Rolls-Royce set for more cost cuts after record loss

Rolls-Royce has been hit by the slump in sterling and a hefty corruption fine. Picture: PA
Rolls-Royce has been hit by the slump in sterling and a hefty corruption fine. Picture: PA
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Further cost cutting is in the pipeline at Rolls-Royce after the engine maker posted the biggest loss in its history.

The blue-chip giant racked up a deficit of more than £4.6 billion last year after being hit by the pound’s plunge and a corruption scandal.

We have to look after the short term or there won’t be a long term

Warren East

Yesterday’s results showed that the mammoth pre-tax loss came after the group was forced to make a £4.4bn write-down due to the slump in sterling since the Brexit vote, as well as its £671 million penalty to settle bribery allegations.

READ MORE: Rolls-Royce agrees £671m settlement for corruption claims

On an underlying basis, Rolls reported pre-tax profits of £813m – nearly half the £1.4bn generated in 2015.

The firm is already going through a restructuring programme after a string of profit warnings, but said it needed to trim more costs. It is flagging a “modest” performance improvement in the current year.

Chief executive Warren East, who is leading the overhaul, said the business portfolio was “broadly correct”, but he needed to review about a fifth of its operations, and would decide on further actions over the coming months.

He said: “With my new team in place, our focus is turning towards the group’s long-term goals. Over the next few months we will conclude our review of our strengths and investment opportunities and set out an appropriate vision for the business.

“2017 remains a challenging year and we have lots of operational improvements to do. We have to look after the short term or there won’t be a long term.”

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The huge annual loss follows a tough past few years for the aero and marine engine maker after several profit alerts and last month’s corruption fine to settle a case brought by the Serious Fraud Office (SFO) and authorities in the US and Brazil.

Sir Brian Leveson said on handing down his written judgment in January that the long-running inquiry revealed “the most serious breaches of the criminal law in the areas of bribery and corruption”.

Rolls will pay the £671m fine over five years, with a £293m payment this year, but has taken the full cost as an impairment charge against 2016 profits.

The group announced its first dividend cut since 1992 a year ago to maintain balance sheet health amid plunging profits. In its latest results, it said it would pay a 7.1p-a-share final dividend or 11.7p a share for the full year, down from 16.4p for 2015.

George Salmon, equity analyst at Hargreaves Lansdown, noted: “After already declaring the £671m in fines relating to historic bribery and corruption, and sterling’s weakness dragging the value of Rolls-Royce’s currency hedges down, it’s unsurprising to see the group declare a record loss this year.

“Going forward, its UK cost base and overseas revenues means the weak pound will be a tailwind for the group, likewise the trend for increasing global long-haul travel. However… a recovery is unlikely to happen overnight.”

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