November 12, 2015 / 7:13 AM / 4 years ago

Rolls-Royce cuts profit forecast again, to review dividend

LONDON (Reuters) - Britain’s Rolls-Royce issued its fourth profit warning in just over a year and said it could cut dividend payments as a slowdown in Asia hit demand for servicing older aircraft engines, showing the scale of the challenge facing its new CEO.

A statue of Henry Royce stands outside Rolls-Royce in Derby, central England , November 4, 2014. REUTERS/Darren Staples

Shares in the world’s second largest maker of aircraft engines plunged 20 percent on Thursday after it forecast profit next year would be more than a third below the current consensus estimate, which analysts had already slashed after a warning in July.

Chief Executive Warren East, who started in July and was almost immediately forced to warn on profits, said the long-term growth of the aero-engine business remained intact and the slowdown next year would be temporary.

But the latest setback will intensify questions about the ability of the 131-year-old group to adapt to changing markets. The company supplies engines to aeroplanes, ships and for industrial use, having split from the luxury car business of the same name in the 1970s.

Activist shareholder Value Act built up a stake of over 5 percent in Rolls in July and is rumoured to want the company to focus on the aero engine business.

Releasing initial findings of an operating review two weeks early, East said he had already highlighted a number of areas where Rolls could make “fundamental changes”.

He launched a restructuring programme to save between 150 million pounds and 200 million pounds a year, streamline senior management and improve decision making.

“I believe we’re carrying too much fixed cost in certain parts of our business,” East, the former head of technology company Arm Holdings, told an investor call on Thursday.

“We’re just not sufficiently flexible at managing that cost base in response to changing market conditions.”

CHINA SLOWDOWN

The company blamed the drop-off in the last four months on airlines grounding older aircraft to fly newer more efficient ones. Analysts pointed to a slowdown in China which has led to some Asian operators parking up their Boeing 777 jets.

Rolls tends to generate higher margins on the parts and servicing it provides for older engines.

“This is essentially capacity management by some of our customers,” said East.

Rolls shocked investors four months ago when it said profits from its aero-engine business, its biggest unit which last year accounted for about half of profits and which it is counting on for future growth, would shrink in 2016.

The company is exposed to some decline in older wide body platforms such as the Airbus A330, on which its Trent 700 has been a big profit source. At the same time, it is yet to see returns on the engine for the A350 platform and no longer involved in single aisle market where production is soaring.

Rolls had already been struggling with a drop in demand from energy customers for its marine equipment following a plunge in oil prices.

Rolls stock was down 20 percent to 529 pence at 1025 GMT, recording its biggest one-day percentage fall in 15 years, and plunging to a 4-year low.

Hargreaves Lansdown analyst Keith Bowman called the decision to review shareholder payments “a major negative”.

“Rebuilding confidence in the company’s outlook is now paramount for the relatively new chief executive,” he added.

Rolls said it now expected profit headwinds of 650 million pounds next year, up from 300 million identified in July. Before the downgrade on Thursday, the consensus forecast for 2016 underlying pretax profit stood at 1.053 billion pounds.

The company also said it expected 2015 profit to come in at the lower end of a guided range.

Editing by Mark Potter and Keith Weir

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