UK Edition
Rolls-Royce considers marine business sale as it restructures again
Rolls-Royce is considering selling the bulk of its struggling marine business as the company embarks on another restructuring which aims to further slash costs.
The FTSE-100 company, which had annual revenues of £14bn in 2016, announced the “simplification” which will see its current five divisions reduced to three as part of chief executive Warren East’s drive to streamline the business.
The blue-chip engineer is currently split into civil aerospace, defence aerospace, power systems, nuclear and marine divisions. Under the new structure it will have just three units: civil aerospace, defence and power.
Rolls Royce's naval marine and nuclear submarines operations will be moved into the defence business, and civil nuclear operations will go into the power systems unit, in a move that will allow a “more fundamental restructuring” that will allow more cost cuts.
The news sent shares in the company surging, rising 7pc to 916p in the wake of the announcement, which also confirmed the business was on track to meet annual expectations.
Mr East took the reins at Roll Royce in 2015, with a remit to get the business back on track after a string of profit warnings which cost the previous chief executive his job. Under a mantra of “pace and simplicity” he set about a shake-up that stripped out layers of the company's bloated management structure in an effort to make it more responsive to the changing market, as well as making a raft of senior appointments.
He also led the company into new areas such as electric aircraft and the digitalisation of industry, but still had to weather more profit warnings and a record £4.6bn annual loss, as well as overseeing Roll Royce paying out £671m relating to historic corruption.
The latest shake-up hints at further senior cuts with “support and management functions” singled out as a target, but duplication between businesses will also be targeted.
Mr East said the company is on target to hit the £200m of annual savings he set out two years ago, but now wants to achieve more.
"It is a balancing exercise," he said. "We needed to deal with more urgent priorities: stabilising the business, new product introductions, doubling engine production and getting the new management in place."
He declined to put a number on new savings but admitted he was "frustrated" at the pace of change.
Merging the nuclear submarine business - a key player in the construction of the Royal Navy’s new Trident missile vessels - into the defence arm will create a division with “greater scale in the market”, Mr East added.
Rolls Royce’s marine business, which supplies engines, propellers and complex power and deck equipment to ships, especially in the offshore oil sector, has been struggling for years in the wake of the oil price crash.
Last year it had sales of £1.1bn, down 24pc, and losses widened to £27m. The poor performance came despite it having cut staff by 30pc to 4,200 and almost halving its number of sites to 15 over the past few years.
There have long been calls for it to be spun off but Mr East has until now resisted them, amid concerns that a buyer would be found only at a fire-sale price. Instead he has invested in new technologies such as robot ships.
The chief executive called now the “right time to evaluate options” for the marine unit’s commercial business. However, Rolls' language hinted at sale noting that the company “will retain the marine operations which supply complex power and propulsion systems to Naval customers, including the Royal Navy and US Navy”.
Mr East added said it was "only right that we consider whether [marine’s] future may be better served under new ownership” but said the company had not made up it mind to sell the business.
Rolls noted that last year commercial marine accounted for 75pc of the unit’s sales, but made a loss, with naval marine delivering the remainder but making a “small” profit.
Jefferies analyst Sandy Morris said: “The shares may have popped up 7pc but we did not get an announcement of cuts last year from Warren; but to me there was no doubt Warren East was not done.”
He added that a sale of the commercial marine business could appeal to a commercial buyer, as it would allow it to cut R&D costs and overlaps, potentially allowing a combined unit to make a profit.