Rolls-Royce shares tumble on weak profit outlook

February 13, 2014 - 10:31:11 am

LONDON: Britain's Rolls-Royce said sharp cuts in defence spending by the U.S. and European governments would prevent any growth in profits in 2014, driving its shares down 12 percent and wiping almost 3 billion pounds of its value.

In a break from the decade-long profit growth that the firm has enjoyed, the world's second-largest aircraft engine maker behind U.S. group General Electric, said the "pause" in revenue and profit growth would follow a strong performance in 2013. 

It expects a return to growth in 2015. 

"We've defied gravity for a couple of years compared to many other companies and now we're having the impact come together in one year," said Chief Executive John Rishton on Thursday of the forecasted decline in defence revenues.     

The company expects a 15 to 20 percent fall in revenue and profit from Defence Aerospace and a modest reduction in revenue but modest growth in profit from the Marine unit in 2014, it said. 

He said he expected profitability across the company to be stronger in the second half of 2014, with growth to return in 2015 as the company ramps up production of aero engines. 

U.S. and European governments have been slashing defence spending in a bid to rein in ballooning budget deficits but the impact has been slow to hit some defence companies due to slow-decision making among lawmakers and the long-dated nature of defence equipment contracts. 

Rishton cited possible cuts by the United States on the size of its Lockheed Martin-built C-130 transport fleet, and the completion of delivery of two of its major export programmes, the Eurojet EJ200 engine to the Middle East and the Adour engine to India, as the reasons behind the expected decline. 

In Marine, the fall in revenues will be due to oil and gas customers choosing to defer investment decisions in 2014, he said. 

He declined to comment further on the company's failed talks to buy Finnish ship and power plant engine maker Wartsila  last year. 

"In short, Defence takes a sharp step back to where it was in 2010," Jefferies analysts said. 

"We saw it coming to a degree, but were wrong-footed by Defence doing better than we expected between 2011 and 2013."

Shares in Rolls Royce, which fell to a nine-month low in earlier trading, were 11.9 percent lower at 1068 pence at 0845 GMT. The shares closed at 954 pence on Feb. 12 a year ago.



Rolls-Royce has enjoyed strong profits and revenue growth over the last 11 years thanks to its civil aerospace unit, which generates about half of its sales. 

It has seen soaring demand for more fuel-efficient engines for planes made by Europe's Airbus and U.S. Boeing 

The company reported 2013 underlying pretax profit of 1.76 billion pounds or $2.92 billion, up from 1.43 billion pounds in 2012, and towards the upper end of analyst forecasts which were between 1.36 billion pounds and 1.89 billion pounds according to a Thomson Reuters survey of 19 analysts.

Underlying revenue rose 27 percent to 15.5 billion pounds.

The strong performance in part reflects the contribution for the first time of the joint acquisition of Tognum, a German diesel engine maker Rolls-Royce acquired with Daimler  in 2011.

Rolls-Royce's order book increased by 19 percent to 71.6 billion pounds. The dividend was up by 13 percent to 22 pence per share.

On costs, which Rishton focused on last year after describing them as "unacceptable", the company has made progress by cutting 11 percent of indirect headcount in 2013, and has been moving production away from high-cost countries, he said. 

He also said Rolls-Royce was helping Britain's Serious Fraud Office "completely" with its probe into the firm's dealings in Asia. 

Two men were arrested on Wednesday by the anti-fraud watchdog in connection with the investigation. (Reuters)