6th Jul 2015 09:57
LONDON (Alliance News) - Rolls-Royce Holdings PLC on Monday maintained its revenue guidance for 2015 but cut its underlying profit forecast as it said it is facing more challenges in its Civil Aerospace and Marine divisions and said it expects to take a significant hit in 2016 from the transition of its Trent 700 engine programme, while adding it will halt its GBP1 billion share buyback amid deteriorating free cash flow.
The profit warning and curtailment of the share buyback sent the FTSE 100 stock earthward on Monday, down 9.6% to 773.90 pence and comfortably the worst blue-chip performer. Shares in Rolls-Royce have fallen by 11% so far in 2015 and are down 27% in the past 12 months, pushed lower by a slew of profit warnings in 2014 and a big drop in reported pretax profit for that year.
The aerospace and engineering group said its revenue guidance for 2015 remains unchanged but said its underlying profit guidance for the division has been downgraded to GBP1.33 billion from GBP1.48 billion, compared to GBP1.4 billion to GBP1.55 billion previously, primarily due to the deterioration in its offshore unit of its Marine division.
And while its revenue guidance for its Civil Aerospace division 2015 remains in place, the group now expects to take a GBP300 million hit in 2016, due to the changes in demand and pricing for the Trent 700 programme, which is transitioning to the Trent 7000 engine, along with business jet and regional aftermarket weakness.
In addition, the group said that is now expects free cash flow for 2015 to be between a negative GBP150 million and positive GBP150 million, compared to its previous guidance of positive GBP50 million to GBP350 million. Just for the first half of the year, it expects its free cash flow to be between negative GBP570 million and negative GBP620 million, compared to negative GBP347 million in the first half of 2014.
Given this weaker cash flow outlook, the company said it will discontinue its current GBP1 billion share buyback programme, having completed half of it in the first six months of the year.
In the Civil Aerospace division, the company expects underlying profit and revenue to be within its previously-guided range of GBP800 million and GBP900 million and GBP7 billion and GBP7.3 billion respectively. But it now expects the impact of lower Trent 700 engine deliveries to be greater than its initial estimates, due to further negative developments in demand for original equipment, spare engines and related pricing. In addition to this, lower-than-expected demand for engines for business jets and softer regional aftermarket conditions also will hit its profit.
In 2014, Civil Aerospace had been a bright spot for Rolls-Royce, as it posted a huge drop in pretax profit to GBP67 million from GBP1.7 billion due to a big rise in financing costs. Its underlying pretax profit was down to GBP1.62 billion from GBP1.76 billion, as revenue fell to GBP13.74 billion from GBP14.64 billion. The revenue drop came from a decline in government spending and a weaker performance in its Land and Sea business, but Civil Aerospace performed well, helping to offset the challenges elsewhere.
Underlying figures exclude the impact of mark-to-market adjustments in Rolls-Royce's hedge book, post-retirement financing and the effects of acquisition accounting.
In the Marine business, underlying profit for 2015 will be between breakeven and GBP40 million, down from Rolls-Royce's previous guidance for GBP90-120 million from the division. The group is reviewing further cost cuts and restructuring in the Marine arm in order to improve its performance, including asset impairments, and it expects these measures to result in a GBP70 million to GBP100 million exceptional charge in its full-year results.
The group expects to take a GBP85 million hit in each of its 2015 and 2016 financial years from its Marine business due to continuing weakness in offshore markets.
Back in May, Rolls-Royce said it would cut a further 600 jobs in the Marine division, in addition to the 2,600 it was already planning, but its warning of an exceptional charge indicates it intends to go further still with the cost-cutting, as it had said in the announcement of the cuts that they would have a "broadly neutral" impact on its 2015 profit.
In 2014, underlying revenue in the Marine arm dropped by 16%, partially due to currency translation effects but also due to a 17% fall in original equipment sales and a 15% drop in services revenue. The original equipment sales were pulled lower by weaker pricing and an anticipated decline in offshore, resulting from the weak order intake in 2013. Service revenue declined as shipowners deferred overhaul and maintenance spending decisions.
Rolls-Royce does, however, expect these problems to be balanced by good growth in is widebody jet aftermarket division and a larger-than-expected benefit from the reversal of a balance sheet provision it made on the launch of the Trent 100 engine, driven by a significant improvement in operating performance and by better profit from its TotalCare contracts. These benefits are anticipated to give the company a financial boost of around GBP200 million, ahead of its previous expectations.
But for 2016, the company said it is set to take a hit of around GBP300 million in the Civil Aerospace business, owing to the problems facing the Trent 700 programme, plus the business jet and regional aftermarket weakness.
The group does expected an improving large engine aftermarket, led by a higher installed base, and a net GBP90 million benefit from the restructuring activities it will undertake in 2015, to largely offset anticipated lower levels of TotalCare revenue and other adjustments for 2016. It added that many of these changes will not have an impact on its cash flows and it does expect cash conversion to improve.
Rolls-Royce said it expects revenue growth over the next decade, driven by its Trent XWB, 1000 and 7000 engine programme, and said that while Civil Aerospace profit is being constrained in the near term by the transition away from the Trent 700 platform, the company said it remains confident the investments it has made to transition its production will create a robust platform for the future.
It also expects the performance of its Marine and Power Systems businesses to improve on the back of cost-cutting plans and better operational focus.
"I have joined Rolls-Royce because I recognise the fundamental strength of the business and the scale of the opportunities available to it. This is a company with exceptional technology and outstanding long-term prospects," said Warren East, Rolls-Royce's chief executive, who started in his role last week following the retirement of his predecessor John Rishton, who had been at the helm since 2011. East is the former chief executive of ARM Holdings PLC, the FTSE 100-listed chip designer.
"However, I am clearly disappointed by today's announcement and the impact this will have on our investors and employees. Notwithstanding the market developments, it is our responsibility to build a business that is sustainable and resilient no matter what is thrown at us and this will be my fundamental priority for the next few years," East added.
"In the near term we have to manage the important transition from the Trent 700 to the new Trent 7000 and build our capacity to service the Trent 1000 and XWB programmes. In addition, our Marine business needs to overcome its offshore market headwinds and rebuild a consistent trend of improving revenues and margins. Our immediate priority is to find the performance improvements needed to deliver these goals and ensure that this world-class business continues to meet the needs of its customers and shareholders alike," East added.
Keith Bowman, an equity analyst at Hargreaves Lansdown, said the profit guidance downgrade is "highly disappointing".
"Some kitchen sinking by the newly appointed Chief Executive may underlie today?s announcement, with the former ARM CEO determined to clear the decks going forward. For now, despite management changes and a still sizeable order book, current consensus analyst opinion of a Hold is likely to come under further downward pressure," Bowman added.
Mike van Dulken, the head of research at Accendo Markets, said that it will be of "little solace" to investors that Rolls-Royce held its revenue guidance for 2015 in the update, given profit and cash flow expectations were downgraded, the outlook for demand and pricing for Trent 700 looks bleak and the share buyback has been cancelled halfway through.
The guidance downgrade comes after a note published by Deutsche Bank on Friday, in which it said that it expects a tough 2015 for Rolls-Royce but also predicted that the company will struggle to deliver any earnings growth in 2016. Deutsche cited a greater drop-off in Trent 700 orders, a decline in equipment deliveries for business jets and material ongoing woes in the Marine business.
In updating its forecasts to reflect these issues, Deutsche said it no longer expects civil aerospace to be capable of delivering earnings before interest and tax growth in 2016, and it cut its earnings forecasts for the division by 10% for 2016 and 9% for 2017.
By Sam Unsted; [email protected]; @SamUAtAlliance
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