Rolls-Royce to Close Ship-Engine Sites as CEO Deepens Cost Cuts

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November 16, 2016

Photo credit: Rolls-Royce Plc

By Benjamin Katz

(Bloomberg) — Rolls-Royce Holdings Plc will close the bulk of sites at its marine-engine and ship-design unit and shift some production to emerging economies as the lower price of crude hurts demand for oil-industry exploration and service vessels.

The offshore market is showing no sign of recovery, with the outlook bleaker as the backlog shrinks, Rolls, which is better known for its plane engines, said Wednesday. The Norway-based marine arm has already closed or sold 12 of its 27 sites and will keep “very, very few,” according to an investor briefing.

Chief Executive Officer Warren East said that London-based Rolls-Royce is unlikely to remain active in all areas of marine engineering, which currently span offshore vessels and oil and gas platforms through freighters, cruise ships, luxury yachts and naval craft. Restructuring steps will include “simplification of operations and a reduction in the number of sites,” he said, without revealing which locations will close.

Rolls-Royce is seeking to slash costs as its marine and industrial units struggle and the aero-engine business suffers from a slump in sales of business and regional jets, lower utilization of older wide-body planes and a slowdown in A330 engine deliveries as Airbus Group SE switches to an upgraded model. East said the company is on course to deliver savings close to 200 million pounds ($250 million), the top end of a targeted range, by the end of 2017. About 50 million pounds will have been secured by the end of this year.

Shares of Rolls-Royce declined as much as 4.6 percent and were trading 18.50 pence, or 2.5 percent, lower at 736 pence as of 11:20 a.m. in London.

Brexit Boost

The stock has still added 29 percent in 2016 after falling more than 30 percent in each of the past two years, aided by investor optimism about the turnaround program and the pound’s slump following Britain’s vote to quit the European Union, which has boosted the value of Rolls’s dollar-denominated engine sales.

Sales at the marine arm will decline this year and again in 2017, Rolls-Royce said. Of the unit’s 15 remaining sites, two are in the U.K. and involved in non-offshore activities, with most in Norway, Finland and Sweden, according to a spokesman for the division. The marine workforce has been reduced by 25 percent in the past two years and will stand at about 4,800 by the end of 2016.

Mikael Makinen, president of the marine business, told analysts and investors that some high-end engineering activities will be moved to Eastern Europe, India and Vietnam, where Rolls-Royce already has lower-cost operations.

East stuck with guidance from last November for a 650 million-pound drop in group profit this year, together with revenue “marginally lower” than 2015’s 13.7 billion pounds. The company was previously rocked by a succession of five profit warnings, including two since July last year, when he took over.

‘Adding Pace’

The CEO has reordered the company into five divisions from nine and eliminated more than 600 management posts, or about a quarter of the total, as he seeks to pare expenses and make the engineering behemoth more responsive to fluctuations in demand and the global economy. “We are taking actions that are adding pace and simplicity,” he said today.Rolls-Royce is also adopting new accounting standards which require a radical revision of its financial reporting and future guidance.

Under the new rules, known as IFRS 15, the company can book profit from maintenance activities only when it completes the work rather than when contracts are agreed. Operating profit for 2015 would have been about 900 million pounds lower when calculated according to the revised criteria.

© 2016 Bloomberg L.P


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