Bloomberg reported this week that Roll Royce PLC’s share prices gain the most in the last 20 months after the company ended its steak of poor earnings and CEO Warren East said that he was also going to increase job cuts to simplify staff structure.
Company shares spiked after the announcement of a 25% increase in annual profits, which beat market expectations and estimates and East announced the news about further staff restructuring. The company’s shares went up by 13%, the highest they have been since July of 2016, to trade at £9333.40. This increase in share price took the company’s market value up to £17.3 billion.
CNBC reported that Rolls Royce’s pretax profits went up by 25% to £1.071 billion, which was much higher than the consensus target forecast of £878 million.
This strong performance in 2017 was due to a jump in engine deliveries as well as higher maintenance volumes. Another factor was the increasing sales in its power systems division; this division makes engines for trains, mining and agriculture.
East had already started the process of restructuring the company by cutting 600 senior manager jobs. He also cut thousands of workers’ jobs from the company’s aerospace and marine businesses. Rumors have it that Rolls Royce’s marine business may soon be put up for sale. These measures saved the company more than £200 million over the last two years, while simplifying management layers as well as reducing manufacturing times.
East took over the ailing company in 2015 and the steps he has taken have made an impact on margins, however, the CEO also has expressed his frustration about the slow pace of change in the company as well as performance concerns on critical engine programs.
Losses in the company’s older aero-engine programs as well as sharp declines in the demand for oil equipment had caused profits to tumble so badly that the company reported record losses for 2016.
In the last 3 years since East took over, this is the first year the company recorded increases in profits and overall performance. This showed that the CEO’s efforts in rebuilding an iconic English brand is finally bearing fruit.
East stated that the latest effort in restructuring would eliminate all duplication of roles within management. While he did not specify the number of jobs that were going to be affected, he did say that the cuts would be in white collar jobs rather than engineering and tech.
Rolls Royce announced that it was on track to meet its 2020 goals. It would create a free cash flow of £1 billion by 2020. East stated that this goal would be met despite the expensive program to fix its Trent 1000 aero-engine.
The CEO said that there were significant issues with the engine. About 400 to 500 of the Trent 1000 engines’ parts were wearing out much sooner than expected, needed extra maintenance and inspection. Airlines affected due to this aero-engine’s issues are British Airways, Air New Zealand, Japanese ANA as well as Virgin Atlantic.
East said that they were being completely transparent about these issues with both their customers as well as the market, and were prioritizing the issue to resolve is as soon as possible. The company was going to take a £340 hit in 2018 as the cost of fixing engine issues, especially for the Trent 1000 in Boeing 787s and the Trent 900, which is used on the Airbus A380 Superjumbo.
Some of these parts are now being redesigned, but they won’t be ready till 2022.