Warren East picked a bad day to announce he’ll be off from Rolls-Royce at the end of the year but, then, his entire spell as chief executive has been an exercise in managing the unexpected. He inherited troublesome Trent 1000 engines, issued two profits warnings in his first six months in 2015 and had to cope with a thumping fine from the Serious Fraud Office for events before his time.
Just when the clouds cleared, and £1bn of annual cashflow could be glimpsed, the pandemic struck, obliterating income that depended on aircraft with Rolls engines recording hours in the air. By the autumn of 2020, the company’s survival was in doubt. The painful remedy was a £7bn package comprising a hefty rights issue, extra borrowing, asset disposals and a heavy round of job losses.
Against that backdrop, the direct fresh uncertainty for Rolls created by Russia’s invasion of Ukraine could almost be viewed as modest. Annual revenues from Russian airlines may dwindle towards zero with sanctions, but the current figure (£170m) is tiny in a group context. A more serious problem may be sourcing titanium for engines since Rolls buys 20% of its supply from Russia but, in the end, that headache ought to be manageable.
The effect of indirect uncertainties, though, is hard to assess. Further delay to the recovery in the long-haul civil aviation market is now the way to bet, especially if oil prices stay above $100 a barrel, but the degree is anyone’s guess. In the circumstances, an underwhelming forecast of “positive free cashflow” and “broadly unchanged” operating profit margins of 3.8% in 2022 wasn’t much comfort for investors who crave medium-term predictability. The shares fell 13%.
The shame is that East has done an excellent job. The boast that Rolls is now “a more balanced and more sustainable business” is basically correct, especially the second part thanks to net zero efforts in electric power systems, clean jet fuel, small modular reactors and the like. East has 10 months left, which probably won’t be long enough for him to prove his point in terms of the share price. Keep going, though.
Chris O’Shea plays it savvy
Chris O’Shea, chief executive of Centrica, owner of British Gas, is displaying more savvy than his predecessor. Outrage over boardroom bonuses was almost an annual occurrence during Iain Conn’s ill-starred reign of credit downgrades, dividend cuts and a crumbling share price. By contrast, O’Shea is forfeiting a £1.1m bonus in sympathy with customers facing rocketing energy bills. Sensible.
It remains to be seen whether the move, plus a return of £27m of furlough money, will count for anything amid continuing talk of windfall taxes, where Centrica is theoretically exposed thanks to its remaining North Sea oil and gas fields that were the biggest driver of the group’s doubled operating profits of £948m for 2021. But one has to concede that O’Shea has a point about regular taxes looking windfall-ish from the point of view of the Treasury: Centrica’s bill was £480m, versus virtually nothing a year ago.
Whatever happens on that front, O’Shea is definitely correct in his call for banking-style “prudential regulation” for retail energy suppliers given that failed companies invariably impose costs on everybody’s customers. He means “fit and proper” tests and, crucially, ring-fencing of customers’ deposits. Centrica has recently adopted the latter policy voluntarily but all firms should be made to fall into line sharpish. Critics may spy a plot to favour large suppliers. Actually, it’s a matter of treating punters fairly.
Lloyds have been this way before
The entire UK financial industry seems obsessed with the idea of catering for the needs of the “mass affluent”, by which they mean people with investable savings of more than £75,000, and here comes Charlie Nunn, new chief executive of Lloyds Banking Group with his version.
One sees the appeal. We’re told that, on average, Lloyds customers hold 2.4 financial products with the bank but have seven overall. So use all those data insights to grab a bit more business from a semi-captive audience. That’s the theory, but banks (including Lloyds) have been round this cross-selling track in the past and have found that specialist providers tend to defend their territory fiercely.
To be fair, Lloyds, by virtue of its sheer size, probably stands a fair chance of success. And Nunn set a few hard targets for extra revenues from a £4bn investment plan that, it should be said, is wider than just wealth management. After almost a decade of no growth at Lloyds during its recovery phase, he had to try something new. But one can’t call it a bold new direction. That may be a good thing, of course.