Spiralling raw material costs in the first half of the year and the weakening dollar conspired to take the gloss off Rolls-Royce's interim results yesterday, despite the world's second-biggest aircraft engine maker reporting underlying profit growth.
Pre-tax profits jumped 17% from £324m to £380m, underlying sales had increased by 10% in the first six months with a turnover of £3.59bn, while services revenues rose by 9% and accounted for 53% of total sales.
The group, which won business worth $15.1bn at the Paris Air Show last month, reported its order book had increased by £34m to £35.1bn at the end of 2006.
However Rolls said its earnings had taken a £40m hit in the first half, and the group has been forced to offset the weakening of the dollar and rising unit and other costs by increasing its dollar-based sourcing of component supplies, restructuring its supply chain and raising productivity through investment in new facilities.
The City reacted by knocking more than 6% off Rolls-Royce's share price, to close 34.25p lower at 496.25p.
The group, which makes engines for aircraft and ships as well as turbines for the energy industry, had also undertaken modernisation of its UK plants and the construction of new component manufacturing facilities in Derby and Bristol.
Those projects that were nearing completion would start operations by the end of the year.
Chief executive John Rose said that civil engine revenues rose by 12%, but would have risen by 18% without the negative impact of a weak dollar.
He added: "Despite the challenges of increasing raw material costs and the effects of a weakening dollar, we are well placed to deliver growth in underlying profit."
Performance had been supported by the continuing strong rise in deliveries of both commercial and business jets and higher services revenues due to rising air traffic volumes.
Rolls-Royce said it was raising its interim dividend by 10% to 4.04p per share. Underlying earnings per share rose by 15% from 13.62p to 15.72p.
In a move to reduce the deficit in its pension schemes, Rolls-Royce injected £132m into the funds in the first half of the year as part of total payments of £500m planned by the end of the year.
The group was also making "good progress" in identifying a site for a new engine facility to increase capacity for assembly and testing of its new commercial jet engine range, the Trent.
Rolls-Royce intends to manufacture for the first time an engine range abroad. The group was already looking at potential sites in Singapore and several US states.
The Trent engine line has been selected as an option on all of the key wide-body jet development programmes under way at Boeing and Airbus, including the Airbus A380 superjumbo, which is due to begin commercial service in the late autumn, and the Boeing 787 Dreamliner, due for its first delivery next May.
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