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Rolls-Royce issues profit warning: Latest British firm to offer grim news despite upturn Continued global crisis hitting UK revenues

February 14, 2014

Sean Farrell

Rolls-Royce has become the latest major UK company to warn on profits as the industrial group called an end to a decade of revenue growth and wiped more than pounds 3bn off its share price.

The Derby-based engine manufacturer joined Pearson, BG Group and Royal Bank of Scotland in surprising investors this year with an about-turn on earnings, predicting profits would be flat in 2014 owing to US defence cuts and the end of profitable contracts.

Rolls-Royce stock slumped 13.6%, costing shareholders pounds 3.1bn, but the company was only the second-biggest faller in the FTSE 100 index behind sweetener firm Tate & Lyle, which issued a profit warning and slipped 16%. They joined a string of companies issuing grim trading updates this year even as the economy shows signs of improvement, with the strength of sterling among the most commonly cited factors for downward revisions to earnings.

Announcing a "pause" in growth after a strong 2013, chief executive John Rishton said: "This is a break in a 10-year trend that will be followed by more growth in 2015. We have defied gravity for a couple of years compared with other defence companies and the impact of a couple of things is coming together in 2014."

The world's second-biggest aircraft engine maker expects revenue to fall between 15% and 20% at its defence business and a small reduction in revenue but modest profit growth at its marine division. The defence arm will feel the effects of "well publicised cuts" in the US and the end of big orders in India and the Middle East, Rishton said.

Tina Wood, an industry analyst at broker Charles Stanley, said: "For the past few years Rolls-Royce's defence business has been outperforming its defence peers. Analysts have been asking about that for the last two years so it's quite a shock for it to be downgraded so much. It's raised a lot of questions and that is clearly reflected in what has happened to the share price, which is dramatic, especially for a company such as Rolls-Royce."

Rishton said: "Could we have done better? Yes we probably could. You reflect on it and you think maybe we need to do something different and that's what we have done."

Rolls-Royce's underlying pre-tax profit for 2013, excluding an acquisition, rose 23% to pounds 1.76bn - near the top of analyst forecasts. Rishton said a record order book of pounds 71.6bn - up 19% - underpinned the group's prospects for many years to come and that a flat 2014 would be "a pause, not a change in direction". He said confidence on growth allowed Rolls-Royce to increase its annual dividend by 13% to 22p.

Rishton declined to comment on two arrests made by the Serious Fraud Office on Wednesday in connection with an investigation into allegations of bribery in Indonesia and China. Neither of those arrested was a Rolls-Royce employee but were said to have been intermediaries used by the company. "It's a matter for the authorities," Rishton said.

Rolls-Royce and Tate & Lyle, whose sucralose product is suffering from heavy competition in China, are the latest big UK firms to warn on trading this year. Royal Dutch Shell, BG Group and Pearson have all shaken investors with profit alerts along with Royal Bank of Scotland and retailers Morrisons and Mothercare.

They were joined yesterday by Swiss firms Nestle, the world's biggest food company, and ABB, an engineering group, which warned of a sharp worsening of revenue prospects.

Financial analyst Louise Cooper said Britain might be growing strongly but the world economy was still suffering from the after-effects of the financial crisis.

"Tate & Lyle is a one-off and it doesn't tell us much about the world.[But] to have three big companies warning about revenue today is a little concerning. Nestle's chief executive calls Europe a no-growth environment with material negative pricing. That is quite worrying for something as basic as food from such a big company."


The Typhoon Eurofighter uses Rolls-Royce engines but revenue is expected to fall between 15% and 20% at the company's defence business Photograph Rex Features

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Source: Guardian (UK)

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