Rolls-Royce Looks For Light at End of the Tunnel -- 2nd Update
November 16 2016 - 5:01AM
Dow Jones News
By Robert Wall
LONDON--After more than a year of crisis management, Rolls-Royce
Holdings PLC Chief Executive Warren East said he's ready to start
planning the long-term future of the British aircraft engine maker
despite pressure on earnings from new accounting rules and weak
demand.
Rolls-Royce, a flagship of U.K. industry, has rarely been under
as much strain as it is today.
Authorities in the U.S. and U.K. are investigating the company
for corruption. In a sweeping reorganization, Mr. East has pruned
the company's executive ranks--a fifth of management posts face the
ax--eliminated thousands of other jobs, and slashed the dividend
after a series of profit warnings which unnerved shareholders.
The CEO, who joined in mid-2015, acknowledged on Wednesday that
the company has "a long way to go on improving the operational
performance of the business" after change has been slower than
hoped.
It was time to look further ahead and define "an appropriate
vision for the future" for Rolls-Royce, Mr. East said.
The strategic review could lead to more changes at Rolls-Royce
in 2017, though the company, which generates most of its profits
from selling and servicing commercial aircraft engines for Boeing
Co. and Airbus Group SE, would remain a diversified engine
provider, Mr. East said.
Some investors have urged Rolls-Royce to focus on commercial
aerospace and shed other activities, such as marine engines.
Activist investor ValueAct Capital Management LP this year joined
the Rolls-Royce board, though pledged not to push for strategy
changes until 2018.
For now, Rolls-Royce said it is on track to achieve promised
yearly cost savings toward the top end of a target range of GBP150
million ($187 million) to GBP200 million from next year.
But Mr. East signaled weak demand for business-jet engines, a
segment where Rolls-Royce has been struggling. Sales of marine
engines for vessels serving the oil and gas market would remain
depressed next year too.
Despite a decline in revenue and profit this year, cash flow
should improve in 2017, said Chief Financial Officer David Smith.
Rolls-Royce, which could burn through GBP300 million in cash this
year, is targeting "something around or above break-even" for 2017,
Mr. Smith said.
Rolls-Royce, no longer affiliated with the luxury car maker, is
also preparing investors for new accounting rules that will take
effect in 2018 and alter how the company reports earnings.
Rolls-Royce typically sells aircraft engines at a loss and makes
up the money later on servicing them. Rolls-Royce masked the early
losses by booking some of the assured services revenue early. Under
new accounting rules those losses will need to be reflected
immediately and services revenue can't be booked until the work
takes place.
The company said sales for its new engines last year would have
been GBP700 million lower than reported and revenue for services to
maintain those engines would have been reduced by GBP200 million.
The company reported 2015 underlying revenue for new engines of
GBP3.3 billion and GBP3.7 billion for services.
Under the new accounting rules, called International Financial
Reporting Standard 15, long-term profits would be higher. Mr. Smith
said the accounting rules would weigh on earnings through 2020,
with reported earnings expected to benefit from the change possibly
by 2025.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
November 16, 2016 04:46 ET (09:46 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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