Rolls-Royce announces that it is embarking on a further simplification of the business, including the evaluation of strategic options for our Commercial Marine operation and a reduction from five operating businesses to three core units based around Civil Aerospace, Defence and Power Systems. As part of this exercise, we plan to consolidate our Naval Marine and Nuclear Submarines operations within our existing Defence business, and Civil Nuclear operations within our Power Systems business. This will facilitate a more fundamental restructuring of support and management functions in particular.
These actions are designed to align our business more closely with our strategic vision to pioneer cutting-edge technologies that deliver vital power. It will allow us to better capitalise on our relationships with Defence customers and our market leading widebody position within Civil Aerospace, while strengthening our technology capabilities across a broad range of power generation applications. We would expect the subsequent restructuring to deliver an additional reduction in costs and assist us in improving performance from our core businesses and the whole Group. We are in the process of defining this restructuring and further details will be given at the time of our 2017 financial results on 7 March 2018 and a fuller discussion at a Capital Markets event later this year.
Chief Executive Warren East said: “Building on our actions over the past two years, this further simplification of our business means Rolls-Royce will be tightly focused into three operating businesses, enabling us to act with much greater pace in meeting the vital power needs of our customers. It will create a Defence operation with greater scale in the market, enabling us to offer our customers a more integrated range of products and services. It will also strengthen our ability to innovate in core technologies and enable us to take advantage of future opportunities in areas such as electrification and digitalisation.”
“Alongside the simplification into three operating businesses, we must continue to address the cost and complexity of the structures that support and serve these businesses, including our corporate head office, with greater decisiveness. Taking this action now will help secure the long-term benefit for our business and stakeholders of the growing cash flows that will be generated over the coming years. At the same time, our operational teams must continue to focus on managing in-service issues within Civil Aerospace and delivering the current increase in engine production.”
Strategic review of Commercial Marine
Since 2015 our Marine business has responded to weak demand for products and services for the offshore oil and gas market, which significantly impacted its profitability. It has divested non-core businesses and reduced the number of sites from 27 to 15 – an overall reduction in footprint of 40%. It has managed a reduction in its workforce by 30% to 4,200, with the majority now based in the Nordic region. At the same time, the business has been investing in new facilities and new technologies and become an industry leader in the fields of ship intelligence and autonomous vessels, culminating in June 2017 with the successful demonstration, in Copenhagen harbour, of the world’s first remotely operated commercial vessel. Given the progress the business has already made, it is now an appropriate time to conduct a strategic review of Commercial Marine. This review will be undertaken during 2018 and we will update the market of the outcome at the appropriate time.
Warren East said: “This is the right time to be evaluating the strategic options for our Commercial Marine operation. The team there has responded admirably to a significant downturn in the offshore oil and gas market to reduce its cost base. At the same time, we have carved out an industry-leading position in ship intelligence and autonomous shipping and it is only right that we consider whether its future may be better served under new ownership.”
Regardless of the outcome of this strategic review, Rolls-Royce will retain the Marine operations which supply complex power and propulsion systems to Naval customers, including the Royal Navy and US Navy. During the first quarter of 2018, these Naval operations will become part of an enlarged Defence business named Rolls-Royce Defence, comprising the current Defence Aerospace business and our Nuclear Submarines operation. We will also continue to have a successful engine business serving marine customers within Power Systems.
In 2016, Marine contributed £1,114m revenue and generated a loss of £27m. Within this, the Commercial Marine business, which supplies equipment and vessel design across the oil and gas, merchant and other commercial markets, accounted for 75% of revenues while the Naval operations accounted for 25% and achieved a small profit. Marine continues to be impacted by weak demand for products and services for the off-shore oil and gas market, as we said on 9 November 2017, and will continue to pursue cost reduction opportunities.
Integration of Nuclear business
In order to further simplify our business from five operating businesses to three focused units, we intend to integrate our existing Nuclear operations into our Defence and Power Systems businesses. Our Nuclear Submarines operation, which is the sole provider and technical authority for the Royal Navy’s nuclear submarine fleet, will form part of Rolls-Royce Defence, while our Civil Nuclear operations will be placed within Rolls-Royce Power Systems, which already provides services to the nuclear industry such as emergency diesel generators.
We expect these changes to take effect during the first quarter of 2018. In 2016, our Nuclear business reported revenues of £777m and generated a profit of £45m. Our Submarines operation accounted for 79% of revenues and our Civil Nuclear operations accounted for 21%.
Restructuring of support and management functions
The simplification of our operating businesses into three focused units will enable them to operate at greater pace, but the full benefits can only be realised if we undertake a more fundamental restructuring, in particular of our support and management functions, and take a highly disciplined approach to capital allocation on investment expenditure and R&D spend. We will also be taking further measures to streamline processes and reinforce behavioural change, accelerating the work we have already done to drive simplicity.
Chief Financial Officer Stephen Daintith, said: “We must address the imbalance and duplication between our corporate functions and our three business units, as well as the cost of our corporate head office. Costs and complexity within our business remain too high, despite the delivery of the transformation activities announced in November 2015 which will achieve the committed fixed cost reduction rate of over £200m from the end of 2017. We are taking decisive action now in order to secure and enhance the long-term benefit of the cash flows that will be generated over the coming years.”
Although the potential impact on our workforce remains to be quantified, we do not anticipate any reduction in the skilled operational and engineering roles that we require to support our current ramp-up in Civil Aerospace engine production. We will honour commitments made to workers’ representatives in the UK and elsewhere, including those which enabled last year’s £150m investment in new and existing Civil Aerospace facilities.
Further broad details of the restructuring will be given alongside our 2017 financial results. Within those results we will report our Marine and Nuclear businesses as separate units, as in prior years. In addition, we plan to hold a Capital Markets event later this year at which we will be in a position to provide a fuller discussion of the expected benefits of the restructuring programme.