Surprise: Rolls-Royce results finally please City

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The aero-engine maker Rolls-Royce delighted the markets yesterday by reporting better-than-expected profits, forecasting a further increase in earnings this year and reiterating its target of achieving margins of 10 per cent.

Rolls' shares surged 15 per cent on the upbeat outlook, making it the best performing stock in the FTSE 100 index. Underlying pre-tax profits rose 12 per cent to £285m while headline profits increased a more impressive 71 per cent to £180m.

The improved performance for 2003 enabled the company to put two torrid years behind it, during which time it had been ravaged by wars, disease and economic downturn, criticised over its accounting policies and weak balance sheet and forced to deal with a pensions crisis.

Asked whether it felt like he had finally emerged from a long, dark tunnel, Sir John Rose, Rolls' chief executive, said: "We had some challenges but our people have dealt with them well."

The increase in profits was achieved with the help of an efficiency programme that has seen £270m of costs and 8,300 jobs taken out of the company since11 September, 2001.

But Rolls also benefited from a healthier mix of revenues last year with highly profitable after-market sales accounting for half the group's £5.6bn turnover.

Civil engine deliveries fell 13 per cent last year and Sir John said he expected output this year to remain flat before the commercial aviation sector saw a pick-up in 2005. However, new civil engines now account for only 20 per cent of the group's business.

The 54,000 Rolls engines in service around the world are putting in more flying hours even though airline capacity shrank last year, generating healthy spares revenues for the company. Rolls estimates that aftermarket sales over the next 25 years for the 10,450 civil engines in service will amount to $28.5bn - equivalent to their original list price.

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