Rolls-Royce Sales To Drop On Russia Sanctions, Economic Woes

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Rolls-Royce Holdings Plc (RR/) said sales will decline this year and could fall again in 2015 as a worsening economic situation prompts clients to delay orders and sanctions over the Ukraine crisis stall Russian contracts.

Shares of London-based Rolls-Royce fell as much as 16 percent as the world’s second-biggest maker of aircraft engines said revenue will drop by between 3.5 and 4 percent in 2014, with free cash flow dwindling to about 350 million pounds ($564 million), or less than half the figure previously anticipated.

Today’s forecast-downgrade is the second at Rolls this year after the company said in February that lower demand for defense equipment meant annual sales would fail to grow for the first time in a decade. The latest warning comes as international sanctions block diesel-engine exports to Russia from a German unit and the global economy shows signs of a reversal.

“Everywhere you look you see signs of economic deterioration,” Chief Executive Officer John Rishton said on a conference call. “Whether it’s the oil price reduction, a 40 percent fall in iron ore, the euro, a slowdown in China, a cutback in expenditures by oil and gas companies, a slowdown in growth in South America — it’s everywhere.”

2015 Gloom

Having previously predicted sales growth would resume in 2015, Rishton said today that there could be a drop of as much as 3 percent, and that profit — still forecast to be flat this year — could also fall by that amount.

Rolls-Royce fell as much as 153 pence to 787.5 pence, the biggest slump since an 18 percent intraday drop on Feb. 13, when the company issued the initial revision. It closed almost 12 percent lower at 832 pence in London.

The stock price has dropped more than one-third this year, putting Rolls on track for the worst annual return since 2008 and paring the company’s market value to 15.7 billion pounds.

Rolls-Royce trimmed its guidance for the nuclear and energy division, saying sales will grow no more than 5 percent this year, half the rate predicted earlier in a best-case scenario, and could even be static.

Earnings growth there will be between zero and 10 percent, versus as much as 40 percent previously envisaged — reflecting “market conditions” and the sale of energy assets to Siemens AG for 785 million pounds to leave the unit focused on nuclear work, announced May 6.

Export Approval

At the power systems arm, enlarged through the 1.9 billion-pound purchase of Tognum AG forced on Rolls in March when Daimler AG exercised a put option, orders for marine and land-based engines from an operation based in Friedrichshafen now need approval from Germany’s export authority, Rolls-Royce said in an e-mailed response to questions. It declined to name the Russian customers, citing confidentiality agreements.

Power systems earnings will now decline as much as 10 percent, having been forecast to gain by as much as that degree.

The Ukraine crisis is also taking a wider toll, Rishton said. Russia’s annexation of Crimea in March has stoked capital flight, undercutting the ruble and fanning inflation. President Vladimir Putin flew into Milan last night for formal peace talks on Ukraine with European Union leaders.

Rolls-Royce, which cut headcount last year, will respond to the pressure on sales with “further restructuring and rationalization” that could include job cuts and changes to the company’s “footprint,” details of which will be revealed once an analysis of possible steps has been completed, Rishton said.

‘Tread Water’

Restructuring costs could amount to about 100 million pounds in 2015 and 2016, according to David Perry, an analyst at JP Morgan Cazenove in London who downgraded the stock to “neutral” from “overweight.” Perry cut his earnings per share targets through 2018 and said in a note that the stock is likely to “tread water” for some time.

“We cant control the external environment but we can control the cost environment,” he said. “If revenues are falling we need to focus more on taking out related costs to offset the impact. We’re looking right across the business.”

Improved cost performance to date means that even with the sales slump revealed today, underlying profit will be flat this year, in line with previous guidance, the company said. The new revenue forecast excludes adverse foreign exchange translation of 500 million pounds, as previously disclosed.

Rolls-Royce stuck by its outlook for revenue growth of 2 to 5 percent this year at the civil aerospace business, the largest by revenue, where demand is being spurred by expanding airlines in Asia and a switch to more efficient planes in Western markets. Profit at the business will gain as much as 20 percent, compared with previous guidance for a 12 percent improvement at best, the company said.

Losses from military aircraft engines should also be more modest than first forecast, Rolls-Royce said, though sales are still expected to drop as much as 20 percent. Guidance for the level of sales decline and loss at the marine arm was unchanged.

Source : Bloomberg

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