Rolls-Royce announced dividend cuts by almost half for the first time in 25 years. In the face of plunging profits, the UK-based engineering group has undergone severe employment cuts in both top and middle-level management, along with massive expenditure reduction.
Defying analysts' expectations of a 30% cut, the company ended up slashing the dividends by 50%, to 7.1p a share. As Rolls had already issued five profit warnings in two years, many had feared a sixth warning on Friday and were hugely relieved when the company halved its dividend component instead of totally scrapping it. In fact, the engine maker saw its shares jump 13%, to 602p, according to TheGuardian.
"That is absolutely a deliberate message," said chief executive Warren East, referring to the increase in shares despite a 12% drop in annual profits, to £1.4 billion from £1.6 billion. "It is a reflection of our confidence in the long-term potential of the business. I do feel we are on firmer ground than we were in the middle of last year."
East said restructuring in the form of operational transformation would be this year's focus, as it would bring "simplicity and pace" to the top-heavy hierarchy of the engine maker. Expecting this year to be reasonable with low profits, the chief executive stated that they had already identified areas of cost-savings that would save approximately £150-£200 million, as represented by The Financial Times. However, the initial costs of setting up the restructuring program could be anywhere between £75 million and £100 million.
Rolls-Royce is known for making engines for Boeing's 787 Dreamliners and Airbus A380 superjumbos, along with Britain's nuclear submarine fleet and parts for ships. While Rolls is confident that the civil aerospace market will improve over time and has already forecast a 4% growth, it is not so sure about the defense scenario. The company has faced huge losses due to reductions in defense spending, plunging oil prices and general fall in demand for corporate jets.
According to BBC News, the aero-engine manufacturer has 21000 employees, with 12000+ working at its Derby aerospace engines and submarines division and more than 3000 in Bristol. The restructuring plan also included job cuts which saw 50 out of its 200 senior managers being laid off. The company announced 3600 lay-offs in total last year, with plans of more downsizing doing their rounds.
What East termed as a "difficult year" saw challenges in terms of management, market conditions, and overall performance which the chief executive still deems to be in line with expectations. For this year, his statement, "Our outlook for 2016 is unchanged; despite steady market conditions for most of our businesses it will be a challenging year as we start to transition products and sustain investment in civil aerospace and tackle weak offshore markets in marine," seems to reflect a reasonably good approach.
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