Rolls-Royce shares dip despite success in cost-cutting turnaround plan

 
Francesca Washtell
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Rolls-Royce has said it will set sail on many of its marine engineering sites (Source: Rolls-Royce)

Rolls-Royce's share price dropped today despite the group saying its huge cost-cutting drive is likely to be at the top end of its targeted range.

The manufacturing giant is one year in to a turnaround programme to reset its finances after posting five consecutive profit warnings in the 20 months leading to November 2015.

In a trading update today, the UK-based group said its 2016 outlook remained unchanged and its cost savings are expected to be at the top end of its £150-200m range.

Chief executive Warren East said at an investor event today that the transformation has taken slightly longer than he would have hoped, as it has taken longer than anticipated to appoint a string of new executives including a new chief operating officer, Simon Kirby, and a new chief financial officer, who will join early next year.

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The group said there were "no signs of recovery yet" in offshore oil and gas markets and that its marine engineering and equipment making orderbook remained "very weak" with further falls in revenue expected next year.

Among some of its other divisions, it said civil aerospace demand remained strong, the defence outlook was "positive overall", though its power systems markets reflected weaker demand for industrial engines and service.

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Rolls-Royce's shares were down 2.6 per cent to 735p in early afternoon trading.

Although best known for the cars bearing its name, Rolls-Royce now designs and makes engines primarily for fighter jets, commercial aircraft, ships and nuclear submarines.

Accounting shake-up

Today the company also revamped the way it books some of its revenues. The firm often sells operation and maintenance (O&M) contracts alongside the engineering products it makes.

Previously, it recognised all of the expected revenues from O&M contracts, which usually extended months or years into the future, in one fell swoop when it sold its products.

This could be problematic for Rolls-Royce as many customers traded into products instead of repairing them, rendering the O&M contracts no longer required.

The only way Rolls-Royce could account for this was by adjusting revenues down to take into account the O&M income that was no longer going to come in.

So, while there is no cash impact for the firm, it means revenue for 2015 was restated £900m lower in its later trading update.

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