13th Feb 2015 10:50
LONDON (Alliance News) - Rolls-Royce Holdings PLC shares were trading lower on Friday after the group reported a sharp drop in pretax profit following a 2014 hit by currency fluctuations, cuts to defence spending, and global macroeconomic uncertainty.
Rolls-Royce also said its 2015 results are likely to be broadly flat as conditions in some of its major markets continue to deteriorate.
Shares in the company were down 0.7% to 899.00 pence on Friday morning, one of the worst performers in the FTSE 100, though paring back losses slightly from their intraday low of 873.00p.
The FTSE 100-listed aerospace group said its reported pretax profit for the year to the end of December was GBP67 million, a massive decline against the GBP1.7 billion reported a year earlier. Its underlying pretax profit was down 8% to GBP1.62 billion from GBP1.76 billion last year. In October, issuing a warning on its revenue outlook for the year, Rolls had said it expected its underlying pretax profit for the year to be flat.
The reported pretax profit was driven lower by a big rise in financing costs over the year, up to GBP1.3 billion from GBP114 million last year, along with the impact of lower revenue.
Reported revenue for the year declined to GBP13.74 billion from GBP14.64 billion in 2013, hit by a decline in defence spending by governments in many countries and a weaker performance from its land and sea business, owing to weaker end markets. The drop was partially offset by growth in Rolls-Royce's Civil Aerospace business and by an improvement in its Defence aerospace services unit.
Underlying revenue for the year was down 6% to GBP14.59 billion, from GBP15.51 billion a year earlier. The drop was worse than the 3.5% to 4% decline in underlying revenue Rolls-Royce said it expected in October.
The group's underlying results strip out the impact of currency translation.
Along with the revenue decline this year, the group provided guidance on its 2015 performance, with underlying revenue expected to be broadly flat year-on-year at GBP13.4 billion to GBP14.4 million. It expects its underlying pretax profit for 2015 to be GBP1.4 billion to GBP1.55 billion. The guidance does not include the effect of currency translation.
In its revenue warning in October, Rolls-Royce had rolled back its statement in its 2013 full-year results, reported in February last year, that it expects growth to resume in 2015. On Friday, it further pulled back on any optimism for the coming year, saying the conditions in some of it major markets have deteriorated and noting the drop in the oil price is creating increased uncertainty for some of its customers, particularly in its Marine Offshore business.
It expects its earnings in 2015 to be weighted towards the second half, as happened in 2014, with a higher research and development charge to be booked in the first half but Civil Aerospace deliveries to be weighted to the second.
It also expects near-term headwinds to its cash position as it invests in the doubling of Trent engine deliveries. Full-year free cash flow for 2015 will be impacted by cash costs involved in its restructuring programmes, including the plan announced in November to cut 2,600 jobs over the next 18 months, and due to higher working capital requirements as engine volumes ramp up.
Free cash flow fell to GBP254 million in 2014, substantially down on the GBP781 million reported last year, owing to lower volumes and lower deposits in its Civil, Marine and Defence businesses.
Rolls-Royce said its total payout to shareholders for the year was 23.1 pence, up on the 22 pence paid last year.
The group's Aerospace business put in a mixed performance, with underlying revenue in the Civil Aerospace business rising slightly on the back of Trent engine orders, but the performance of its Defence arm suffering from a slowdown in orders.
Rolls-Royce's order book at year-end was up 5% to GBP73.7 billion, boosted by increases in the Civil Aerospace, Defence Aerospace and Power Systems businesses.
The Civil Aerospace order book increased by 5% in the year, boosted by a series of orders for its Trent engine range, including GBP4.5 billion in orders for Trent 7000 engines and TotalCare service orders for Airbus A330neo planes.
Underlying Civil Aerospace revenue was up 3%, with 8% growth in original equipment sales but a 1% decline in services revenue. The original equipment performance was driven by a ramp-up in Trent 1000 engine production, Rolls-Royce said, though this was offset by a 9% drop in business jet engine deliveries.
But the performance in the Civil Aerospace division was offset by weakness in its Defence Aerospace arm, where underlying revenue dropped by 20% to GBP2.07 billion. The drop was driven by a 41% fall in underlying original equipment revenue over the year, hit by lower volumes across several work programmes, including major deliveries in 2013 for two export contracts which were close to completion in Saudi Arabia and India.
Underlying profit in the Defence arm was down 16%, with the decline in revenue somewhat offset by cost cutting and a favourable mix towards aftermarket sales.
Within its Land & Sea business, Rolls-Royce reported weaker revenue in its Power Systems and Marine business but an improvement in its Nuclear business, excluding the unit it has sold to Germany's Siemens AG.
Power Systems underlying revenue was pulled down 4%, primarily due to currency translation impacts. Growth in its defence and power generation segments within the division was offset by substantially lower sales to European construction, industrial and agricultural customers. Marine revenue in the Power Systems unit also fell, down due to weaker yacht markets.
Underlying revenue in the Marine business was dragged lower by 16%, partially due to currency translation 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 came down as shipowners deferred overhaul and maintenance spending decisions.
Underlying revenue in Rolls-Royce's Nuclear business, excluding the energy gas turbines and gas compressor business sold to Siemens last year, rose 3%, driven by growth in its Civil Nuclear service business. Including the business it has sold to Siemens, underlying revenue fell 8% to GBP1.41 billion.
"2014 has been a mixed year during which underlying revenue fell for the first time in a decade, reflecting reduced spending by our defence customers, macroeconomic uncertainty, and falling commodity prices," Rolls-Royce Chief Executive John Rishton said.
Investec said the results were broadly in line with consensus and with its forecasts and said the midpoint of Rolls-Royce's 2015 profit guidance is broadly in line with the market view, which should provide some reassurance.
Following 2014, however, investors are likely to be cautious on the company, the broker said. It said it expects the focus to shift rapidly to 2016, where Rolls will continue to face the same headwinds to its business, and Investec reckons a continued drag on its performance by non-aerospace units will serve a catalyst for a strategic review.
Investec has put its recommendation and price target on the stock under review, having previously had a Hold review and 860 pence price target.
By Sam Unsted; [email protected]; @SamUAtAlliance
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