Two British engineering giants are rocked by events overseas.
It’s a brave chief executive who admits that the coming year will see a sudden end to his company’s long record of continuing growth. It might be a little foolhardy of that CEO to then predict that the firm will be back on track just a year later.
But John Rishton, head of Rolls-Royce, needed to reassure the markets when, unveiling good financial results for 2013, he sent out the shocking message that the aerospace group would experience a “pause in our revenue and profit growth” in 2014. This would be the first halt to annually rising profits since 2003, and the firm’s shares responded to the news by diving 13 per cent, cutting more than £3bn from the company’s market value.
This was despite the company posting a 23 per cent increase in underlying pre-tax profits to £1.76bn on the back of a 27 per cent rise in underlying revenues to £15.5bn. ‘Underlying’ here includes the impact of currency changes and the integration of Tognum, a German diesel engine maker that was acquired in 2012. Rolls-Royce’s 2013 order book was also strong, reaching £71.6bn, up 19 per cent on 2012.
So why the gloomy forecast for 2014? The protracted fallout from cuts in US and European government defence spending will bite. The company cited two specific developments this year that are likely to have an impact. One is expected cuts by the US to its C-130 transport aircraft fleet. The other is the completion of two export programmes - sending Eurojet EJ200s to the Middle East, and Adour engines to India.
So profits will be flat in 2014, but will this be just a blip year? Demand for civil aircraft engines remains strong, says Rolls-Royce, which also has plans to cut costs and increase cashflow this year. However, there is no doubt that its defence activities are likely to continue to come under pressure from government spending cuts.
Rolls-Royce faces possible future fallout from a continuing Serious Fraud Office (SFO) probe into alleged bribery at the company’s operations in China and Indonesia. Two men - neither of them employed by Rolls-Royce - were arrested in London in connection with the allegations last month. The company has responded by commissioning a review of its code of conduct for staff.
Rolls-Royce’s executives face a challenge if they want to replicate that former record of a decade of continued growth. After the recent crash in share price, the markets may have shaken off their over-optimism about the company’s resilience to market turbulence.