Rolls Royce
Industryweek 10917 Rr Engine 1
Industryweek 10917 Rr Engine 1
Industryweek 10917 Rr Engine 1
Industryweek 10917 Rr Engine 1
Industryweek 10917 Rr Engine 1

Rolls-Royce to Cut 300 More Management Posts as Profit Sputters

May 5, 2016
With other cuts made earlier, all-told Rolls-Royce plans to cut between 20% and 25% of its 2,000 management positions. 

Rolls-Royce Holdings Plc (IW 1000/193) said it’s working on plans to eliminate as many as 300 more management posts as the maker of engines for Airbus Group SE and Boeing Co.’s biggest jets steps up a cost-cutting drive amid sputtering first-half earnings.

The U.K. company, which has already announced the elimination of 200 senior positions in two tranches, is in the process of informing employees of the next steps in its savings program, and will reach a decision on the number of jobs to go by the end of the first half.

All-told, London-based Rolls-Royce plans to cut between 20% and 25% of its 2,000 management positions, CEO  Warren East said in a briefing following the company’s annual shareholder meeting on May 5.

The CEO said 2016 earnings will be “a little more skewed” toward the second half than the company had anticipated, after Rolls said in a statement that the first-half figure will be “close to break even.” Any profit the company does report for the current six months will be “very, very small,” he said.

Share Decline

While Rolls-Royce shares fell as much as 6.7% on the earnings update, East said he’s “totally confident” that an end-of-year surge in aero-engine deliveries will enable the company to “significantly” lift profit before interest and tax in order to meet its full-year earnings guidance.

Airbus’s handover rate for the A350 wide-body jet -- which accounts for 50% of Rolls-Royce’s engine backlog -- has been lower than planned this year as the European planemaker grapples with issues affecting the supply of cabins. Rolls said transitioning between the Trent 700 and 7000 engines for the current and future A330 models has also taken a toll.

East said Rolls-Royce faces “quite a lot of activity” next year in order to deliver the balance of its savings goal of 150 million to 200 million pounds (US$217 million to $290 million), after targeting 30 million to 50 million pounds this year. Wider savings potential of as much as 1 billion pounds probably won’t be addressed for four years or more, he said.

Guidance Reiterated

Rolls-Royce shares fell the most since Nov. 12 before trading 4.6% lower at 615.5 pence as of 1:55 p.m. in London, paring gains this year to 8% and valuing the company at 11.3 billion pounds. The stock had its biggest gain in 12 years on Feb. 12 as East ended a run of six profit warnings and said restructuring efforts were bearing fruit.

The CEO today reiterated full-year guidance that envisages a 650 million-pound hit against earnings from slowing business-jet sales, slumping revenue from maintaining regional aircraft and a collapse in demand at a marine unit that mainly serves the oil industry.

Free cash flow will also be more weighted toward the second half than in 2015, he said, while the outlook excludes foreign-exchange effects that may boost revenue by 450 million pounds and improve pretax profit by 50 million pounds.

Sandy Morris, an analyst at Jefferies Equity Research, said that while he’d estimated underlying earnings at 268 million pounds in the first half, the new guidance doesn’t change anything “fundamental,” with Rolls subject to so many variables including its restructuring, research spending, evolving engine programs and long-term contracts.

No Disposals

East, who previously ordered a strategy review to accompany his operational overhaul, said he’s planning no major announcements on changes to Rolls’s business portfolio this year. The CEO said the marine arm may be trimmed to broaden its focus away from oil, while ruling out significant disposals.

He said that Rolls also has no reason to be “angsty” about its absence from the short-haul engine market, adding that there are no new aircraft platforms for the company to target and that it has its work cut out doubling Trent engine production in coming years in order to satisfy the current orderbook.

Brad Singer, appointed to the Rolls-Royce board to represent activist investor ValueAct Capital Management LLC, which holds a 10.8% stake, was opposed by 6% of proxy voters, prompting the American to say that he’d seek to convince any doubters of the U.S. firm’s intentions.

ValueAct, which had been touted as likely to seek disposals before it built up its stake, will work with the board in Rolls’s best interests, he said in an interview after the shareholder meeting in Nottingham, close to the company’s main manufacturing site in Derby, England.

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