only a low or very low market share of the wide body market and narrow body market (roughly RB211 and Spey). When P&W came up with a workable geared fan for the narrow body market, RR decided to bet the farm on the wide bodies, very successfully. RR sold their 32.5% in IAE to P&W, to avoid the risk of over-reaching themselves. P&W effectively gave up on wide bodies, ditto RR on narrow bodies.

P&W's foray in narrow body geared fans still has about one quarter of that market, but looking to get better.

So RR has a 50% share of the wide bodies, P&W has 65% of one quarter (thus 16%) of the narrow bodies, roughly.

So this seems to have worked out well for both RR and P&W, although both are a little over-stretched, one profit wise the other operationally. If both succeed in their ambitions, good for them. These are mighty big risks and potential rewards.

The oil price is the big issue now, particularly on narrow bodies. Airlines can still buy cheap old tech engines in new planes.

[Edited 2015-11-13 01:39:45]

[Edited 2015-11-13 01:40:31]
 
AirbusA6
Posts: 1648
Joined: Tue Apr 26, 2005 5:53 am

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 9:41 am

RR expanded to buy the Tognum business outright from Daimler Benz (MTU diesel engines) and analysts being analysts will always be advising companies to do something, diverge, acquire, merge etc. It's how they make money...

I'm sure next year the profits will bounce back
it's the bus to stansted (now renamed National Express a6 to ruin my username)
 
lancelot07
Posts: 1078
Joined: Mon Apr 21, 2014 8:22 pm

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 10:08 am

Quoting Amiga500 (Reply 42):
Which means Boeing are dependent on future sales of the aircraft to pay the (already paid) fixed costs.

Not wholly unlike Rolls being dependent on future part/maintenance sales to meet profit guidelines.

Both sides of the same coin - and both are unrealistic. Although would agree that program accounting has a purpose; its purpose is not on the annual profit and loss sheet.

No.
When Boeing develops a new airframe (or Rolls Royce develops a new engine) they make huge investments, mostly regarded as assets. Those are later (hopefully) recovered by sales of the airframes (or engines). In this period, the write downs on the investments enter the income statement as cost, and at some point hopefully a positive return on the investment is the result. If the project fails miserably, it might wipe out the company's equity, probably bankrupting it.

Maintenance contracts are a different animal, there are comparatively little investments associated with signing contracts.

Of course, all companies depend upon future revenue to meet earning guidance. But not all have huge investments at risk.
 
Ruscoe
Posts: 1747
Joined: Sun Aug 22, 1999 5:41 pm

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 10:11 am

Quoting Amiga500 (Reply 42):
Which means Boeing are dependent on future sales of the aircraft to pay the (already paid) fixed costs.

You may be correct, but to be fair, if Boeing is in that situation, then Airbus is in the same situation, if not even more dependent. (Because of their much higher backlog) Not sure about RR.

Ruscoe
 
User avatar
speedbored
Posts: 2230
Joined: Fri Jul 19, 2013 5:14 am

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 10:22 am

Quoting lancelot07 (Reply 29):
Tools, patents, even knowledge without patents - that are assets, no doubt.
Quoting lancelot07 (Reply 45):
When Boeing develops a new airframe (or Rolls Royce develops a new engine) they make huge investments, mostly regarded as assets. Those are later (hopefully) recovered by sales of the airframes (or engines). In this period, the write downs on the investments enter the income statement as cost, and at some point hopefully a positive return on the investment is the result. If the project fails miserably, it might wipe out the company's equity, probably bankrupting it.

I'm not sure that you fully understand the deferred production costs element of program accounting. On the 787 program, for example, the vast majority of those deferred costs have absolutely nothing to do with tooling, patents, R&D, testing, or any other costs that would be considered "investment". It is mostly costs incurred due to individual aircraft costing a lot more to manufacture than was estimated for the production block (several $100m more in the case of early frames) - after each aircraft is delivered, there really is no related "asset" left, tangible or otherwise.
 
lancelot07
Posts: 1078
Joined: Mon Apr 21, 2014 8:22 pm

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 11:49 am

Quoting speedbored (Reply 47):
after each aircraft is delivered, there really is no related "asset" left, tangible or otherwise.

after an assumed number of sold planes, yes. The more they can sell above that number, the more profitable the project will become.

I did not know that they booked cost overruns with the first planes as asset, although if is some kind of learning process - why not ?
 
mjoelnir
Posts: 9386
Joined: Sun Feb 03, 2013 11:06 pm

RE: Rolls Royce Faces Profitability Issues...

Fri Nov 13, 2015 1:49 pm

Quoting Ruscoe (Reply 40):
So it is reflected in lower profits, increasing borrowings, Capital Raisings, Asset sales and so on.

That is one thing you really do not seem to understand. Lower profits yes, but everything else like borrowing, capital raising, asset sales and so on stay the same.

By using program accounting for cost, you raise profits, dividends and bonuses early in the program. You are still spending the same amount of money, have the same cash flow, need the same borrowing and so on. You are just hiding it to pay it later.

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