Around 4,600 white collar jobs will be cut over the next two years, predominantly in the UK where the bulk of the group’s corporate and support functions are located. Hard lines for the salarymen, but for aggregate restructuring costs of approximately £500m, shareholders can look forward to run-rate net cost savings of £400m a year by the end of 2020.
As if by rote, Derby North MP Chris Williamson called for the government to intervene in the matter, but any exhortations in terms of ‘national interest’ would sound a little hollow given that the group had already struck a deal with unions to safeguard 7,000 front-line engineering jobs in the East Midlands for five years. Indeed, the core engineering division is probably set for a period of expansion to meet the existing order backlog. Outlay on R&D hit £1.39bn in 2017, representing a 7 per cent increase in self-funded spending, while the group filed more patents than any other single UK corporation. That doesn’t appear symptomatic of an entity in decline – quite the opposite.
Notwithstanding the ongoing headache over the Trent 1000 compressor, it’s becoming increasingly apparent that Warren East has a clearly defined set of priorities to put the group on a stable financial footing, while ensuring that it builds on its technological legacy. And he certainly has a decent pedigree. Under his leadership, ARM Holdings morphed into the world’s leading semiconductor licensing company, but it’s often easier to build than it is to renovate. The chief executive, who took over the reins at Rolls-Royce in 2015, was faced with a group weighed down by a stratified, unwieldy management structure, which had contributed to a string of profit warnings, and the eventual undoing of his predecessor, John Rishton.
Presumably, there’s still plenty of fat on the bone. So, while the media concentrated on the group’s turnaround in reported profits through 2017, it’s likely that Mr East paid a little more attention to the 87 basis point contraction in the gross margin. Stephen Daintith, chief financial officer, said the group needs to further reduce the original equipment cash deficit per engine, while increasing aftermarket cash margins. In a recent IC podcast, we speculated whether the introduction of the IFRS 15 accounting standard helped to concentrate minds on this front. Some might argue that the group’s accounting policies on revenue recognition served to obscure underlying trading performance – we’ll get further insight into the effects of the change when the group's half-year figures are released at the beginning of August.
That the group was effectively top-heavy goes some way to explaining why it seemed overly vulnerable to the cyclical turn of civil aviation demand – an unavoidable aspect of the business, one would think. But there’s one area of operations that holds genuine promise, if only government ministers could provide clarity on energy policy. Rolls-Royce is at the vanguard of efforts to develop small modular reactors (SMR) for use in civil applications. It already supplies reactor technologies for the Royal Navy’s fleet of nuclear submarines, although the technical requirements of civil and military applications are quite distinct. A spokesman for the group, though suitably effusive over the practical advantages of this mode of power generation, was unable to provide any comment on the likely path towards commercialisation – the ball remains firmly in Whitehall’s court.
