Rolls-Royce launches sweeping review in turnround bid

Rolls-Royce reported stronger than expected annual profits as its new chief executive Tufan Erginbilgic launched a sweeping restructuring of Britain’s flagship engineering group, sending its shares up more than 15 per cent.

Erginbilgic, who succeeded Warren East in January, said on Thursday that the group could deliver “materially higher profit, cash flows and returns”.

The company has identified seven areas of improvement, including reducing its working capital and increasing efficiency. The transformation programme will also look at synergies across the group as well as the size of its footprint.

Erginbilgic refused to rule out potential job cuts but insisted that the focus would be on generating improvements that were “sustainable”.

“This is not about immediate returns,” he told reporters. “This is to create a business that we can reassert in the industry as a strong company.”

Rolls-Royce, he added, at present did not have “strategic clarity”. A strategic review to determine which areas the company will keep investing in will take place alongside the transformation programme.

Shares surged 17 per cent to 126.30p by mid-morning in London, but remain well below their pre-pandemic level.

Erginbilgic last month delivered an unflinching assessment of the group, telling staff that Rolls-Royce had underperformed all its key competitors and describing it as a “burning platform”.

The oil industry veteran was unapologetic about his description on Thursday, saying that he had “shared some facts” with Rolls-Royce staff.

The company’s total shareholder return over the past five years was negative 67 per cent. Its margins are also below those of larger competitors such as America’s General Electric.

“We have a need to change because Rolls-Royce’s issues are not actually created by Covid. Covid made it more difficult but they are not created by Covid,” said Erginbilgic.

The restructuring promises more upheaval for the 117-year-old group. It is only just emerging from a sweeping overhaul launched by East following the coronavirus pandemic, including the loss of 9,000 jobs to save £1.3bn in costs.

The grounding of international air travel during the pandemic severely dented the company’s civil aerospace business, which still generates 40 per cent of the group’s underlying revenues. Rolls-Royce builds and maintains large engines for widebody aircraft including Airbus A350 jets and Boeing’s 787.

Alongside the announcement of the restructuring plan, the UK company’s latest results showed an improvement in its civil aerospace and power systems divisions. Rolls-Royce said large engine flying hours in civil aerospace grew 35 per cent year on year as the recovery in international aviation continued.

Underlying operating profit rose 57 per cent to £652mn last year while revenues were £12.7bn, up from £11bn in 2021. The company generated £505mn of free cash flow last year, trouncing analysts’ expectations.

Net debt remains high at £3.3bn but was down from £5.2bn after a disposal programme launched by East.

The company predicted adjusted operating profit of £800mn to £1bn for this year, with free cash flow of as much as £800mn.

Results of the strategic review will be released in the second half of the year. Erginbilgic did not reveal which areas might leave the group as part of the review but insisted that the company could be a player in the energy transition.

Under East, Rolls-Royce invested in new business areas of electric aircraft and small modular nuclear reactors to underline the fact that the company should be seen as more than a maker of fossil-fuel-burning engines.

Erginbilgic said he believed mini reactors could play a role in Britain’s push to net zero but stressed that it needed government backing for it to be successful. The company wants ministers to commit to formal talks over potential funding models.