Rolls-Royce issues profits warning as group experiences headwinds
AERO engine manufacturer Rolls-Royce has issued a new profit warning and suspended its current share buyback programme, blaming headwinds across its civil aviation and marine businesses.
The announcement caught many by surprise as it was unscheduled and several analysts have suggested the company could be hoping to catch many investors off-guard as attention is focused on what is happening in Greece.
Performance for 2015 for the bulk of the group’s business is expected to be broadly in line with previous guidance. However, further deterioration in the offshore market is now expected to impact full year profit for Marine.
Guidance for 2015 revenue is unchanged for the full year. Group underlying pre-tax profit is now expected to be between £1,325m to £1,475m, compared to previous guidance of £1,400m to £1,550m, reflecting the deterioration in offshore. Free cash flow for 2015 is now expected to be a maximum of £150m, compared to previous guidance of between £50m and £350m.
“Given the weaker near-term cash outlook, we will discontinue the current share buyback programme, having completed £500m of the planned £1bn programme in the first half of the year,” it added.
In Civil Aerospace, it expects 2015 underlying revenue and profit within the guided range provided in February of £7,000m to £7,300m and £800m to £900m respectively.
However, it said it now expected the impact of reduced Trent 700 deliveries to be greater than initial estimates, reflecting further adverse developments in the demand for OE (original equipment) and spare engines and related pricing.
“In addition, lower-than-expected demand for engines to power business jets and a softening regional aftermarket will also adversely impact profit,” it said.
“These market headwinds should be balanced by good growth in our widebody aftermarket and a larger-than-expected benefit from the reversal of a balance sheet provision on the Trent 1000 launch, as a result of an expected significant improvement in operating performance, and by improved retrospective TotalCare contract profitability. The value of the provision release and contract profitability are expected together to contribute around £200m, somewhat more than previously expected.”
Taken together, the recent changes in demand and pricing for the Trent 700 programme (which will be known as the Trent 7000), combined with the reduced demand for business jet engines and a softer regional aftermarket, are expected to create a £300m net Civil Aerospace profit headwind into 2016, it added.
It said an improving large engine aftermarket, led by a higher installed base, and the net £90m benefit of restructuring should largely offset the likely lower level of TotalCare service agreements and other adjustments in 2016. Many of the changes will not impact cash flows and as a result cash conversion is expected to improve.
