Rolls-Royce Share Price Dives on Dividend Warning, Weaker Outlook -- 5th Update
November 12 2015 - 4:41PM
Dow Jones News
By Robert Wall
LONDON-- Rolls-Royce Holdings PLC warned it may cut its dividend
to cope with spiraling costs and profit shortfalls--sending the jet
engine maker's shares into their sharpest tailspin in 15 years.
One of the most recognized names on London's blue-chip FTSE 100
stock market index and a mainstay of British pension-fund
portfolios, the company has failed to deliver cost cuts across the
business. Orders for some of its older engine lines also have
weakened, while big capital outlays aimed at delivering newer
engines won't generate returns for years to come.
Rolls-Royce long ago split from the luxury car maker of the same
name, and makes the majority of its profit selling aircraft engines
for large, commercial jets, like Boeing Co.'s 787 Dreamliner and
Airbus Group SE's A380. Those plane makers in recent years have
been delivering record numbers of planes and profits, but years of
failing to rein in spending damped the benefits for
Rolls-Royce.
Rolls-Royce's biggest competitor in commercial-aviation engines,
General Electric Co., has benefited from a boom in orders for
smaller, narrow body jets. But Rolls-Royce exited the market to
power single-aisle jets several years ago to focus on other
markets.
The company also disclosed for the first time on Thursday that
activist investor ValueAct Capital Management LP, which revealed
over the summer that it had built a more than 5% stake in the
company, is seeking a board seat.
Rolls-Royce said full-year underlying pretax profit, a measure
that excludes some costs, is expected to be at the low end of its
previously issued GBP1.33 billion and GBP1.48 billion ($2.02
billion to $2.25 billion) range. It also said its 2016 earnings
outlook had weakened. Further rattling investors, it suspended its
medium-term earnings guidance, which it started providing not much
more than a year ago.
The company said it would decide by February, when it reports
full-year earnings, whether to cut its dividend. Shares fell 19.6%
to GBP5.37 in London. Shares in Rolls-Royce have retreated more
than 50% since February 2014, when it issued the first in a string
of profit warnings.
"As a business, we carry too much fixed cost and are inflexible
in managing this in response to changes in market conditions,"
Chief Executive Warren East said in a statement. The company's
balance sheet and liquidity were strong, Mr. East said, but he
called the cost issues "unacceptable."
The company elevated Mr. East, a former CEO at microchip design
giant ARM Holdings PLC, to the top job in July, with a mandate to
turn the business around. Two days after joining, he issued his
first profit warning and initiated a broad operational review. The
same month ValueAct disclosed its holdings in Rolls-Royce,
ratcheting up the pressure
Mr. East has engaged with ValueAct over his tenure, but it is
unclear if the investor has made any other requests aside from the
board seat. "They have some very good questions," Mr. East said on
Thursday, without detailing them. ValueAct couldn't immediately be
reached for comment.
Rolls-Royce faces upheavals across its product lines. Its
commercial aircraft engine business--the biggest profit
contributor--is moving from delivering well-established,
profit-generating engines, such as those powering Airbus A330
widebodies, to newer engines, like the TrentXWB, which powers
Airbus's latest long-haul plane.
Rolls-Royce has invested billions of dollars to develop the
engine and build production plants, but won't generate profit from
these new products for several years. The company's servicing
business also weakened as some of the older planes using its
engines are flying less. It is also losing market share in powering
business jets, after failing to invest in new products. Meanwhile,
demand for Rolls-Royce turbines, used to power ships and in
electricity generation, also has suffered.
Rolls-Royce announced on Thursday initial findings of Mr. East's
operational review. The review was aimed at finding ways to boost
Rolls-Royce's returns, though shies away from major shifts in
strategy.
The company said savings measures identified, including
streamlining senior management, should yield incremental gross cost
savings of between GBP150 million and GBP200 million a year from
2017. Rolls-Royce plans to spell out full details on these measures
in a Nov. 24 investor day.
Rolls-Royce said a previous cost-savings program was on track to
deliver a promised GBP115 million in year-over-year savings in the
aerospace and marine businesses next year. The company has
announced big job cuts in both areas.
"The next few years are going to be important in laying the
foundations for our long-term profitable growth," Mr. East
said.
Write to Robert Wall at robert.wall@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 12, 2015 16:26 ET (21:26 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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