The Rolls-Royce share price fell 18% this morning after it was announced that chief executive Warren East is set to leave his post at the end of the year. The news comes after a difficult 12 months for Rolls-Royce's shares, which have been buffeted by the ebb and flow of the pandemic and the travails of the travel sector. That said, the stock has recovered well from the dark days of October 2020, when it traded as low as 34.70p.
Since those lows, the Rolls-Royce share price has more than trebled. However, over the last six months the shares have traded choppily between peaks of 150p in November and an element of buying interest just above the 100p area, with technical resistance just above the 200-day moving average.
Rolls-Royce makes profit, but CEO announces exit
Today’s full year numbers show Rolls-Royce eked out a tiny profit of £10m, after last year’s £3.1bn loss. However, this news has been overshadowed by the announcement that CEO Warren East is stepping down at the end of 2022, after eight years in the top job. This is a huge blow for the business at a key stage in the latest turnaround process.
East played a crucial role in the turnaround plan that was launched at the start of his tenure, and he has been at the forefront of this latest one. The last thing the business needs in choppy waters is for its captain to abandon ship.
On the numbers, underlying revenue from continuing operations came in at £10.9bn, generating an underlying operating profit of £414m. Free cash flow has improved but was still negative to the tune of £1.44bn, with net debt rising to £5.16bn.
The balance sheet is in better shape due to the £2bn of disposals announced in the last few months, including the sale of ITP Aero for €1.7bn, with that deal expected to complete in the first half of this year.
Cost-cutting measures
Rolls-Royce has taken significant steps in the last year to reduce head count and cut costs, with management saying that they were on course to cut a further £1.3bn by the end of 2022. Last year, measures taken to bolster the finances delivered an unexpected half-year profit of £393m, the company announced in August.
However, the jet engine maker’s fortunes remain closely linked to civil aviation engine flying hours (EFH), and while these have improved thanks in part to the return of transatlantic flights, air travel has been severely impacted by coronavirus restrictions and, most recently, the Omicron variant. As a result, the company missed its full-year target for EFH to reach 55% of 2019 levels by the end of 2021. That said, today’s numbers show that in the second half of the year EFH reached 57%, which could be described as a small victory.
Rolls-Royce has also had some good wins on the defence side of the business in recent months, including a £1.9bn deal with the Pentagon which will see Rolls-Royce’s F-130 engines used to power the B-52 Stratofortress for the next 30 years.
Business diversification
Rolls-Royce continues to diversify its operations. The company's small modular reactor (SMR) business is gaining traction after the UK government put in £210m on top of £145m of private investment, as Rolls-Royce steps up its role in helping the UK cut its carbon output. In December, the company announced that Qatar’s sovereign wealth fund would invest £85m in the nascent mini-reactor business.
Meanwhile, the company's civil aerospace unit has secured 58 engine orders for the Airbus A350 freighter, as the division's underlying revenue came in at £4.5bn, down 10% versus last year. Underlying losses in the unit fell to £172m.
Rolls-Royce has also announced that its power systems unit is developing low-emission MTU yacht engines powered by methanol amid a drive to diversify away from its core business of civil aviation.
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