Rolls-Royce shares dip after CEO predicts challenging 2016

Rolls-Royce CEO, Warren East, has revealed the initial findings of his review of operations, which includes an update on the company's profit forecast for 2015 and the outlook for 2016.

Following the announcement, the British engine maker’s shares dropped more than 23% to a low of 510p at one stage before closing on Friday at 514p – down from a high of 709p on November 4.

Rolls-Royce blamed falling demand for corporate jets in Brazil, China and South East Asia following China’s economic slowdown, as well as the slump in oil prices affecting its energy customers.

The initial findings released on Thursday indicated a further downturn in 2016, with Rolls-Royce stating that its profits would be hit by headwinds of £650m.

The company said it expected higher than average margin segments of the business, where fixed costs are relatively high, would experience a significant fall in profits.

The negative outlook reflects sharply weaker demand in 2016, with the key areas of demand weakness affecting selected aerospace and offshore marine markets.

The impacts felt on the company’s corporate and regional business, such as sharply lower volumes of corporate jets powered by Rolls-Royce engines and weakness in demand for corporate jet aftermarket services, account for roughly £100m of the company’s predicted incremental profit headwind.

The profit headwinds also included around £250m related to lowered volume and pricing expectations for Rolls-Royce’s Trent 700 programme.

The firm currently makes engines for Boeing’s 787 Dreamliners and Airbus A380 superjumbos, and has put its faith in wide-bodied aircraft.

But the trend among regional airline operators has been towards single-aisle plane orders, a trend which has hurt Rolls-Royce’s bottom line as the falling demand has been highlighted by the company as a major reason for its recent share plunge.

Adding to its recent woes of falling demand and share prices, Rolls-Royce missed out on the two new Gulfstream aircraft engine supply contracts – the G500 and G600 – for which US rival Pratt & Whitney, owned by United Technologies, received the order.

Rolls-Royce CEO says 2016 will be ‘challenging’

Rolls-Royce CEO, Warren East - image courtesy of Rolls-Royce
Rolls-Royce CEO, Warren East (image courtesy of Rolls-Royce).

Rolls-Royce CEO, Warren East, forecast a challenging year ahead for the company, but also a positive future in the years beyond 2016.

“While 2015 remains broadly as expected, the outlook for 2016 is very challenging,” he said.

“The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term,

“At the same time I remain very confident about the opportunities before us and convinced that our long-term outlook is positive,

“The next few years are going to be important in laying the foundations for our long-term profitable growth.”

Warren East’s review

Easts’ recent findings highlighted that despite the negative outlook for the upcoming year, the company’s performance improvement programmes remain on track for delivering £115m of year on year cost savings for Aerospace and Marine in 2016, due to significant headcount reductions and plant rationalisation.

The review of Rolls Royce’s operations also included an update on the outlook for 2015.

Group guidance statistics from 2015 is unchanged from July 30, with full year guidance revenue of £13.4b – £14.4b compared with 2014 actuals of £13.9b, and full year guidance profit before tax of £1,325m – £1,475m, compared with 2014 actuals of £1,620m.

Rolls Royce’s is forecasting free cash flow of between -£150m and +£150m for 2015, down from the 2014 actuals of £447m.

This week’s review of Rolls Royce’s operations also featured an announcement of a major restructuring programme to be implemented from 2016.

The wide-ranging programme will be utilised to simplify the organisation model, streamline senior management, reduce fixed costs and add greater pace and accountability to decision making.

Work undertaken as part of the new programme will enhance plans underway to improve the company’s management information, forecasting and business systems.

The restructuring programme is expected to provide incremental gross cost savings of £150-£200m per annum, with benefits accruing from 2017 onwards.