Third Rolls Royce profit warning stuns City

Warren East, chief executive of the aircraft engine manufacturer, said that he wanted to communicate clearly and effectively with shareholders as he issued another surprise profit warning, the group’s third in a year.

In a not-so-subtle swipe at the previous management, Mr East said that he wanted to “get away from this view that Rolls-Royce has a questionable relationship with the City”. He added: “I think it is very important that we communicate well and effectively with the City. We have been very conscious to get this [profit warning] to the market as quickly as we can.”

The FTSE 100 group rushed out the warning yesterday, Mr East’s second working day in his new role, after a review showed that the continued volatility in oil prices would have a greater-than-expected impact on its marine division.

The Times reports that the statement sent the shares down by more than 6 per cent, with Rolls the biggest faller in the index.

The manufacturer has been caught out by a quicker-than-expected fall in demand for its Trent 700 engine, which is used in A330 aircraft but is being phased out for an upgraded Trent 7000 engine. Some airlines, rather than buy the ageing Trent 700, have delayed orders until the 7000 is available.

As a result, Rolls’s profit outlook for this year has been lowered to between £1.3 billion and £1.4 billion. This is down from already lowered guidance of between £1.4 billion and £1.5 billion. The group’s free cashflow this year also could become negative, where cash outflows are higher than inflows, prompting fears about the payment of its dividend.

Rolls-Royce is the world’s second- biggest manufacturer of aircraft engines and supplies 380 airlines and leasing firms.

It is considered so important to the national interest that it is one of only a handful of companies safeguarded by a government special share.

In order to protect the group’s military technology and expertise, the government may block any takeover. However, the recent profit warnings and announcement of thousands of redundancies, including 2,600 in its aerospace division, has dented investor confidence.

The City had a difficult relationship with John Rishton, the former chief executive who left in April, who was accused of failing to keep channels of communication open.

David Smith, the chief financial officer whose review of the business led to yesterday’s warning, said that the group was making a conscious effort to improve communications. “I do think in the past we might have waited a bit longer to do this [issue the profit warning]. It is also the first time we have given indications for next year.”

The latest profit warning also laid bare the scale of the challenge facing Mr East, who decided to cancel Rolls’s first £1 billion share buyback, which was halfway through.

“I don’t think it was the wrong decision [the share buyback], but I think cancelling it was the only responsible decision,” he said.

“This is a difficult message to deliver, but what we are trying to emphasise is that the long-term prospects of this business haven’t changed. A view which, for me, has been reinforced by this review we have done.”