RR. Rolls-royce Holdings Plc

Jet-engine maker's chief says he is confident of making full-year targets

By Robert Wall 

LONDON -- British aircraft engine maker Rolls-Royce Holdings spooked investors once again on Thursday, signaling that its first-half results would only be "close to break-even."

Rolls-Royce, which makes engines for Boeing Co. and Airbus Group SE long-range jetliners, is poised to deliver "very, very little profit" for the first six months, Chief Executive Warren East said.

Shares in Rolls-Royce, which previously said profit would primarily come in the second half of this year, retreated more than 4.5% in London trading. Analysts worried about the scale of performance the company would have to deliver in the final months of the year.

"Rolls normally has a heavy weighting to the second half in its results, though the scale of the 2016 skew is particularly stark," RBC analyst Robert Stallard said. The company also is betting on strong performance from improved aircraft engine aftermarket business when some older Rolls-Royce-powered planes are flying less than forecast, he said.

Mr. East acknowledged the performance in the first six months would be slightly weaker than initially expected, in part reflecting fewer than forecast aircraft engine deliveries. However, he said, the company was totally confident of making its full-year targets.

Rolls-Royce is recovering from a series of profit warnings that led it to cut its dividend for the first time since 1992 after profits slumped. The company has seen lower demand for some of its most profitable products and struggled with the impact on demand from low crude prices on its marine and power-systems operations.

Rolls-Royce chairman Ian Davis told shareholders "significant short-term challenges remain" including costs that are too high and the effects of the commodity prices slump on some of its markets. He welcomed the changes that Rolls-Royce was implementing to improve its financial performance, but said "the journey to recovery will take time."

Rolls-Royce also said earnings this year could benefit from weakness in the British currency versus the dollar. If currency exchange rates remain at the level seen to date, reported revenue would improve by GBP450 million ($654 million) and reported profit before tax by around GBP50 million. Many of Rolls-Royce's sales are dollar denominated.

The shareholder meeting, Mr. East's first as CEO at Rolls-Royce, comes after months of turmoil for the company that has seen the departure of top executives and U.S. activist investor ValueAct Capital Management LP becoming the company's largest investor. In March, Rolls-Royce appointed Bradley Singer, ValueAct's chief operating officer, to join the board.

Mr. Singer faced the weakest support from shareholders, with about 6% not backing his board position based on early votes cast. Mr. Singer said he would seek to win over those shareholders that didn't back him.

ValueAct, which owns more than 10% of Rolls-Royce shares, has pledged not to battle the company until at least the 2018 shareholder meeting. Mr. Singer said ValueAct had no "preconceived notions" of changes that would be required at Rolls-Royce and said the investor remained convinced the engine maker's fortunes would improve.

Restructuring measures, including layoffs, should start bolstering the bottom line this year, Rolls-Royce said. "We are well on track to delivering the expected cost savings in 2016," the company said, estimated at GBP30 million to GBP50 million benefit by year-end.

Mr. East added that the company expected to surpass the GBP150 million to GBP200 million in annual savings it has targeted from 2017. The near-term focus is on delivering the promised figure, he said, with significant effort unlikely to go into identifying the next round of savings this year.

Rolls-Royce would need to take about GBP1 billion in costs out to match the profitability of its rivals, Mr. East said, such as General Electric Co. Achieving that was an "ambition," he said, which would stretch several years.

Further management-level job cuts also are on the horizon. Mr. East said about 20% to 25% of the top 2,000 managers layer may be removed in a drive to simplify the business. The review of the company structure should be completed by midyear, he said. About 200 of those job losses have already been announced.

Mr. East said the company was continuing to assess whether any business activities should be shed. Any such changes would be only adjustments, he said, saying the strategic review wasn't the priority. There is no guarantee any disposals will take place this year, he added.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

May 06, 2016 02:48 ET (06:48 GMT)

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