Rolls-Royce Surges After New CEO Vows Higher Returns in Overhaul

(Bloomberg) — Rolls-Royce Holdings Plc surged the most in more than two years after new Chief Executive Officer Tufan Erginbilgic embarked on a strategic review, saying the UK engineering firm has underperformed financially for years.

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The stock jumped as much as 20%, the most since Nov. 2020. Rolls-Royce also reported earnings that beat estimates, with adjusted operating income coming in at £652 million for last year, above the £489 million analyst estimate. The company predicted adjusted operating profit of £800 million to £1 billion this year, with free cash flow of as much as £800 million.

The company said it’s identified seven areas where it will seek improvements — from working capital to investment priorities to culture — as Rolls-Royce aims to boost returns, regain an investment-grade credit rating and resume shareholder payments. There will be no dividend for last year, Rolls-Royce said in a regulatory filing on Thursday.

While Erginbilgic wouldn’t specify areas that might leave the group as part of the review, he emphasised that Rolls-Royce’s established businesses around power and aerospace have “great potential to create value.” Rolls-Royce will reveal the findings of its review in the second half of the year.

“We are focusing on commercial optimization,” the CEO said on a call with journalists. “This is about getting the right reward for the risks we take and the value we create for our customers. It will focus on the civil aerospace and power systems.”

Analysts at Agency Partners said Rolls-Royce should “have a hard look at the nuclear project” as part of the review. The analysts said cash flow beat estimates and the guidance for this year is also higher than consensus.

“Overall, no bad surprises, very much a transitional year,” analysts Nick Cunningham and Sash Tusa wrote in a note.

Rolls-Royce, long seen as the crown jewel of UK engineering, struggled as long-haul air travel — which its engines power — was among the slowest parts of the aviation industry to recover from the virtual standstill during the Covid-19 pandemic.

Erginbilgic, who spent two decades at BP, is pushing for Rolls-Royce to transform its operations, calling it a “burning platform,” the Financial Times reported last month. He’s already shaken up operations after moving out the head of the civil aerospace unit while also bringing in BP veteran Nicola Grady-Smith as his chief transformation officer.