Rolls-Royce CEO Sharpens Cost Focus as Sales Help Profit

Rolls-Royce Holdings Plc (RR/) Chief Executive Officer John Rishton said he wants to halt a sustained increase in costs to bring profit in line with competitors.

“It is quite clear that the controls around costs haven’t been what they should be,” Rishton told reporters today. Spending increases have outpaced revenue growth, he said.

Cash conservation also needs to improve after the aircraft-engine manufacturer, the world’s second biggest, recorded an outflow of 461 million pounds ($705 million) in the first half, as “if we don’t we will struggle to pay for the investments in new facilities, new products, and people,” Rishton said on a conference call.

Rolls-Royce has made boosting profitability one of its focus areas as it tries to translate growth, particularly in commercial aerospace, into earnings that match the performance of companies such as General Electric Co. (GE), the airliner-engine industry leader. London-based Rolls-Royce is looking to double revenue in the next decade.

“These are hard and difficult issues to address and will take time,” Rishton said. “We have opportunities across the entire company.”

Rolls-Royce rose as much as 5.1 percent, the most in a year, to 1,240 pence in London trading after reporting first-half underlying pretax profit rose 34 percent. The stock was 3.6 percent higher as of 10:03 a.m., valuing the company at 23 billion pounds.

Limiting Hiring

The pace of hiring should be moderated, and more engineers have been deployed to examine how products can be made more cheaply while retaining quality, Rishton said. Supplier relations also are being reviewed.

Inventory needs to be controlled more tightly after levels increased by 261 million pounds in the first six months, which Rishton said “was disappointing.”

Rolls-Royce has focused its commercial-aircraft engine business on powering long-range planes. Sales have gained as Toulouse, France-based Airbus SAS (EAD) has brought output of A330 wide-body airliners to a record and Boeing Co. (BA) boosts production of the 787 Dreamliner, a market the engine producer shares with Fairfield, Connecticut-based General Electric.

First-half pretax profit excluding currency effects and some one-time items increased to 840 million pounds from 628 million pounds a year earlier, Rolls said today in a statement. Earnings beat the 828.8 million-pound average estimate of six analysts surveyed by Bloomberg. Underlying revenue advanced 27 percent to 7.3 billion pounds, matching analysts’ projections.

Margin Increases

The return on sales widened to 11.9 percent from 11.4 percent a year earlier, Rolls-Royce said. The order backlog increased 15 percent to 69.2 billion pounds.

Rolls-Royce’s reorganization to boost profitability has included ceasing some activities, such as a decision announced in April to sell the company’s stake in its RTM322 helicopter-engine joint venture to partner Safran SA (SAF) for 293 million euros ($386 million).

Results in the first half reflected the inclusion of the Tognum diesel-engine joint venture with Daimler AG (DAI), where underlying revenue and profit are expected to remain flat, Rolls-Royce said.

The company maintained its forecast for the year for “modest” revenue growth, excluding the Tognum figures, and a “good” increase in profit on an underlying basis, which excludes currency effects and some one-time items including pension costs and acquisition.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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