The year has not started off well for Rolls-Royce (LSE: RR) shareholders, with February’s release of full-year results triggering further decline. The Rolls-Royce share price lost 9.6% during the month, on top of a 10% fall in January.
We heard other news during the month, as the company completed the sale of its 23.1% shareholding in AirTanker Holdings. The disposal raised proceeds of £189m in cash. It will be used “to help rebuild the Rolls-Royce balance sheet in support of our medium-term ambition to return to an investment grade credit profile.”
On results day, 24 February, Rolls-Royce announced the imminent departure of chief executive Warren East. After almost eight years in the role, Mr East will step down at the end of 2022. The board says it will “now launch a thorough and extensive search for his successor.” That suggests to me that maybe it has come as a bit of a surprise.
Share price fall
The Rolls-Royce share price fell 13% on the day, though I thought the full-year figures looked positive.
Rolls reported an underlying operating profit of £414m in the year. Compared to longer-term performance, that’s pretty dire. But in the horrible year that was 2021, I think seeing any operating profit at all is a cause for celebration. The year was all about improving the cash situation, and on that score, Rolls performed better than expected.
The company reported “restructuring run-rate savings of more than £1.3bn delivered one year ahead of schedule.” That seems impressive to me. And disposals are “on track with total expected proceeds of around £2bn.” Free cash flow for the year was still negative, with a £1.5bn outflow. But the company did say it was “substantially improved and ahead of expectations.” And it’s way better than the £4.3bn cash outflow recorded in 2020.
Increase in debt
Rolls-Royce’s debt situation is a worry, mind. At 31 December, net debt (including lease liabilities) stood at £5.1bn. That’s a lot, especially for a company with a market cap of £8.8bn. But at least the increase over the year, of £1.6bn, was not as high as I feared it might be.
What I take from this is twofold. One is that we’re looking at a company that I think is on its way back to decent levels of profit and to sustainable earnings growth. The other is that I reckon there’s still a long road ahead before it gets there. Progress along that road, though, has been better than I would have thought a year ago.
Management uncertainty
The negative reaction seen in the Rolls-Royce share price must surely be down to the departure of Warren East. He has provided a steadying hand throughout the pandemic. And his guidance has clearly been bearing fruit as far as progress towards recovery is going. To see the captain leaving the ship while it is still in the early days of a perilous journey… well, it does not inspire confidence.
While I find 2021 progress at Rolls-Royce encouraging, I will still wait and watch. Especially now the trusted boss is on the way out.
