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Rolls-Royce to slash thousands of jobs in latest overhaul

Shares jump after jet-engine manufacturer says about one-third of the 4,600 staff cuts will occur by the end of this year

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"We have made progress in improving our day-to-day operations and strengthening our leadership, and are now turning to reduce the complexity that often slows us down," says CEO Warren East.

London

ROLLS-ROYCE Holdings plc will eliminate 8 per cent of its workforce in chief executive officer Warren East's biggest step yet to overhaul the UK jet-engine manufacturer and save more than half a billion dollars a year.

The shares jumped after London-based Rolls said about one-third of the 4,600 staff cuts will occur by the end of this year. Rolls is seeking to save £400 million (S$716 million) annually by the end of 2020, the company said in a statement on Thursday, confirming a Bloomberg News report.

The latest retrenchment by Mr East, who took charge in 2015, extends the total jobs eliminated under his leadership to about 10,000.

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The former head of semiconductor developer ARM Holdings plc has been working to simplify Rolls's convoluted structure and improve earnings visibility since taking charge of the manufacturing behemoth. The executive, 56, has been frustrated by the slow pace of change and inability to respond to shifts in demand in core markets.

"We have made progress in improving our day-to-day operations and strengthening our leadership, and are now turning to reduce the complexity that often slows us down," Mr East said in the statement. "We are fundamentally changing how we work."

Rolls advanced as much as 4.2 per cent in early London trading. The stock is little changed this year. Most of the job losses will take place in the UK, where 26,000 of the company's 55,000 workforce is based.

Mr East has been signalling the moves for months, as Rolls-Royce contends with pressure from activist shareholders, engine durability issues and a price squeeze from major customers Boeing Co and Airbus SE.

Rolls will spend £500 million to implement cutbacks, the company said, adding that its guidance for full-year free cash flow remains unchanged.

Analysts had expected savings from the restructuring to be as much as £250 million.

The cost review was announced in March after ValueAct, Rolls's biggest shareholder, declined to extend a two-year old agreement that it wouldn't interfere in management's plans to turnaround the embattled engineer.

Mr East is trying to bring Rolls's laggard profit margins closer to the historic performance of rivals General Electric Co and Pratt & Whitney.

Rolls-Royce said last month that its moves would mainly affect middle management and back-office staff in the company's human resources, finance, IT, legal and marketing departments.

The company has also said it will quit its base in one of London's most upmarket districts for cheaper offices.

Mr East hired US consultants Alvarez & Marsal in March to secure a new round of savings as Rolls targets £1 billion in free cash flow by 2020. The company is also clamping down on discretionary spending to help rein in costs this year as it seeks to deliver on financial targets amid spiralling expenses from durability issues afflicting the Trent 1000 engine that powers Boeing's 787 Dreamliner.

Rolls-Royce has already shed layers of management, cut less-successful products and agreed to sell its fuel-injection unit in efforts to trim expenses amid a downturn in demand for marine engines and maintenance revenues from its business-jet turbines. The marine unit remains under review for possible disposal.

The company was plunged into crisis soon after Mr East joined as falling oil prices hurt sales of engines for specialist offshore ships, demand slumped for corporate and regional jets slumped, and some of the bigger planes powers by Rolls engines reached retirement age.

More recently, Mr East has had to confront issues surrounding unexpectedly high levels of wear on Dreamliner engines, forcing him to slash short-term spending to safeguard earnings and cash-flow goals.

The latest slimming-down could propel Rolls stock to "take a large step forward", Sandy Morris, an analyst with Jefferies, said in a research note.

Mr East must now draw a line under years of retrenchment and pessimism, the analyst said, and use the reorganisation as a springboard for success. "To fulfill its ambition, we think Rolls-Royce must look and sound the part," he added. BLOOMBERG