Credit: Rolls-Royce

Rolls-Royce shares tank 18% as it runs into 'headwinds'

New chief executive Warren East has gone for the kitchen sink approach.

by Rachel Savage
Last Updated: 14 Dec 2015

‘Headwinds’ has become the corporate metaphor du jour for whatever is causing your business a spot of bother and Rolls-Royce has run into a whole tornado of them. The aerospace giant issued its fourth profit warning in less than two years, sending its shares tanking more than 18%.

Profits for 2015 will be in line with expectations – although at the lower end of its forecasted range. But it will be hit by ‘profit headwinds’ of £650m in 2016 due to problems in its offshore marine, corporate jet and wide-bodied aircraft engine businesses, where fixed costs are all relatively high. Ouch.

Of course the FTSE 100 engineer couldn’t unveil bad news like that without ‘doing something’, so it also announced a cost-cutting program that will start next year. That’ll save £150m-£200m a year, but not until 2017. Not good enough, was shareholders’ perhaps predictable response.

Rolls-Royce shares have been in a near permanent storm for the last two years. Source: Yahoo News

‘The outlook for 2016 is very challenging,’ said new chief executive Warren East. ‘The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term.’

‘We carry too much fixed cost and are inflexible in managing this in response to changes in market conditions,’ he continued. ‘This is unacceptable in a world-class business that, as I've said before, needs to be more resilient and sustainable.’

East couldn’t do much about the last profit warning, issued only a day after he joined from chip designer ARM in July. But this announcement is classic kitchen sinking, trying to get all the bad news out of the way before embarking on the real hard work of a turnaround.

However, some analysts have argued Rolls-Royce should spin off its land and sea engines divisions, which previous chief exec John Rishton moved the business into. American activist shareholder ValueAct has also indicated it quite likes the idea.

East has said he thinks Rolls-Royce’s diversification is ‘broadly correct’, though. The question remains whether his cost-cutting plans will be enough to batten down the hatches against those stormy headwinds.

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