RYCEY Rolls Royce Holdings PLC (PK)

By Robert Wall 

LONDON-- Rolls-Royce Holdings PLC faces sustained pressure on earnings from new accounting rules and weak demand even as Chief Executive Warren East said he is ready to start planning the long-term future of the British aircraft engine maker.

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.

Mr. East signaled weak sales of business-jet engines, a segment where Rolls-Royce has been struggling, would remain under pressure in 2017. Sales of marine engines for vessels serving the oil and gas market would remain depressed next year too.

Rolls-Royce, no longer affiliated with the luxury car maker, forecasts a drop in revenue and profit for this year. Chief Financial Officer David Smith said profit should improve modestly in the coming years and that cash flow should improve in 2017. 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.

Reported earnings are set to take a hit from new accounting rules that will take effect in 2018 and alter how the company reports earnings. The drag on sales and profit will last through the decade.

Shares in Rolls-Royce fell almost 3% in mid-morning London trading.

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.

Still, Mr. East said, 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.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

November 16, 2016 06:29 ET (11:29 GMT)

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