July 6, 2015 / 6:53 AM / in 2 years

Rolls-Royce cuts profit forecasts as new CEO takes helm

LONDON (Reuters) - British engineer Rolls-Royce (RR.L) cut profit expectations for the third time in nine months on Monday, increasing the challenge for its new chief executive.

Shares in the 131-year-old company dropped as much as 10 percent after it also scrapped a plan to buy back 1 billion pounds ($1.6 billion) of shares halfway through the program.

Rolls-Royce has been struggling for some time with a drop in demand from energy customers for its marine equipment following a plunge in oil prices.

But the firm said on Monday its aircraft engine business was also suffering during a switch from its Trent 700 engine to the newer Trent 7000, with fewer of the legacy engines being sold than anticipated.

That turns up the heat on new CEO Warren East, who took the helm only four days ago. The aerospace business accounted for almost half of 2014 revenues and has been riding a surge in demand for fuel-efficient engines for passenger jets, though it has lagged rival General Electric (GE.N) on profit margins.

Hargreaves Lansdown analyst Keith Bowman said that while it was common for new CEOs to cut expectations, the warning was another blow for investor trust in Rolls-Royce.

“The company’s prior push to reduce earnings volatility and surprises looks to have been completely unwound, with investors today suffering another shock,” he said.

DOWNGRADES

For 2016, Rolls-Royce said lower demand and pricing for the Trent 700 engines, reduced demand for its business jet engines and some weakness in its after-sales business for smaller jet engines would cut profit estimates by about 300 million pounds -- reducing analysts’ consensus forecast by around 20 percent.

For this year, underlying pretax profit would come in between 1.325 billion and 1.475 billion pounds, as much as 5 percent lower than its previous guidance, it said.

East, the former boss of chipmaker ARM Holdings ARM.L whose appointment in April led to a jump in Rolls-Royce shares, said his fundamental confidence in the business was not shaken, adding -- in a swipe at past management style -- that the bad news was announced to investors as soon as possible.

“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,” he said.

“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.”

East said he would start an operational review of the company in the coming months.

Cost-saving programs are already underway in both the aero-engine and marine businesses.

At 1000 GMT (6:00 a.m. EDT), Rolls-Royce shares were down 9 percent at 779.35 pence, the biggest fall by a European blue-chip stock .FTEU3, after touching a nine-month low of 772 pence.

Edited by Paul Sandle and Mark Potter

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