Engine manufacturer Rolls-Royce is cutting its payout to shareholders in half, after a 12% fall in profits and amid an extensive restructuring of the company.
Rolls-Royce released its full-year results on Friday, showing a 12% drop in pre-tax profits and a 1% fall in underlying revenue.
The company has issued five profits in just under two years, blaming the slump on a slowdown in servicing old aircraft engines and a collapse at its marine engine business because of the crashing price of oil. Profit at its marine business, which makes up 10% of the company, fell by 94% in 2015.
Rolls-Royce sums up nicely what’s wrong with the business in a paragraph in Friday’s results:
As we grew as an organisation we embedded costs and complexity in the business which, in periods of significant investment and product transition like now, is impacting our performance. But the higher costs also present a significant opportunity; to simplify what we do and sustainably reduce the cost of management, creating a more streamlined, resilient and sustainable business.
In short, the business was built in the good times, with lots of costs. When a downturn arrived it wasn’t ready.
Rolls-Royce is overhauling its business as a result, targeting cost savings of between £150 million and £200 million each year. 20% of the top two layers of management were recently laid off.
CEO Warren East says the “pace of investment required to transform the business creates near-term pressure on free cash flow.” As a result, Rolls-Royce is cutting its final dividend by 50% to 7.1p. The cut, the first in 24 years from the company, was expected, but it is still unwelcome news for investors.
CEO East, who the job last year, says:
In the context of challenging trading conditions our overall performance for the year was in line with the expectations we set out in July 2015. It was a year of considerable change for Rolls-Royce: in our management, in some market conditions and in our near-term outlook.
At the same time, there were some important constants: the underlying growth of our long-term markets, the quality of our mission critical technology and services, and strength of customer demand for these, which are reflected in our growing order book.
While East is optimistic for the long-term prospects, Rolls-Royce says revenue for 2016 is forecast to be “marginally lower” than 2015.
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