At flagship U.K. engineering firm Rolls-Royce Holdings Plc, more than half of staff never get near the production line. Chief Executive Officer Warren East reckons that’s a recipe for red tape and narrow margins.
East, who has run Rolls-Royce since 2015, is scrapping thousands of white-collar posts at the jet-engine giant in a bid to redress the balance and unleash the potential of an 80 billion-pound (US$107 billion) order backlog.
“We have 33,000 non-manufacturing roles,” the former tech-sector boss said Thursday after announcing the London-based company’s most radical restructuring since 2001. “That is too many for a business of our size.”
The latest plan will see 4,600 management and back-office roles eliminated and the business reduced to three units in an effort to sharpen its focus on supplying turbines to Airbus SE and Boeing Co. The cuts amount to 8% of the workforce and will take the number of jobs lost since East took charge beyond 10,000, saving more than half a billion dollars a year from 2020.
East, the one-time head of semiconductor developer ARM Holdings Plc, has been working to simplify Rolls’s convoluted structure and improve earnings visibility since joining the manufacturing behemoth.
The executive, 56, has been frustrated by the slow pace of change and an inability to respond to shifts in demand. Part of his answer has been to reduce the number of management layers between himself and the group’s most junior employees from as many as 11 to as few as six, cutting through bureaucracy and improving efficiency.
“I couldn’t do this before,” East said on a conference call. “We needed to first stabilize the business, we needed to continue with the modernization of the business so we could manufacture products competitively and we needed to scale up. And finally I really needed to get the right leadership team in place.”
Rolls-Royce shares advanced as much as 4.2% and were trading 3.1% higher as of 11:33 a.m. in London. The stock is has gained 1.8% this year, held back by the disclosure of unexpected wear and tear afflicting its Trent 1000 engine that powers Boeing’s 787 Dreamliner model.
Most of the job losses will come in the U.K., where 26,000 of the company’s 55,000 staff are based. East has been signaling the restructuring for months as Rolls contends with the engine durability issue, pressure from activist shareholders and a price squeeze from its planemaker customers.
The cutbacks will cost about 500 million pounds to implement and deliver 400 million pounds in annual savings, the company said, adding that its guidance for full-year free cash flow remains unchanged. Analysts had expected savings of no more than 250 million pounds.
The cost review was announced in March after ValueAct, Rolls’s biggest shareholder, declined to extend a two-year-old agreement not to interfere in East’s turnaround plans as he sought to bring profit margins into line with historic levels at rivals General Electric Co. and Pratt & Whitney.
Rolls-Royce said last month that the moves would mainly affect middle management and back-office staff in its human resources, finance, IT, legal and marketing departments. The company has plans to quit its base in one of London’s most upmarket districts for cheaper offices.
East hired U.S. consultants Alvarez & Marsal to develop the savings plan as he targets 1 billion pounds in free cash flow by 2020. The company is also paring discretionary spending to help rein in costs this year as it seeks to deliver on financial targets amid spiraling expenses from the Trent 1000 issues.
Rolls-Royce has already shed layers of management, cut less-successful products, agreed to sell its fuel-injection unit and earmarked a marine business for possible disposal in the push to trim expenses.
The company was plunged into crisis soon after East joined as falling oil prices hurt sales of engines for specialist offshore ships, demand for corporate and regional jets slumped, and some of the bigger planes powered by Rolls engines reached retirement age.
The latest slimming-down could propel Rolls stock to “a large step forward,” Sandy Morris, an analyst at Jefferies International. East must now draw a line under years of pessimism and use the reorganization as a springboard for success, he said in a note. “To fulfill its ambition, we think Rolls-Royce must look and sound the part,” he said.
“If we want to be around for the next 100 years we need to be a world-class business not just a company with world-class technology,” East said. “This is a big correction of not paying attention to the business side of the company for quite a long time.”
By Benjamin Katz