Rolls-Royce powers back
More restructuring on the card after cost cuts snap earnings decline
LONDON: Rolls-Royce Holdings Plc pledged to deepen restructuring efforts after chief executive officer Warren East’s initial cost cuts helped the aero-engine giant snap years of earnings declines.
Shares of Rolls-Royce jumped 10% after 2017 profit beat estimates and East said the company has hired consultants Alvarez & Marsal to help develop a “considerably simplified staff structure”. A review of the marine division, the only unit to suffer a significant profit decline, is also progressing, the London-based company said in a statement yesterday.
“We are embarking on a more fundamental restructuring programme with a refreshed leadership team and an improved market environment,” East, CEO since 2015, said in the release. Underlying pretax profit surged 25% to £1.07bil (US$1.5bil) in 2017, easily beating the £889mil average prediction of 11 analysts, while free cash flow more than doubled.
East has eliminated around 600 senior managers in an earlier slimming down of Rolls’ unwieldy structure, as well as more than 4,000 at the marine unit, which may be sold. While the measures are helping to tap the potential of a record order backlog, much of the profit gain came from the power-systems division and some key engines models are experiencing performance issues.
In particular, the Trent 1000 that powers Boeing Co’s 787 Dreamliner and the Trent 900, which is used on the Airbus SE A380 superjumbo, have experienced “durability issues” with a small number of parts. In some cases the problems have required turbines to be removed for repairs, leading to disruption for customers and a £170mil hit on cash flow.
The cash impact could double this year as maintenance activity peaks, though some parts are having to be redesigned and work won’t be completed until 2022. Those costs are included in the current outlook and Rolls still expects to achieve a target of posting £1bil in free cash flow by 2020.
East said the latest restructuring effort will aim to eliminate remaining duplication within management. He declined to say how many jobs will be affected, though the focus will be on white-collar staff rather than engineers and technicians.
“The reality is that there is more simplification that we need to do to make ourselves truly competitive,” East said on a conference call.
Rolls-Royce shares rose the most since Aug 1 last year and were trading 8% higher at 897.20 pence as of 8:11 am in London, valuing the company at £16.6bil.
We are embarking on a more fundamental restructuring programme with a refreshed leadership team and an improved market environment.
Warren East