RYCEY Rolls Royce Holdings PLC (PK)

   (FROM THE WALL STREET JOURNAL 11/13/15) 
   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.

The company also disclosed for the first time on Thursday that ValueAct Capital Management LP is seeking a board seat. The activist investor revealed over the summer that it had built a more-than-5% stake in the company.

Rolls-Royce 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.

The company 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.

The company remains one of the most recognized names on London's blue-chip FTSE 100 stock market index and a mainstay of British pension-fund portfolios.

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.

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 projected range of GBP 1.33 billion to GBP 1.48 billion ($2.02 billion to $2.25 billion). 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 20% to GBP 5.37 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.

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. Its role in powering business jets was hurt by its failure to invest in new products. And demand for Rolls-Royce turbines, used to power ships and in electricity generation, also has suffered.

Rolls-Royce disclosed initial findings of Mr. East's operational review on Thursday. 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 GBP 150 million and GBP 200 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 GBP 115 million in year-over-year savings in the aerospace and marine businesses next year. The company has announced big job cuts in both areas.

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(END) Dow Jones Newswires

November 13, 2015 02:48 ET (07:48 GMT)

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