Rolls-Royce CEO Takes Cue From Chip Expertise to Decide Spending

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Rolls-Royce Holdings Plc’s new chief executive officer, Warren East, said he’s taking cues from his previous job in the semiconductor industry to make sure the company doesn’t spread itself too thin developing new engines.

Still in his first month on the job, East remained optimistic about the medium- to longer term, predicting a 50 percent market share for engines on wide-body planes in five years and pushing along restructuring of operations including the marine business.

Rolls-Royce’s XWB engine developed for the Airbus A350 should bring in twice the cash flow than the existing Trent 700 model on the Airbus A330, East said. Still, the company will not be tempted to develop engines for new plane variants unless large rewards are all but guaranteed.

“The financial dynamics of the jet-engine business are remarkably similar to that of the microprocessor business,” said East, previously CEO of ARM Holdings Plc. “It would be easy to customize engines for every plane, and easy to design bespoke microprocessors, but it would be a stupid thing from the business point of view.”

On the A380 super-jumbo, East said the relatively limited market for a re-engined variant would mean Rolls-Royce would have to find a means to commit to a new engine without pouring large amounts of money into the development.

East on his second day in the job this month halted a share buyback program to preserve dwindling cash and lowered the profit outlook. He succeeded John Rishton, who left the company after several profit revisions.

East is now grappling with sluggish marine-engine sales and a drop in demand for Airbus A330 jetliner engines that is set to hurt earnings in 2016 and 2017.

Reported pretax profit before currency hedging and one-time items fell to 439 million pounds ($684 million) from 646 million pounds in the year-earlier period, Rolls-Royce said in a statement Thursday. The figure beat analyst estimates for profit of 410 million pounds. Reported underlying revenue fell to 6.3 billion pounds from 6.5 billion pounds.

Rolls-Royce gained as much as 26.5 pence, or 3.6 percent, to 757 pence in London. The stock has lost 14 percent this year.