Rolls-Royce mulls disposal of weaker units

Bloomberg

Rolls-Royce Holdings Plc Chief Executive Officer Warren East said the struggling aircraft-engine manufacturer will deepen costs cuts and restructure or sell the weakest parts of its business after profit dropped by almost half in 2016.
While around 80 percent of activities are in ‘a reasonably strong position in an attractive market,’ the rest are on less solid ground and could be refocused or disposed of, East said on an earnings call on Tuesday.
Rolls-Royce’s pretax profited fell 49 percent last year and only a ‘modest’ improvement is expected in 2017, the London-based company reported, sending the stock down as much as 6.3 percent and increasing the urgency for East, CEO since July 2015, to roll out the next stage of his turnaround plan.
“It is now time to look further ahead,” said the executive, who has previously played down the likelihood of disposals. “Over the next few months we will conclude our review of our strengths and investment opportunities and set out an appropriate vision for the business.”
That will mostly involve taking steps to improve the competitive position of some operations or re-positioning them to target “slightly different” sectors, East said, while adding: “Or yes, maybe, some of those pieces are up for disposal, maybe there would be a better owner for some of those activities.”
Among weaker businesses at Rolls are electrical and hydraulic systems, East said on a conference call. The marine arm, which serves the offshore oil and gas market, remains “extremely tough” following the oil-price decline, and the company is continuing with efforts to consolidate sites and pare costs, he said, without specifying whether elements could be offered for sale.

Cash Boost
East spoke after Rolls-Royce posted adjusted pretax profit of 813 million pounds ($1.02 billion) for 2016, heavily down from the previous year though better than the 685 million pounds estimated by analysts.
Revenue gained 9 percent to 15 billion pounds, savings were higher than targeted at 60 million pounds, and cash flow reached 100 million pounds after the company had suggested that a figure of minus 100 million pounds to minus 300 million pounds was likely.
Still, profit this year will show only a “modest” gain, Rolls said, after earlier providing an analyst consensus pointing to a 25 percent increase. Given the out-performance in 2016, the guidance is “underwhelming,” Jefferies analyst Sandy Morris said by phone, while adding that the company does seem to be turning a corner.
Shares of Rolls-Royce traded 1.9 percent lower at 726 pence as of 12:26 p.m. in London. The stock has gained 8.5 percent this year after a 16 percent advance in 2016, when it was buoyed by the pound’s decline following Britain’s vote to quit the European Union, a development that lifts the value of the company’s dollar-denominated sales.

Fines, Hedging
East said he’s ready to address more strategic issues after focusing chiefly on operational concerns and “stabilization” since joining Rolls-Royce. The former head of semiconductor-maker ARM Holdings Plc has eliminated hundreds of office jobs and shuffled senior management in a bid to make the company more responsive to changes such as the collapse of crude prices.
East warned soon after taking charge that 2016 earnings would be hit by a 650 million-pound headwind stemming from the slump at the marine division, slowing regional- and corporate-jet demand, a drop in sales of the original Airbus Group SE A330 ahead of the introduction of a re-engined model, and reduced maintenance revenue from older wide-body jets.
While Boeing Co.’s plans for a new mid-sized aircraft sitting somewhere between the biggest narrow-body and smallest twin-aisle plane are still in early stages, East said Rolls would be “very keen” to power such a model, estimating that it could address as much as 5 percent of the aviation market should it get the go-ahead.

Nuclear Setback
The company doesn’t currently compete in the single-aisle engine market, with its Trent range focused on bigger planes such as the Airbus A350, a late surge in deliveries of which helped it to exceed pretax estimates.
Rolls’s plans to introduce a new range of modular nuclear reactors hit a snag Tuesday as Toshiba Corp. opted to halt production of atomic plants via its Westinghouse Electric Co. business. The U.K. company had viewed the Japanese group as a potential ally in developing factory-built reactors that avoid the expense of on-site construction.
“Toshiba is a potential partner, a potential customer for our civil business in nuclear,” East said. “If they’re not active and if they’re pulling out of that, then we’ll have to see if that project goes ahead.”
Rolls-Royce last month agreed to pay 671 million pounds in charges to the US, UK and Brazilian fraud agencies to settle bribery charges. It also booked a 4.4 billion-pound non-cash mark-to-market valuation adjustment to its currency hedge book, reflecting sterling’s slide, resulting in a 4 billion-pound net loss. Most of the accounting adjustment will be recovered as hedges mature and when Rolls delivers engines paid for in dollars, Chief Financial Officer David Smith said on the conference call.
Rolls will pay an unchanged final dividend of 7.1 pence a share and continue to adjust shareholder rewards in the light of cash demands, East said.