Rolls-Royce announces that it is embarking on a further simplification of the business, which includes the potential sale of its commercial marine operation, as it consolidates its operating businesses into three core units.
The three core units, to be reduced from five, will be based around Civil Aerospace, Defence and Power Systems, the company said in a statement.
A decision on the sale of Rolls-Royce’s marine unit will be made following a strategic review, which will be conducted some time in 2018, and comes amid weak demand products and services for the offshore oil and gas market since 2015.
Part of the plan includes consolidating Rolls-Royce’s Naval Marine and Nuclear Submarines operations within its existing Defence business, and Civil Nuclear operations within its Power Systems business, which will facilitate “a more fundamental restructuring of support and management functions.”
Rolls-Royce said the actions are designed to align its business more closely with its strategic vision to pioneer cutting-edge technologies that deliver vital power.
“It will allow us to better capitalize on our relationships with Defence customers and our market leading widebody position within Civil Aerospace, while strengthening our technology capabilities across a broad range of power generation applications. We would expect the subsequent restructuring to deliver an additional reduction in costs and assist us in improving performance from our core businesses and the whole Group. We are in the process of defining this restructuring and further details will be given at the time of our 2017 financial results on 7 March 2018 and a fuller discussion at a Capital Markets event later this year,” a statement from the company read.
Chief Executive Warren East commented: “Building on our actions over the past two years, this further simplification of our business means Rolls-Royce will be tightly focused into three operating businesses, enabling us to act with much greater pace in meeting the vital power needs of our customers. It will create a Defence operation with greater scale in the market, enabling us to offer our customers a more integrated range of products and services. It will also strengthen our ability to innovate in core technologies and enable us to take advantage of future opportunities in areas such as electrification and digitalization.”
“Alongside the simplification into three operating businesses, we must continue to address the cost and complexity of the structures that support and serve these businesses, including our corporate head office, with greater decisiveness. Taking this action now will help secure the long-term benefit for our business and stakeholders of the growing cash flows that will be generated over the coming years. At the same time, our operational teams must continue to focus on managing in-service issues within Civil Aerospace and delivering the current increase in engine production,” Mr. East added.
As for the marine unit, Rolls-Royce said the profitability of its Marine business has been significantly impacted since 2015 due to the downturn in the offshore oil and gas market. As a result, the company has already divested non-core businesses and reduced the number of sites by 40% from 27 to now just 15. It has also led to a reduction of its workforce by 30% to 4,200, with the majority now based in the Nordic region. “At the same time, the business has been investing in new facilities and new technologies and become an industry leader in the fields of ship intelligence and autonomous vessels, culminating in June 2017 with the successful demonstration, in Copenhagen harbor, of the world’s first remotely operated commercial vessel. Given the progress the business has already made, it is now an appropriate time to conduct a strategic review of Commercial Marine. This review will be undertaken during 2018 and we will update the market of the outcome at the appropriate time,” the company said.
Warren East continued: “This is the right time to be evaluating the strategic options for our Commercial Marine operation. The team there has responded admirably to a significant downturn in the offshore oil and gas market to reduce its cost base. At the same time, we have carved out an industry-leading position in ship intelligence and autonomous shipping and it is only right that we consider whether its future may be better served under new ownership.”
Regardless of the outcome of this strategic review, Rolls-Royce will retain the Marine operations which supply complex power and propulsion systems to Naval customers, including the Royal Navy and US Navy. During the first quarter of 2018, these Naval operations will become part of an enlarged Defence business named Rolls-Royce Defence, comprising the current Defence Aerospace business and our Nuclear Submarines operation. We will also continue to have a successful engine business serving marine customers within Power Systems.
In 2016, Marine contributed £1.114 million revenue and generated a loss of £27 million. Within this, the Commercial Marine business, which supplies equipment and vessel design across the oil and gas, merchant and other commercial markets, accounted for 75% of revenues while the Naval operations accounted for 25% and achieved a small profit.