Rolls boss to cut engineer's bloated management
Mr East is also set to reveal his intention to cut costs at the aircraft and marine engine manufacturer, having earlier this month overseen Rolls’ fifth profit warning in less than two years.
He began the review soon after taking the controls at Rolls in July, but his tenure following John Rishton got off to a portentous start when he put out a profit warning just days into the job.
Setting out a clear timetable to the City of his plans to overhaul Rolls is understood to be a priority for the chief executive, who is under increasing pressure from US-based activist investor ValueAct, which took a major stake in the company weeks after his arrival in the top job.
Last week ValueAct near doubled its holding to 10.01pc, making it by far the largest investor in Rolls, and adding weight to its requests to take a seat on the board and cut costs.
“The review is the first step in restoring investor confidence,” a source close to Rolls’s management said, referring to the calamitous run of downgrades that have seen the engineer’s shares collapse from almost £13 two years ago to 552p at the end of last week.
Cutting executives could alleviate some investor concerns. Mr East is understood to think the current ratio of one senior manager for ever 25 employees slows down the Rolls’ ability to react to events and this is a major factor in its recent troubles.
“The problem is information about what is happening in the market is not being acted upon fast enough,” a source at Rolls said, adding that Tuesday’s review will not include numbers of expected job losses. “It takes too long to realise something has changed and then to do something about it. There’s a lack of accountability when there are so many people between the guys on the shop floor and the executives.”
Such lethargic responses are thought to have been a factor in the most recent profit warnings, where a slowdown in demand for the company’s bestselling Trent 700 engine should have been anticipated because an aircraft that used it was being upgraded. This meant that airlines were unlikely to buy the current jet, instead holding off until the improved version came out.
Some major investors in Rolls are reported to be supportive of ValueAct’s campaign to win board representation, believing its presence could provide insight that it is currently lacking.
Mr East is understood to be clear that changes need to be made but what he sees as a “pace and simplicity” approach will not result in an immediate fundamental shake-up of Rolls.
“This needs to be done and fixed costs have got to be reduced but Warren is broadly happy with the shape of the business,” said the source, adding that a break-up to dispose of the under-performing marine division that some have called for is not on the cards.
The chief executive is also distancing himself from predecessor Mr Rishton, under whom Rolls was seen to be poor at communicating with investors and analysts. Mr East is expected to set out a simplified policy of guidance, giving direction of travel rather than a series of precise targets which he believes are “unhelpful” and “just as likely to be precisely wrong”.
Tuesday’s update is likely to be welcomed in the City where many analysts are at a loss of how to value the company.
“We’ve pretty much torn up our models for Rolls,” said one, speaking on the condition of anonymity. “How do you value a company that throws out profit warnings so often and has no cashflow for the next two years?”