Rolls-Royce outlines mid-term ambition

Eleanor Steed
By Eleanor Steed June 18, 2018 09:28

Rolls-Royce outlines mid-term ambition

Rolls-Royce leadership team delivered confidently on Friday morning (June 16) the full details of its restructuring, cost savings, a 15% return on invested capital and near-term ambition to exceed £1bn in free cash flow by 2020 at an analysts’ capital markets briefing that was also streamed online.

Chief executive officer, Warren East, described this moment as “pivotal” for the company and although just a powerpoint today, the revitalised leadership team is dedicated and confident it can deliver on the promises it has made to restructure and revitalise the business. Initial responses from analysts and investors have been very positive to the plan made by Rolls-Royce to fundamental change its structure, culture, processes and people to allow it to deliver improved returns, higher margins and increased cash flow. Rolls-Royce shares rose by more than 10% on the news.

During the meeting, Rolls-Royce confirmed already leaked reports that the company will be making 4,600 job losses over the next two years, which will be predominantly in the UK, with around a third of these expected to leave by the end of 2018. The programme is expected to gain further momentum through 2019, with full implementation of headcount reductions and structural changes by mid-2020.

The total cash cost of the restructuring is expected to be £500 million, which includes the cost of redundancies and required systems investments to facilitate the programme. Full year net cost savings from this restructuring are expected to reach a run-rate of £400 million per annum by end 2020.

East said: “After a decade of significant investment we are committed to delivering significantly improved returns while continuing to invest in the innovation needed to realise our long-term ambition to be the world’s leading industrial technology company. It is never an easy decision to reduce our workforce, but we must create a commercial organisation that is as world-leading as our technologies.”

That decade of investment to 2018 included the launch of six new aero engine programmes, which has forced the company to expand its production capacity significantly to meet its target of manufacturing c.600 engines per year. The growth in its widebody active installed engine base from 4,409 engines today to circa 6,500 engines by 2020, all of which have Trent TotalCare packages attached – added the unforeseen issues with the Trent 1000 – has also required the company to work to enlarge its maintenance capacity.

In his presentation, CFO, Stephen Daintith, outlined plans in place to reduce the average loss per engine from £1.6 million today to c.£400,000 by 2020.

“We are coming out of a significant investment cycle and are poised to deliver much improved returns. To achieve this we must focus on reducing further the original equipment cash deficit per engine, increasing our aftermarket cash margins and ‘bending the fixed cost curve’ by focusing on R&D, capital expenditure and commercial and administration costs. The restructuring programme is a key enabler to delivering reductions in our fixed costs while allowing our businesses to be more accountable for their own costs. Our mid-term ambition is to deliver free cash flow per share of over £1 and to generate annual cash flow return on invested capital of 15% through the cycle.”

Specific savings on manufacturing costs are to be realised by adapting current manufacturing methods, sourcing options and efficiency improvements. For example, Rolls-Royce has made a strategic investments in its internal manufacturing capability for the Trent family of engines, specifically in the manufacturing capability for shafts, discs & blisks that the company says will result in a 50% reduction in machining operations and manual intervention and better quality resulting in £30k benefit per engine. Similarly, amendments to current commercial terms and partnerships for the Trent XWB, such as combining workshops and machining changes, will result in a £20k benefit per engine. Daintith’s statement that the “Trent XWB-84 OE will be break-even by 2020” was greeted favourably by investors at the briefing but it also posed a question of which engine was losing considerably more to result in the average loss per engine of £1.6 million. Warren East said that this could be explained by the fact that launch engines, in this case the Trent 7000 and the Trent XWB-97, were sold very competitively.

East also provided investors with a further update to the ongoing issues with the Trent 1000 Package C and B engines. In March, Rolls-Royce had anticipated that the cash costs associated with in-service issues on both the Trent 1000 and 900 would double from the £170 million incurred in 2017, the current assessment is that the further issues encountered with Trent 1000 since the 7 March announcement could lead to combined additional 2018 cash costs of around £100 million. East added that the firm has “successfully enacted a number of short-term discretionary cost mitigation actions separate to, and outside of, the proposed restructuring plan, which we expect to offset these incremental costs. As such our FY18 free cash flow guidance remains unchanged at around £450m + /- £100m.”

The costs of addressing the issues with turbine and intermediate pressure compressor blades on more than 500 engines will cost nearly £1bn. Investors asked East whether he could provide any assurances that these similar issues would appear on other engines types, specifically the XWB. East said that he could not provide such assurances on such a young engine and it would require a number of more flying hours to determine if any similar issues were present, although he did confirm that to date no such problems had been found and that a permanent fix for the turbine issue would have been secured by then.

 

For more on the Rolls-Royce briefing, see the next issue of Airline Economics Issue 43, as well as the Airline Economics annual Aero Engine Guide, which will be published in mid-July. To subscribe and ensure you receive these magazines in print and digital format as soon as they are published, click here.

Eleanor Steed
By Eleanor Steed June 18, 2018 09:28