By Robert Wall
LONDON-- Rolls-Royce Holdings PLC has scrapped its first ever
share buyback program and issued another profit warning, saying
weak demand in its airliner and marine-engine businesses would be
drag on earnings through next year.
The warning, Rolls-Royce's second this year, comes as the
Europe's largest aircraft engine maker is under new management,
with a new chief executive and chief financial officer freshly
installed.
"I am clearly disappointed by today's announcement and the
impact this will have on our investors and employees," said new CEO
Warren East said on Monday. "This isn't exactly how I would have
chosen to spend our second day on the job," Mr. East told
reporters. Rolls-Royce stock fell more than 9% in morning trading
in London.
The weak cash performance led Rolls-Royce to end its GBP1
billion ($1.5 billion) share buyback, introduced a year ago, about
halfway through the program, though the company said that cash flow
should improve from next year.
Having angered investors in the past two years by wrong-footing
them with a series of profit warnings, Mr. East signaled the
company would be more proactive in the future.
"We are bringing this news to the market now perhaps rather
earlier than you might have expected," he said. The magnitude of
the latest problems only became clear over the weekend, Mr. East
said.
The new CEO said he is still planning a "thorough operational
review of the business" and would provide an update when the
assessment is complete.
The engineering group said that this year's underlying pretax
profit, a measure that excludes some costs, is now expected to be
GBP1.33 billion ($2.06 billion) and GBP1.48 billion this year, down
from its previous guidance of GBP1.40 billion to GBP1.55
billion.
Underlying pretax profit is expected to have been GBP390 million
and GBP430 million in the six months to end June, or around 30% of
the expected full-year amount, compared with 40% in 2014.
Rolls-Royce said its cash outlook also has worsened. It could
range between a GBP150 million cash outflow and GBP150 million
inflow. Management previously expected the group would generate as
much as GBP350 million in cash.
In its first indication of how business will fare next year,
Rolls-Royce warned of a GBP300 million profit setback in its
civil-aerospace business--the unit generates most of Rolls-Royce's
earnings--amid weak demand and pricing for Trent 700 engines that
power Airbus Group SE A330 jets. The European plane maker is
introducing a new model from 2017, powered exclusively by
Rolls-Royce.
"The prices that we achieved for those engines has been lower
than we originally thought," Mr. East said.
Weak prices and demand for Trent 700 engines could last another
three years, said CFO David Smith. "We will see a couple of
difficult years," Mr. Smith said, warning that a promised
improvement in profit margins from 2018 would also be delayed.
Civil aerospace earnings also have been hit by softness in
business-jet sales in some markets and lower-than-anticipated
demand for parts for regional airliners, while cutbacks in the
offshore oil and gas industry have knocked back demand for marine
engines, Rolls-Royce said. Management plans further restructuring
of the marine business where it announced 600 job cuts in May.
The trouble in its civil aerospace business isn't curtailing the
company's appetite for new projects. Mr. Smith said the company
remains "very interested" in powering an upgraded model of the
Airbus A380 superjumbo now under study. "We won't go ahead if there
isn't a proper business case," he said.
--Tapan Panchal contributed to this article
Write to Robert Wall at robert.wall@wsj.com
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