BAD DAYS AHEAD? Rolls-Royce new CEO Warren East has dropped the automaker's profit forecasts for 2015/16Image: Newspress.
LONDON, England - British engineer Rolls-Royce cut profit expectations for the third time in nine months on Monday, increasing the challenge for its new chief executive.
Shares in the 131-year-old company dropped as much as 10% after it also scrapped a plan to buy back $1.6-billion of shares halfway through the programme.
DROP IN DEMAND
Rolls-Royce has been struggling for some time with a drop in demand from energy customers for its marine equipment following a plunge in oil prices.
But the firm said on Monday its aircraft engine business was also suffering during a switch from its Trent 700 engine to the newer Trent 7000, with fewer of the legacy engines being sold than anticipated.
That turns up the heat on new CEO Warren East, who took the helm only four days ago. The aerospace business accounted for almost half of 2014 revenues and has been riding a surge in demand for fuel-efficient engines for passenger jets, though it has lagged rival General Electric on profit margins.
Hargreaves Lansdown analyst Keith Bowman said that while it was common for new CEOs to cut expectations, the warning was another blow for investor trust in Rolls-Royce.
Bowman said: "The company's prior push to reduce earnings volatility and surprises looks to have been completely unwound, with investors today suffering another shock."
For 2016, Rolls-Royce said lower demand and pricing for the Trent 700 engines, reduced demand for its business jet engines and some weakness in its after-sales business for smaller jet engines would cut profit estimates by about 300-million pounds - reducing analysts' consensus forecast by around 20%.
For this year, underlying pretax profit would come in between $1.9-billion and $2.4-billion, as much as 5% lower than its previous guidance, it said.
East, the former boss of chipmaker ARM Holdings whose appointment in April led to a jump in Rolls-Royce shares, said his fundamental confidence in the business was not shaken, adding - in a swipe at past management style - that the bad news was announced to investors as soon as possible.
East said: "We are bringing this news to the market now perhaps rather earlier than you might have expected or you might have seen from Rolls-Royce in the past.
"I hope that is part of the tone for the style of communication that we are going to expect now I've joined the business."
East said he would start an operational review of the company in the coming months.
Cost-saving programmes are already underway in both the aero-engine and marine businesses.
At 10am on Monday, Rolls-Royce shares were down 9% at the equivalent of $12.13 the biggest fall by a European blue-chip stock , after touching a nine-month low of $12.01