Rolls-Royce chief voices ‘disquiet’ over diesel engine business
Warren East, Rolls-Royce’s chief executive, has flagged new risks to the performance of the aerospace group’s diesel engine business — the only division to have so far escaped a downgrade in the last five profit warnings.
Speaking in an interview with the Financial Times, Mr East voiced “disquiet” about trading conditions in the unit that supplies power systems for the mining and offshore oil industries.
“If you look at our competitors in our reciprocating engines part of the business, there have been some fairly serious downgrades on next year,” he said. “When I look at that, I do have a feeling of a little bit of disquiet . . . I’ve got to say, that’s a risk area.”
Mr East told investors last month that he would not rule out a new profit warning after five since February 2014. Now the Rolls-Royce boss is going further by identifying the industrial businesses as still vulnerable to a downgrade.
However, the company made clear on Sunday night that it was not planning to issue a formal profit warning.
Analysts have slashed forecasts for 2016’s earnings from about £1.2bn to about £764m during the past year.
Mr East stressed that the power systems division, which last year generated £2.7bn of the group’s total £14.6bn in underlying revenues, was also exposed to resilient sectors such as rail and defence, giving him cause to be more confident than his competitors.
Mr East last week took the first step in his plan to transform Rolls-Royce by shaking up top management and abolishing the group’s divisional structure. The chief executive, who took up his post in July, has been meeting investors in recent weeks to explain his transformation plan and highlight key risks for 2016 in an effort to improve transparency and restore confidence.
Rolls-Royce is “fundamentally a great business model”, he said.
Outlining the near-term challenges, Mr East pointed to the troubles of Anglo-American, which is scaling back its mining operations amid a deepening commodities downturn. Other companies exposed to segments served by Rolls-Royce, such as Caterpillar and Weir Group, have also warned of a difficult outlook for 2016.
Analysts are expecting a flat performance from the power-systems unit, created from the combination of Rolls-Royce’s Bergen marine engine business and the recently acquired Germany-based Tognum. But this was increasingly in question, given the market context, analysts said. “Everybody who has been exposed to extractive industries has been killed,” said one.
Mr East also issued a word of caution over the aerospace business after news last week that Airbus was encountering difficulties in the delivery of its A350 wide body, on which Rolls-Royce is the exclusive engine.
“Rolls-Royce will supply as many engines as Airbus needs and wants [for the A350],” he said. “But it may be a bit slower because of other things going on in the supply chain.”
Mr East insisted Rolls-Royce would come through its current difficulties, even if the transformation to a leaner, fitter group would take time.
“The root of the profit warnings are because information about things that are going on in the market, don’t get translated into implications for the company quickly enough,” Mr East said. Improving transparency for investors and for management was one of the priorities of his restructuring.
In a demonstration of his confidence Mr East last week bought 17,300 shares last week for a total consideration of £99,821. Nevertheless some investors are not willing to wait for the transformation to take effect. Old Mutual Global Investors confirmed to the Telegraph that it had sold its undisclosed stake after the fifth profit warning in November. Its disposal follows the exit of Neil Woodford as a long-time shareholder this month when he sold his 2.3 per cent stake.