Rolls-Royce Says Major Restructuring Will Simplify Organization

  • CEO East says engine-maker undergoing `unprecedented' change
  • Leading investor says long-term prospects remain positive

Rolls-Royce Holdings Plc is poised to announce a “major restructuring” as the embattled aircraft-engine maker moves to streamline senior management, lower fixed costs and speed decision-making -- steps its biggest investor ValueAct Capital Management says are core to its recovery.

The U.K. manufacturer will host a presentation later Tuesday in which Chief Executive Officer Warren East will outline a plan to save as much as 200 million pounds ($303 million) a year from 2017, it said in a statement.

“We are undergoing an unprecedented period of change,” East said in the release. “These changes, while more painful than we expected in the near-term, are vital to our long-term success.”

Rolls-Royce said two weeks ago that 2016 pretax profit will take a 650 million-pound hit from a slide in demand that the company is unable to mitigate because of an inflexible approach to costs. The announcement extended a series of profit warnings that have battered the company for two years, and was East’s second warning since he took over in July.

Shares of Rolls-Royce, which plunged the most since 2000 after the Nov. 12 statement, traded 0.3 percent higher at 570.50 pence as of 11:25 a.m. in London. The stock has dropped 32 percent this year.

‘Jewel’

ValueAct, commenting in a quarterly communication with investors dated Nov. 12, the day of the latest warning, said it was developing a relationship with East and Rolls Chairman Ian Davis as they worked on the strategy review.

The U.S. activist fund said it remains excited by Roll-Royce’s long-term prospects, describing the company’s installed base of turbines as a “jewel asset.” That has been overshadowed by losses on sales of new engines -- standard for the industry -- and more immediate issues concerning a marine propulsion arm and a slide in demand for smaller aircraft.

“While it has been painful to be early buyers, we believe these issues do little to change our long-term view of the business opportunity and the company is already accelerating cost cuts that are necessary to create operational flexibility and deliver margin expansion,” ValueAct said in the letter, obtained by Bloomberg News.

Power Balance

The firm said that it had “taken advantage of the ongoing weakness in the quarter to buy more stock.” Since the letter, San Francisco-based ValueAct has lifted the holding to 10.01 percent, according to a statement from Rolls-Royce on Nov. 19.

The manufacturer still expects long-term cash flow to be driven by growth in maintenance and spare parts programs for wide-body aircraft engines. Rolls-Royce also defended its commitment to its power-systems portfolio, which “will provide a strong balance of growth” and be able to compete in a market “protected by strong engineering-led barriers to entry.”

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