17th Oct 2014 08:49
LONDON (Alliance News) - Rolls-Royce Holdings PLC Friday updated its guidance for the full year and next year, while providing medium-term guidance, as it said it now expects underlying revenue this year to be lower and said its outlook for 2015 has become more challenging.
The news sent shares in the company sharply lower in morning trade, down 8.8% to 858.05 pence to be comfortably the worst performer on the FTSE 100.
The FTSE 100 engineering and aerospace group said it expects underlying revenue for the full year to be 3.5% to 4% lower, compared to previous guidance of flat revenue against the comparable year. This includes adverse foreign exchange translation for the group estimated at GBP500 million, the same as it has previously announced.
The major reduction in the outlook for its divisions came for its Nuclear & Energy business, where it has reduced its expectations for underlying revenue growth to 0% to 5%, from 5% to 10%, due to the wider negative market conditions and the impact of the impending sale of its energy gas turbine and compressor arm.
It maintained guidance for its Civil Aerospace, Defence Aerospace, Marine and Power Systems businesses.
Due to cost reductions, Rolls-Royce has maintained its guidance for underlying profit in 2014 at flat, with adverse foreign exchange translation now estimated to be slightly lower at GBP60 million from GBP70 million previously.
Rolls-Royce said it has cut its profit guidance for its Power Systems business to a 5% to 10% decline, having previously forecast a rise of 5% to 10%. It also downgraded its profit guidance for its Nuclear & Energy arm substantially, cutting its forecast to 0% to 10% profit growth from a previous prediction of 30% to 40% growth.
It maintained its guidance for profit in its Marine arm to fall 15% to 25% in the year, but improved is guidance for its Civil Aerospace and Defence Aerospace arms. The Civil Aerospace arm's profit guidance has been upped to 15% to 20% growth, from 8% to 12% previously, on the back of improvements to lifecycle costs. Defence Aerospace profits are expected to be down 12% to 15% for the period, an improvement on the 15% to 20% decline previously predicted.
The group said its expects free cash flow for the year to be around GBP350 million, down from its previous guidance for this to be in line with 2013 at around GBP780 million. The fall reflects the revenue downgrade, lower deposits for its Energy and Marine businesses, and slower-than-planned progress than planned.
Rolls-Royce also said it expects to complete the sale of its Energy Gas Turbine and Compressor business to Siemens AG by the end of the year. The pair reached an agreement for the German industrial group to buy the assets in May for GBP785 million in cash.
The group warned in its full year 2013 results statement in February that it expects to see a "pause" in revenue and profit growth this year owing to lower revenue in its Defence business on the back of spending cuts by major customers and lower revenue for its Marine business, driven by its Offshore operation.
Its forecasts had already been shown to be accurate in July when the group posted a drop in profit in the first half due to lower defence spending and weaker trading for its marine business. It also warned then that a recovery would take time as it invests in revamping its plants and delivering its order book.
But, in its full-year results in February, it said it expects growth to resume in 2015.
For 2015, however, Rolls-Royce said Friday the economic outlook has deteriorated since its interim results and said it would accelerate cost-cutting measures in order to mitigate any impact. It said its Power Systems and Marine arms are likely to suffer from the impact that worsening economic conditions will have on investment decisions by its customers.
It also said sales for its Civil Aerospace arm's Trent 700 engine would be impacted by the launch of the Trent 7000.
Rolls-Royce said it does still expect growth to resume next year, but said its best estimate for underlying revenue in 2015 at present is for 3% growth or contraction, and for profit between 0% and 3% higher against 2014 at constant exchange rates.
For the medium term, it said its business is well-positioned to achieve growth, though it warned it is difficult to precisely forecast revenues and so did not provide medium-term guidance on group revenues given the wide range of variables its business units face.
For the business units, it gave medium-term guidance for its Civil Aerospace business to generate a return on sales of 14.5% to 15.5% and said it expects group return on sales to be 13.5% to 14.5%.
"While the short term is clearly challenging, reflecting the economic environment, the prospects for the group remain strong, driven by the growing global requirement for cleaner, better power. The operational efficiencies already achieved and the cost programmes we will now accelerate will put us in a better position to benefit from these growth driver," said Rolls-Royce Chief Executive John Ritson.
Jefferies analyst Sandy Morris says Rolls Royce will not be the only company to express caution over 2015 and hopes for a measured reaction to its guidance changes Friday. The analyst believes that the medium-term guidance is credible and says the company's civil engineering deliveries will be at the heart of its equity story.
By Sam Unsted; [email protected]; @SamUAtAlliance
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