Source: Rolls-Royce

Rolls-Royce May Close More Marine Sites as Cost Cuts Deepen

  • U.K. company sees no upturn in demand for offshore oil vessels
  • CEO says savings at top end of targeted range, profit in line

Rolls-Royce Holdings Plc is looking at closing more factories at its marine-equipment and ship-design unit and will shift some production to emerging economies as the lower price of crude hurts demand for oil-industry exploration and service vessels.

The offshore market is showing no sign of recovery, with the outlook bleaker as the backlog shrinks, Rolls-Royce, which is better known for its plane engines, said Wednesday. The Norway-based marine arm has already shut or sold 12 of its 27 sites, according to an investor briefing.

Chief Executive Officer Warren East said Rolls is unlikely to remain in all areas of marine engineering. Restructuring steps will include “simplification of operations and a reduction in the number of sites,” he said, without specifying how many further locations are under review.

Rolls-Royce is seeking to slash costs as its marine and industrial units struggle and the aero-engine business suffers from a slump in sales of business and regional jets, lower utilization of older wide-body planes and a slowdown in A330 engine deliveries as Airbus Group SE switches to an upgraded model. East said the company is on course to deliver savings close to 200 million pounds ($250 million), the top end of a targeted range, by the end of 2017. About 50 million pounds will have been secured by the end of this year.

Shares of London-based Rolls fell as much as 4.6 percent and were trading 18 pence, or 2.4 percent, lower at 736.50 pence as of 2:27 p.m. in the U.K. capital.

The stock has still added 30 percent in 2016 after falling by a similar degree in each of the past two years, aided by investor optimism about the turnaround program and the pound’s slump following Britain’s vote to quit the European Union, which has boosted the value of Rolls’s dollar-denominated engine sales.

Declining Workforce

Sales at the marine arm will decline this year and again in 2017, Rolls-Royce said. Of the unit’s 15 remaining sites, two are in the U.K. and involved in non-offshore activities, with most of the rest in Norway, Finland and Sweden, according to a spokesman for the division. The payroll has been reduced by 25 percent in the past two years and will stand at about 4,800 by the end of 2016.

Mikael Makinen, president of the marine business, told analysts and investors that some high-end engineering activities will be moved to Eastern Europe, India and Vietnam, where Rolls-Royce already has lower-cost operations.

“We are taking very, very decisive actions here,” Makinen said. “What we have done, going from 2 1/2 years ago, we had 27 operational sites. Now we are going down, you will see later, to very, very few.” While the majority of the restructuring is done, not all of the remaining plants are major operations, so that they could be easily combined, he said.

The marine division currently supplies gear spanning propellers, rudders, winches, control systems and propulsion equipment for offshore vessels, oil and gas platforms, freighters, cruise liners, ferries, trawlers, luxury yachts and naval craft, as well as designing entire ships.

While the unit also markets engines, that equipment is made by the power systems arm, which has likewise streamlined operations and laid off staff.

East stuck with guidance from last November for a 650 million-pound drop in group profit this year, together with revenue “marginally lower” than 2015’s 13.7 billion pounds. The company was previously rocked by a succession of five profit warnings, including two since July last year, when he took over.

The CEO has reordered the company into five divisions from nine and eliminated more than 600 management posts, or about a quarter of the total, as he seeks to pare expenses and make the engineering behemoth more responsive to fluctuations in demand and the global economy. “We are taking actions that are adding pace and simplicity,” he said today.
Rolls-Royce is also adopting new accounting standards which require a radical revision of its financial reporting and future guidance.

Under the new rules, known as IFRS 15, the company can book profit from maintenance activities only when it completes the work rather than when contracts are agreed. Operating profit for 2015 would have been about 900 million pounds lower when calculated according to the revised criteria.

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