Rolls-Royce CEO touts faster engine production
East argues transformation efforts have made ‘reasonable progress’
Warren East took over as Rolls-Royce chief executive in the wake of several profit warnings nearly 16 months ago, and, by his own admission, the transformation of one of Britain’s proudest industrial companies is taking longer than he had expected.
“I had hoped we would be more into concentrating on strategy and refining product portfolios by now rather than basic transformational activity,” he told the Financial Times in an interview. Nevertheless Mr East will tell investors at the company’s capital markets day on Wednesday that, “one year on, we have made reasonable progress”.
To back up his claim, the Rolls-Royce chief plans to point to anecdotal evidence of change at the 110-year-old company, which is as famous for the bureaucracy that weighs on profitability as it is for the jet engine technology that has won it 50 per cent of the global market for wide-body turbines.
Since February Rolls-Royce has cut the time it takes to assemble the Trent 1000 engine — found in Boeing’s 787 Dreamliner — by almost a quarter, from 40 days to 30, Mr East says. “This is a genuine improvement,” he says.
He aims within the next 12 months to bring assembly time down further, to just 20 days. The lessons will be applied across other engine programmes, in particular the Trent XWB which powers the Airbus A350 wide-body. There, the goal is to reduce the production time by 50 per cent.
Mr East is counting on similar improvements to encourage a more flexible way of working and to help the group deliver the £1bn in efficiency improvements it needs to match the profitability of rival General Electric of the US.
Seven per cent of Rolls’ workforce has been cut in two years, but Mr East concedes, “There is still a heck of a long way to go”.
The changes will also help to free up resources as Rolls-Royce faces one of the biggest production challenges in its recent history. The company intends to double annual production by the end of the decade, which will allow it to churn out 600 jet engines a year — more than at any time since second world war.
Mr East arrived at the helm of Rolls-Royce in July 2015, after three profit warnings had undermined the company’s credibility and shattered a long record of steady profits growth. Under his tenure the company has revised its guidance twice more. Analysts are now expecting underlying pre-tax profits of about £680m for 2016 against the £1.4bn achieved last year.
Rolls-Royce is not expected to change guidance again on Wednesday, but it will make clear the impact of new accounting standards, which are due to come into effect in 2018, by restating 2015 profits as a guide to what to expect. This restatement is expected to show that reported profits last year would have been lower by more than £800m had the new rules applied.
The group is keen to stress that the changes are technical and will have no impact on the fundamentals of the business or on its cash flow, which is already strained by the ramp-up in production and investment in new engine programmes.
Mr East plans to reassure investors that the volatility that has hit Rolls-Royce’s cash generation is ebbing. The Rolls-Royce boss will indicate that 2016 will be a low point with more cash going out than coming in. He expects to reach cashflow break-even next year, with the trend improving to sharply positive in 2019.
Mr East admits, however challenges remain for the final six weeks of the year. Meeting this year’s earnings guidance will depend on the performance of the power systems business, which makes reciprocating engines for ships, rail and land vehicles and the oil and gas industry, sectors where the market is extremely tough.
“We need the power systems business to deliver what we expect it to deliver. We think it will, but it is very challenging,” he says.
The difficulties in power systems, and in the group’s marine engine division which is also heavily reliant on the depressed oil and gas sector, have not weakened Mr East’s commitment to a diversified Rolls-Royce. Some investors have said the company’s wide range of activities has distracted management from the core need to improve competitiveness and cash generation in civil aerospace, which contributes two-thirds of group revenues.
Mr East insists the business portfolio remains “broadly right”. However he now plans to set strategic priorities which are likely to mean a substantial downsizing of both the marine and power systems divisions.
He adds that he believes that the time is now ripe to set out his long-term vision for these businesses and for the civil aerospace division that defines Rolls-Royce. It will involve a focus on new technologies, including electrification in all types of propulsion, from planes to trains and ships.
“We want to reassure people that we haven’t totally got our heads in the weeds of operational stuff,” he says. “There will be a future.”