Rolls-Royce CEO East Promises Cost Cuts, Management Pruning -- 3rd Update
November 24 2015 - 1:20PM
Dow Jones News
By Robert Wall
LONDON-- Rolls-Royce Holdings PLC Chief Executive Warren East on
Tuesday promised far-reaching restructuring at the British engine
maker after a series of earnings missteps, and he signaled some
activities could be shed even while the company remains
diversified.
The maker of engines for Boeing Co. and Airbus Group SE
jetliners plans more layoffs as the company prunes management to
streamline decision-making, which Mr. East said is overly
cumbersome.
Rolls-Royce, which previously announced 3,600 jobs would be cut
in its aerospace and marine businesses, wouldn't quantify the scale
of additional job losses. The company is promising savings of 150
million pounds ($226.9 million) to GBP200 million a year beginning
in 2017, though it still is assessing upfront costs to reach those
targets.
Mr. East faces pressure to show results from the turnaround
effort. The share price at the FTSE 100 blue-chip company has
declined 32% this year. U.S. activist investor ValueAct Capital
Management LP has become its largest shareholder and is seeking a
board seat.
Mr. East has repeatedly stressed that the review was focused on
operations. Strategic decisions, such as whether to divest business
lines, weren't on the agenda, he has said, despite concerns outside
the company that its land and sea engine operations are a drag on
its aerospace activities, the company's largest profit
contributor.
"The notion we are going to sell big chunks is just wrong," he
told reporters.
That doesn't mean the company wouldn't shed some activities. "A
bit of portfolio optimization could be done," he said, without
identifying possible targets for disposal.
Rolls-Royce has struggled to deliver on previous cost-cutting
efforts and been hit by weakening demand for some civil aircraft
engines, including aftermarket support. It also has lost market
share in the business jet engine market. Its marine engine business
has suffered from falling demand.
Rolls-Royce said earlier this month it may cut its dividend,
prompting the worst selloff in the company's stock in 15 years.
Chief Financial Officer David Smith said the company's debt rating
may also face a downgrade.
Mr. East, who became chief executive in July and then issued a
profit warning on his second day in the job, wouldn't rule out a
further downgrade in expectations Tuesday.
Rolls-Royce also indicated the restructuring would take time.
The company is still determining what the simplified structure
should look like. Mr. East said a top-level structure should be
defined by year-end. Details on the costs of restructuring should
be available in February when the company releases full-year
results. Other measures will be detailed later, Mr. East said.
After the latest profit warning issued earlier this month,
Rolls-Royce suspended its medium-term earnings outlook introduced
only a year ago to give investors greater clarity. It will not be
restored for at least a year, Mr. East said, as the company tries
to fix excessively complex internal accounting systems. Still, he
promised the company should generating cash "comfortably" before
2020.
One example of simplification Rolls-Royce plans is the paring of
its 27 key technologies to around eight themes, Mr. East said. That
will reduce the number of people needed to manage those efforts,
while also allowing more regular reviews.
In Rolls-Royce's critical civil aerospace business, Mr. East
said, the focus is on driving profitability by delivering the big
backlog of ordered large engines for such planes as the Airbus A350
long-haul jet. Regaining business jet market share also is a
priority.
Mr. East played down expectations Rolls-Royce would mount a push
to re-enter the market to power narrowbody jets, the backbone of
global airline fleets.
The company doesn't have to be in that segment, he told
investors. Mr. East's predecessor signaled Rolls-Royce was keen on
re-entering the market, possibly through a partnership with Pratt
& Whitney, the engine unit of United Technology Corp.
Absent new single-aisle plane programs at Airbus and Boeing, Mr.
East said, there are no near-term opportunities to break into that
segment in the immediate future. "This is not something we should
be wasting our time on debating," he said.
He also said the company should "harvest" earnings in its
declining market to power regional jets, where an opportunity to
power new models also is lacking. Those sales could fall by a third
over the next five years, the company projects.
Write to Robert Wall at robert.wall@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 24, 2015 14:05 ET (19:05 GMT)
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