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Fall in Pound Causes Rolls Royce to Publish Record Loss

In a shock for the manufacturing industry, one of the titans of British manufacturing has posted the biggest loss in their history.

Rolls Royce, supplier of jet engines for companies around the world, posted a loss before tax of £4.6 billion for 2016. However, with one-off costs stripped out, the company’s underlying profit was better than many experts had predicted. Rolls Royce is a separate company to the car making division.

One off costs for 2016 included issues like a £671 million corruption settlement made after cases with UK and US authorities and a £4.4 billion write off from currency related contracts.  The reason for that? Well, like many international businesses, Rolls Royce takes out long term currency trades in an effort to shield themselves from fluctuations in currency valuations.

However, this was designed to protect RR from what was considered the most likely scenario – a fall in the dollar. Indeed, many were put in place before the EU referendum was even announced.  That has meant that since the UK voted to leave the EU and the value of the pound has fallen significantly, Rolls Royce have had to make that £4.4 billion write off.

Profits aside from these costs sat at £813m, down from £1.4bn from the previous accounting year, but still a respectable profit.

Rolls Royce are expecting 2017 to see a “modest performance improvement”, though chief executive Warren East said that more has to be done to bolster profit margins within the company.

"We must ensure our wide ranging business transformation programme delivers the full benefits expected, not only in terms of cost savings but also the cultural and behavioural changes necessary to ensure the transformation is sustained and high standards of business conduct are maintained," said Mr East.

"These are essential if we are to become a more trusted, resilient company."

Rolls Royce continue to expand at a remarkable pace, which is slowing down profit growth, but they will be susceptible to the weakened pound across the year.

The value of sterling has meant that whilst it’s cheaper for overseas companies to buy British, it’s much more expensive for UK manufacturers to buy from abroad. This has driven costs up for many, and is tipped to result in increased prices for the consumer later in the year.

As a UK supplier of BSP hose fittings and PFTE hose fittings, we too are susceptible to these increases. However, by buying raw materials from the UK, the cost increase has been negligible. Nevertheless, the effect on UK manufacturers shouldn’t be underestimated. A report earlier in the month found that factory costs rose at their fastest rate since records began in 1992.

Rob Dobson, Senior Economist at Markit said: “UK manufacturers have reported a bumper start to 2017, but are also seeing prices rise at an unprecedented rate. Factory output growth accelerated to a 32-month high in January, as solid domestic demand continued to drive production volumes higher. There were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroad slowed sharply.”

 

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