With the proposed 4,600 job cuts announced this morning being primarily based around back-office and management roles in the UK being part of an ongoing restructuring programmes designed to both simplify organisational and operating structures and provide the basis for continuous improvement Rolls-Royce is increasing the pace of driving through change.
This latest announcement forms part a continuing process of change, one that is aimed not only at delivering better returns but also in making the structure more efficient and less complicated. This is rightly viewed as being necessary not just because of the financial perspective and the need to improve bottom line returns but also in order improve efficiency of operation across the organisation and importantly, to speed up decision making processes.
I have copied below the statement made by Rolls-Royce to shareholders this morning and due to limited time I will make only a few serious observations:
Firstly, it is in my view important to stress that the restructuring announcement today is part of an ongoing process and one that has as its central aim driving improved run-rate in order to produce net cost savings in the order of £400 million per annum by the end of 2020.
As events over the past three years since the transformation programmes began, if the company was to stay competitive against its peers it had no choice but to make itself leaner, simpler and more agile. In doing so Rolls-Royce is doing exactly what its big competitors such as GE have done.
It is no use having world leading technologies if you are uncompetitive on price. That is why the need to transform the business and make it more efficient and competitive in order to support current and next generation technologies is of paramount importance for Rolls-Royce.
The process and pace of change at Rolls-Royce in order to make the company leaner, fitter, more efficient and able to produce higher margins required time. Whilst it did not take long for CEO Warren East to recognise that the company was top heavy in management, that the structure of management systems was out of line with modern manufacturing requirements and that the divisional structure that he inherited was now inappropriate, change has always to be properly planned and implemented.
In was only in January that Rolls-Royce announced a major simplification of group structure based on three customer-focussed units. Of inevitability that change provided the opportunity to create a much smaller group structure and in the process exposed the extent of management layers within the business and the high cost of the existing corporate. My view is that the announcement today forms the basis of change announced today will go a very long way toward creating the efficient group structure that Rolls-Royce needs to operate in the future.
The planned reduction of 4,600 predominantly UK based jobs is of course regrettable. But, given that it is still the UK that provides the majority of corporate and support functions, it is not surprising that the bulk of jobs to go will be those based here in the UK. No one likes announcements of this nature but if Rolls-Royce is to survive and prosper it has no choice but to make itself more efficient and competitive.
Rolls-Royce announces the next stage in our drive for pace and simplicity with a proposed restructuring that will deliver improved returns, higher margins and increased cash flow. This will support our long-term ambition to be the world’s leading industrial technology company.
Following the announcement in January that we will simplify the Group into three customer-focused business units, this proposed restructuring will create smaller and more cost effective corporate and support functions and reduce management layers and complexity, including within engineering. It follows a comprehensive review of our structure, culture, processes and people with a view to creating a much simpler, healthier and dynamic organisation with clearer accountabilities, greater productivity and quicker decision-making.
Over the next 24 months, we expect the proposed restructuring will lead to the reduction of around 4,600 roles, predominantly in the UK where the majority of our corporate and support functions are based. Around a third of these roles are expected to leave by the end of 2018. The programme is expected to gain further momentum through 2019, with full implementation of headcount reductions and structural changes by mid-2020
Chief Executive Warren East said: “Our world-leading technology gives Rolls-Royce the potential to generate significant profitable growth. The creation of a more streamlined organisation with pace and simplicity at its heart will enable us to deliver on that promise, generating higher returns while being able to invest for the future.
“We have made progress in improving our day-to-day operations and strengthening our leadership, and are now turning to reduce the complexity that often slows us down and leads to duplication of effort. It is never an easy decision to reduce our workforce, but we must create a commercial organisation that is as world-leading as our technologies. To do this we are fundamentally changing how we work.
“These changes will help us deliver over the mid and longer-term a level of free cash flow well beyond our near-term ambition of around £1bn by around 2020. After a decade of significant investment we are committed to delivering improved returns while continuing to invest in the innovation needed to realise our long-term aspiration to be the world’s leading industrial technology company.”
Rolls-Royce has traditionally operated with overlapping activities between individual business units and a large corporate centre. We will shift our centre of gravity much closer to our customers and make our three customer-facing business units fully accountable for the delivery of their strategic and financial targets. In turn, the business units will be in control of the support they need. We will be significantly reducing the size of our corporate centre to remove the complexity and duplication. A traditionally heavily centralised control culture will be replaced by empowered businesses, in a simpler, leaner structure with much clearer accountabilities. This will foster quicker decision-making throughout the organisation.
We have invested significantly over the past decade to build a commanding position in our core growth market of civil aerospace. Since 2010, we have invested over £11bn in cutting-edge research and development, world-class factories and modern facilities. We have launched six new civil engines including the world’s fastest-ever selling civil large engine, the Trent XWB, and most recently the Pearl 15 for the business aviation market. We have amassed orders for over 2,700 aero engines for wide-body aircraft and business jets. We are currently undertaking our biggest ever increase in large engine production, targeting over 600 wide-body engines a year by the end of this decade. As a result of our innovation and investment, we are poised to become the world-leader in large aircraft engines, powering over half of the world’s passenger wide-body fleet within the next few years, compared to 22% just 10 years ago.
We will create an organisation that will better enable us to maximise the economic value of these past investments, realise the growth potential embedded in our business and seize the opportunities we see across all our markets. We will continue to also pursue disciplined investment in our technologies, including in newer areas such as electrification and digitalisation.
During the restructuring process, we will ensure that we continue to deliver on our commitments to customers. We do not anticipate that the restructuring will lead to any reduction in the skills and capabilities that we require to support our current programmes. We will continue to support our current ramp-up in Civil Aerospace engine production and will remain focused on our management of the current in-service issues with the Trent 1000. We will honour previous commitments for no compulsory redundancies of represented staff. This includes those commitments made in Derby, Hucknall and Annesley which enabled last year’s £150m investment in new and existing Civil Aerospace facilities.
The total cash cost of the restructuring is expected to be £500m which includes the cost of redundancies and required systems investments to facilitate the programme. These cash costs will be incurred across 2018, 2019 and 2020 and, given the one-off nature of the restructuring programme, these will be reported below group underlying free cash flow (FCF). Full year net cost savings from this restructuring are expected to reach a run rate of £400m per annum by the end of 2020.
Current trading in-line with expectations
Current trading remains in-line with the full year expectations we set out at the time of our 2017 results in March. Despite the already announced incremental costs associated with further recent Trent 1000 in-service issues, the mitigating actions we continue to take across the group enable us to be confident that our FY18 guidance for Group FCF of around £450m +/- £100m remains unchanged.
CHW (London – 14h June 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785