Rolls-Royce says its nuclear and energy and power systems business has been hard hit by deteriorating economic conditions

Rolls-Royce dashes hopes of profits rise in 2015

Rolls-Royce has warned that deteriorating economic conditions meant profits would not rise next year as previously forecast.

Chief executive John Rishton pointed to the fall in oil and iron ore prices, an absence of growth in Europe and a slowdown signs of economic slowdown, while also blaming tightening Russian trade sanctions for hitting its results.

The revised outlook, released three days earlier than expected, knocked more than 8 per cent off the company's shares, sending them to their lowest level since December 2012.

"The economic environment has deteriorated, and it has deteriorated quite quickly, impacting our revenue, especially in oil and gas and mining and construction, which are important markets for our land and sea businesses," Rishton told reporters.

Rolls said the worsening market conditions being experienced by a number of its customers had caused an impact on the timing of investment decisions, particularly in its power systems and marine divisions.

The power systems division is based in Germany and delivers high-speed engines and propulsion systems for ships, rail and defence vehicles and for the oil and gas industry.

The company said underlying profit next year would be unchanged from the expected outcome for 2014 or up to 3 per cent lower, with underlying sales in the range of 3 per cent higher to 3 per cent lower.

Rolls also said its results this year would be affected by the deteriorating economic backdrop, forecasting that underlying revenue would fall between 3.5 per cent and 4 per cent, rather than remaining unchanged from a year earlier.

It said this year's underlying profit, however, would still be flat compared to 2013 due to improved cost performance and a stronger performance by its aircraft engine servicing business.

"But despite the adverse conditions in 2014 we are maintaining our outlook for group profit because of the progress we have made on costs," Rishton said.

Royal Bank of Canada analysts said although expectations for Rolls' mid-term outlook were already low, the new guidance for 2015 was clearly worse than the company had previously forecast.

"With clear short-term non-aerospace industrial pressures, we see these continuing to weigh on estimates and sentiment going forward," they said.

The announcement is a turn-around on a prediction of a return to profit next year made in July. The company previously disappointed the market in February when it said US and European defence spending cuts would mean flat profits in 2014, bringing more than a decade of profit growth to an end.

Until then, the company had enjoyed 11 years of strong profit and revenue growth as soaring demand for more fuel-efficient engines for passenger planes made by Airbus and Boeing boosted its civil aerospace unit, which accounts for about half of its sales.

The engines giant warned the tough climate would increase its focus on costs, including headcount, but also said that in the medium term it expected group return on sales of 13.5 per cent to 14.5 per cent, helped by slightly stronger margins of 14.5 per cent to 15.5 per cent in its civil aerospace unit.

Rishton said: "While the short term is clearly challenging, reflecting the economic environment, the prospects for the group remain strong, driven by the growing global requirement for cleaner, better power.

"The operational efficiencies already achieved and the cost programmes we will now accelerate will put us in a better position to benefit from these growth drivers."

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