RYCEY Rolls Royce Holdings PLC (PK)

By Robert Wall 

LONDON-- Rolls-Royce Holdings PLC on Thursday suffered its sharpest share drop in more than 15 years after the British engine maker said it may cut its dividend and warned that its earnings outlook for this year and next had weakened.

The company said that earnings this year would be at the low end of its guidance and that profit next year would be GBP650 million ($988.8 million) lower than it expected, without stating its projection.

The maker of aircraft engines for Boeing Co. 787 Dreamliners and Airbus Group SE A380 superjumbos said full-year underlying pretax profit, a measure that excludes some costs, is now expected to be at the low end of its GBP1.33 billion and GBP1.48 billion range.

"The outlook for 2016 is very challenging. 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," Chief Executive Warren East said.

Shares in Rolls-Royce fell more than 23% in midday London trading.

Agency Partners analyst Nick Cunningham said there are "existential risks" at Rolls-Royce and that the share price had further to fall.

It is the second profit warning for Mr. East, who issued his first only two days into taking the top job in July. The latest was widely expected as Mr. East reset investor expectations. The company has been struggling with costs in its aerospace business and a weaker market for its marine engine business amid lower oil prices.

The company said demand for engines in the corporate-jet market and regional planes had slowed. Use of some older long-range planes is coming down, affecting Rolls-Royce's services sales.

Rolls-Royce said it would review its dividend plans. The review should be completed by the time the company reports full-year results in February.

The company's balance sheet and liquidity were strong, Mr. East said, but the cost impact of planned changes to the business made it prudent to review dividend plans.

The company also suspended its medium-term guidance.

Mr. East was named chief executive after the company suffered a series of profit warnings under his predecessor, John Rishton, drawing investor ire. Shares in Rolls-Royce have retreated more than 57% since its series of profit warnings began in February 2014.

In July, Rolls-Royce activist investor ValueAct Capital Management LP raised its stake in the company to more than 5%. It also is seeking board representation, Mr. East said. "They have some very good questions, " he said, without discussing details of the discussions between management and the investor.

Rolls-Royce also announced Thursday initial findings of an operational review that Mr. East has been conducting. The review was aimed at finding ways to boost Rolls-Royce's returns, though shies away from major shifts in strategy.

"As a business, we carry too much fixed cost and are inflexible in managing this in response to changes in market conditions. This is unacceptable in a world-class business that, as I've said before, needs to be more resilient and sustainable," Mr. East said.

The company said the savings measures, including streamlining senior management and reductions in costs should yield incremental gross cost savings of GBP150 million to GBP200 million a year from 2017. Rolls-Royce plans to spell out full details on these measures in a Nov. 24 investor day.

Rolls-Royce said a previous cost-savings program was on track to deliver the promised GBP115 million in on-year savings in the aerospace and marine businesses next year. The company has announced big job cuts in both areas.

"The next few years are going to be important in laying the foundations for our long-term profitable growth," Mr. East said. Long-term prospects remain positive, he said.

Chief Financial Officer David Smith said the business should see strong growth over the next five years "that will produce significant improvement in the results result of the business."

Write to Robert Wall at robert.wall@wsj.com

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(END) Dow Jones Newswires

November 12, 2015 08:12 ET (13:12 GMT)

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