Rolls-Royce warns its profit could fall further this year

February 13, 2015, 12:58 PM UTC
Photograph by Christopher Furlong — Getty Images

British engineer Rolls-Royce has warned profits this year could fall by as much as 13% on top of an 8% drop last year, saying the low oil price had increased uncertainty for many of its markets and customers.

The world’s second-largest maker of aircraft engines after U.S. group General Electric had already cut its 2015 forecasts in October, when it shocked the market by warning there would be no growth this year.

The company said on Friday it now expected to make a pretax profit of 1.4 to 1.55 billion pounds ($2.2-2.4 billion) in 2015, a drop of up to 10% points on its previous forecast in October for profits to be up to 3% lower.

However, analysts had already been expecting a drop in profit this year to 1.481 billion pounds before tax, in line with the mid-point of Rolls-Royce’s new range.

Shares in the company were lower, holding the partial recovery since October’s shock profit warning, when the price fell by 16% in one day to a two-year low of 787.5 pence.

At the time the company said the market for its main aircraft engine business would strengthen but customers in the oil and gas, mining, construction, industrial and agricultural sectors were cancelling or delaying orders.

“For a company that had a bit of a stinker last year, it does look like it’s settling down. There’s probably more here to say things are steadying than to worry about,” said Espirito Santo analyst Edward Stacey, who has a “buy” rating on the stock.

On Friday Rolls-Royce said it made an underlying pretax profit last year of 1.617 billion pounds, down 8% on the previous year but slightly ahead of the average of analysts’ forecasts of 1.601 billion pounds.
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Investors in the company have had a rough ride over the past 12 months and the shares are still down 25 percent since a profit warning this time last year, blamed on declining U.S. and European military budgets, ended a decade of continuous growth.

In widening the range for its profit forecast for this year the company reiterated it was also seeing lower demand for propulsion systems and related services in its marine business which supplies the offshore oil and gas industry, as well as cutbacks from customers who use its equipment in power generation, construction and mining projects.

Additionally the company said that past delays in some aircraft development projects, the two biggest being Boeing’s 787 and Airbus’s A350 widebody jets, has meant new engine production capacity which Rolls-Royce has already put in place is being under-utilised.

“We’ve broadened that (forecast) band because of our growing uncertainty,” Chief Executive John Rishton told reporters.

However, he said he was confident in the performance of the business in the longer term.

“We’re clear about how to address the short-term challenges and we’re taking decisive action that will make us a stronger company and return us to profitable growth,” he said.

The company is already in the throes of a rationalization program to improve profitability in its aerospace division, which accounted for almost half of 2014 revenues and has benefited from soaring demand for more fuel-efficient engines for passenger jets but has lagged market leader General Electric on profit margins.