Rolls-Royce CEO Tells Investors Engine-Maker to Stay Intactby
East says review has revealed no case for major disposals
Re-entering narrow-body market not a practical proposition
Rolls-Royce Holdings Plc Chief Executive Officer Warren East said a review begun when he took over in July has concluded that the engine maker is better off retaining its current focus, resisting investor calls for a break up and rejecting arguments for re-entering the narrow-body market.
Some 60 percent of Rolls’s non-aerospace revenue comes from businesses with good competitive positions, East said in an investor briefing, arguing that the nuclear sector is fast growing and that even the marine-engines arm could be a profit driver if refocused on Asia with a leaner product line.
Where a non-core activity is under-performing, that “does not mean that we need to sell this business or get out of this business,” he said. “It could mean that actually we need to change what we are doing in that business to improve the competitiveness, or improve the market attractiveness.”
East, who has issued two profit warnings in four months, said the focus of a restructuring plan will instead be on improving the company’s ability to respond to volatile markets and deal with bad news, as well as on slimming down a bloated management. New structures should be agreed by the year end, though job loss figures may not be announced until February.
Rolls-Royce aims to save as much as 200 million pounds ($303 million) a year from 2017 after saying two weeks ago that 2016 pretax profit will take a 650 million-pound hit from a slide in demand that it’s unable to mitigate because of an inflexible approach to costs.
The London-based company would be unwise to “waste time” debating re-entry into the narrow-body market, which it exited in 2012, since there’ll be no clear opportunity for a large-scale return until the early 2030s, East said. Rolls should instead be content to reap maintenance returns from those engines it previously sold in the sector, which amount to about 250 million pounds annually, he said.
A European Union probe into levels of competition in maintenance, from which aero-engine companies derive the bulk of revenue, is focused mainly on the single-aisle market and therefore doesn’t much concern Rolls, East said.
The former ARM Holdings Plc chief was delivering his verdict on Rolls after investors including Sequoia Fund Inc. and Investec Ltd. lobbied his predecessor John Rishton to consider breaking the company up to focus more squarely on aircraft engines. Activist fund ValueAct Capital Management, now the No. 1 shareholder, has also queried the wisdom of retaining marine and power operations, a person familiar with its plans has said.
East broke with Rolls’s reputation for reticence in laying bare the extent of its problems, and his proposed solutions, after a 27 percent decline in its share price during his tenure. The stock closed 3.3 percent higher after he spoke.
Rolls-Royce reckons it will control at least 50 percent of the wide-body engine market in five years, up from about 30 percent, and Chairman Ian Davis told investors prospects for significant value creation are “not a mirage,” but real.
“Today’s statement looks relatively dull by Rolls-Royce’s recent standards,” RBC Europe analyst Robert Stallard said after the company gave notice of the investor briefing earlier Tuesday. “Management has stuck to its guns.”