Rolls Royce share price set to slump after spending £3 billion in H1

The UK engineering and auto manufacturing giant Rolls-Royce has entered a new phase of turmoil after an increasingly morbid couple of years, with the company announcing this morning that it has burned through more than £3 billion in cash reserves during the first half of 2020.

Unsurprisingly, the Rolls-Royce share price slumped as markets opened in London, compounding a long decline that has seen the company shed more than half of its share price value since March. In addition to this morning's announcement, Rolls-Royce also confirmed that the company would be shedding 9000 jobs in the UK, representing around 17% of its total workforce.

Rolls-Royce said that they had already received more than 3000 'expressions of interest' for voluntary redundancy from workers. All of this is part of an effort to introduce cost-cutting measures that will save the company more than £1.3 billion per year by 2022. Let's take a closer look at the situation as it stands for Rolls-Royce, and what the future holds for this titan of British industry.

Rolls-Royce share price slump compounds years of decline

Although the cuts and cashflow problems announced today are among the worst on record for the 116-year-old company, they were hardly unexpected. The engineering sector in general, particularly companies that manufacture auto and jet parts, have been particularly hard-hit by the Covid-19 financial crisis that has decimated demand.

However, that's not the whole story. Rolls-Royce has been suffering for years, with the company's pivot towards civil aerospace engineering a few years back now being regarded as a disaster. Job cuts have been ongoing for several years, with major setbacks such as the decision by Airbus in 2018 to halt production of its A380, which Rolls-Royce supplied the engines for, costing the company hundreds of millions of pounds.

Meanwhile, orders for the kind of aerospace parts that are Rolls-Royce's forte have almost completely dried up as airlines frantically look to cut costs and shrink operations. As a result of its ongoing woes, Rolls-Royce has to defer CEO and CFO bonuses and withdraw the dividend this year, the first time the company has done so since 1987. Today's announcement looks like just another blow in a series of misfortunes for the company.

Is the H2 outlook for Rolls-Royce brighter?

Despite today's grim news, Rolls-Royce seems to believe that there is reason to be optimistic. The company's chief executive, Warren East, said that performance is expected to improve significantly in the second half of 2020 and that the overall cash outflow for Rolls-Royce this year will be £4 billion.

He also attributed some of the losses so far to a one-off impact resulting from the company's decision to scrap invoice factoring and highlighted that the company had increased its liquidity to £8.1 billion in response to the financial crisis.

While this might seem like an attempt to calm any jitters in the City, there is plenty of merit in the claim that Rolls-Royce's future could be brighter and that its share price could indeed recover. For one, the company has been making significant efforts to beef-up its defence manufacturing operations.

This has been the most consistently profitable arm of the company, and demand for its products from governmental clients has continued to rise throughout the recent crises.

Demand for both UK defence products and the specialised energy technology produced by Rolls-Royce is widely expected to remain high well into the long-term, and it is clear that the company is banking on this to pull itself back into the black.

While the situation for Rolls-Royce looks unmistakably bleak at the moment, there is every possibility that it will bounce back stronger than ever, as it has done several times throughout its long history.

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