British engineering giant Rolls-Royce has revised its profit forecasts for 2015 and 2016, expecting the ongoing oil price crisis as well as weakening demand for aircraft engines to affect revenue.
The news comes only four days after Warren East, the new CEO, took office.
The firm said on Monday it now estimates to make between £1.325bn and £1.475bn in 2015, about five per cent less than previously expected due to the continuing deterioration in the energy markets that directly affects sales of Rolls-Royce’s marine engines.
The firm expects it could lose up to £85m compared to previous guidance over 2015 and 2016 due to the oil price crisis.
While the aerospace division is expected to perform in 2015 more or less according to estimates, it will likely be hit in 2016 by dropping demand and lower pricing of Rolls-Royce’s Trent 700 engines. This cut could erase up to £300m from the 2016 profits.
Rolls-Royce’s shares fell nearly nine per cent following the announcement.
"We are bringing this news to the market now perhaps rather earlier than you might have expected or you might have seen from Rolls-Royce in the past," said CEO Warren East.
"I hope that is part of the tone for the style of communication that we are going to expect now I've joined the business."
He further added that although he was disappointed by the development, his fundamental confidence in the business was not undermined.
East replaced John Rishton, who stepped down after four years in office. The change of CEOs came amidst a difficult period after a decade of strong profit and revenue growth was interrupted by a 13 per cent profit fall this year.
The group said as recently as May that shifts in currency exchange rates could hit reported revenues this year but possibly not profits, enabling it to maintain its forecast at that time.
The guidance for lower profits in aero engines, which has been a more stable part of the business as the drop in the oil price has seen marine engines cancelled, may surprise investors.
The Trent 700 engine was gradually being replaced by the newer Trent 7000 engine, a move which East said was having more of an impact on profits than expected.
"The number of legacy engines that have been sold is fewer and the prices that we achieve for those engines has been lower than we originally thought," he told reporters on a call.
The company is already in the throes of a rationalisation programme to improve profitability in its aerospace division, which accounted for almost half of 2014 revenues and has benefited from soaring demand for more fuel-efficient engines for passenger jets but has lagged behind market leader General Electric on profit margins.
In May, it also began a cost-cutting plan in its marine unit, which builds propulsion systems, winches and anchors for ships. About 60 per cent of this business depends on oil and gas-related customers.