Stocks in Focus: Rolls-Royce

20/06/2018

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This week Jason Butler of NW Brown looks at 112-year-old British company, Rolls Royce, and its biggest transformation plan in nearly 20 years.

During a capital markets event last week, chief executive, Warren East, stated that an overcomplicated way of working was holding the engineering giant back. A six-month long evaluation revealed unnecessary complexities in processes and a lack of accountability and cost awareness throughout the business. As a result, Mr East has announced that he will be implementing some further restructuring in the business as part of the ongoing changes.

Earlier this year, the CEO announced plans to consolidate the company into three focused business units - Civil Aerospace, Defence and Power Systems, as opposed to the current five business unit structure. This is designed to remove management duplication between the three new units, with each having a greater degree of autonomy to allow them to work faster. The announcement made last week will involve cutting 4,600 back office and middle-management jobs over the next two years to make the business simpler and more efficient. All of the redundancies will involve non-manufacturing staff, with roughly two-thirds affecting the UK headquarters in Derby. The company currently needs production staff to help it deliver a sizeable order book of new aero engines. This shake-up is aimed at saving £400m a year by 2020 and generating about £1.9bn in free cash flow over the next five years.

It has been a tough couple of years for Rolls Royce after five profit warnings, dividend cuts and a dividend freeze. The new plan sounds promising and brings a breath of fresh air. Investors welcomed the transformation plan and sent the shares soaring to a six-month high. However, the business will need to start delivering against its targets on operational improvements, cost reductions and cash generation before it can convince the market that it is on a sustainable path to recovery.

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