Britain's Rolls-Royce sticks to guidance despite inflation headwinds

By Sarah Young

LONDON (Reuters) -British engineering company Rolls-Royce stuck to its forecasts for 2022 despite headwinds from the rising costs of energy and raw materials and supply chain snags, which pose ongoing challenges for its new boss.

Warren East, overseeing his last trading update before he retires after seven years, said that the company was continuing to recover from the coronavirus pandemic, and that cuts made at the time had positioned it well for the uncertain economic environment.

He hands over to former BP executive Tufan Erginbilgic at the end of the year, who must wrestle with Rolls's COVID-19 debts of 4 billion pounds ($4.50 billion) and a civil aerospace unit which is still being affected by travel restrictions in China.

Shares in Rolls-Royce fell 5% in mid-morning deals. It said it was targeting low-to-mid-single digit underlying revenue growth, a profit margin broadly in line with last year's 3.8% level and modestly positive cash flow.

The stock had risen 10% in the week ahead of the update but is down 36% this year.

"Rolls Royce is doing all it can within its control," said Hargreaves Lansdown analyst Sophie Lund-Yates. "The trouble is, and which has been the case since the pandemic struck, the group's grappling against a multitude of headwinds from external forces."

Like all manufacturers, Rolls-Royce, whose engines power the Airbus A350 and Boeing 787, is also facing higher input costs. In Britain, it said it agreed a 6.5% wage increase and additional 1,500 pound payment for staff represented by unions.

Rolls said it aims to recover the higher costs through efficiency gains and higher prices and that higher stock levels, as a result of supply chain pressures, would not affect its ability to meet forecasts.

Aero-engine maker General Electric has also noted supply chain strains, specifically in obtaining castings from suppliers, while planemaker Airbus has said that the global supply chain remains a "very degraded environment" following the pandemic.

($1 = 0.8884 pounds)

(Reporting by Sarah Young; editing by James Davey and Tomasz Janowski)