* Rolls-Royce expects return to growth in 2015
* Sees sharp drop in revenue, profit from Defence Aerospace
* Slow down comes after decade-long growth
By Brenda Goh
LONDON, Feb 13 Britain's Rolls-Royce sent
shivers through Europe's defence and aerospace sector on
Thursday after it said U.S. and European spending cuts would
halt profit growth in 2014, wiping almost 4 billion pounds off
the firm's value.
Following the announcement that the group's decade-long
profit growth was coming to an end, shares in Rolls Royce fell
as much as 17.8 percent and led to a 2 to 3 percent slide in the
shares of European peers BAE Systems, Finmeccanica
The drop in Rolls-Royce's share price represented the
biggest one-day fall for the company in more than 13 years.
"We've defied gravity for a couple of years compared to many
other companies and now we're having the impact come together in
one year," said Chief Executive John Rishton on Thursday of the
forecasted decline in defence revenues.
The 130-year-old company expects a 15 to 20 percent fall in
revenue and profit from Defence Aerospace in 2014, and a modest
reduction in revenue - but modest growth in profit - from the
Marine unit. Overall this will result in a "pause" in 2014
overall revenue and profit growth following a strong performance
Analysts had expected almost 8 percent growth in 2014 pretax
profits, Thomson Reuters data showed. Rolls said it expects
growth to return in 2015 as it ramps up production of aero
"It's clearly shocked the market...It's a weaker backdrop
than we have factored in previously. It's dragged everything
else down," said Investec analyst Chris Dyett, who cut his
profit guidance for Rolls-Royce by about 11 percent.
Defence contractors have found it difficult to forecast the
impact of reduced defence spending by U.S. and European
governments due to slow decision-making among lawmakers and the
long-dated nature of some defence equipment contracts.
A two-year budget deal passed by U.S. Congress last year
eliminated some uncertainty about funding levels, but analysts
said that a solution for more cuts beginning in fiscal 2016 had
yet to be found.
U.S. arms makers have recently tried to reassure investors
by forecasting that U.S. military budgets would hit their low
point in 2014 and 2015, with spending likely to stabilise and
rise after that.
Rishton cited possible cuts by the United States on the size
of its Lockheed Martin-built C-130 transport fleet, and
the completion of delivery of two of its major export programmes
- the Eurojet EJ200 engine to the Middle East and the Adour
engine to India - as the reasons behind the expected decline.
An analyst who declined to be named said that Rolls's
defence business in 2011-2013 was unusually buoyed by big export
orders to Saudi Arabia and India. "Rolls Royce should have
indicated that there was an element of bubble in that, that that
was not sustainable."
Shares in Rolls-Royce, which fell to an almost 12-month low
in earlier trading, were 17.6 percent lower at 996.75 pence at
1247 GMT. The shares have risen almost 800 percent in the last
10 years, when the group has enjoyed rapid growth.
Rolls-Royce has enjoyed strong profits and revenue growth
over the last 11 years thanks to its civil aerospace unit, which
generates about half of its sales. It has seen soaring demand
for more fuel-efficient engines for planes made by Europe's
Airbus and U.S. Boeing
On Thursday, it exceeded analyst expectations by posting a
23 percent rise in underlying pretax profits to 1.76 billion
pounds ($2.92 billion), on a 27 percent increase in underlying
The company's 2013 and 2012 results were revised following
accounting changes requested by Britain's accounting regulator.
Rolls-Royce said among its other units, it now anticipates
modest growth in revenue and good growth in profit at its Civil
In Marine, which it had looked to strengthen last year by
weighing a bid for Finnish ship and power plant engine maker
Wartsila, a leader in building medium-speed engines,
Rishton said they were continuing to look for ways to improve
the unit's capability such as working on such engines in-house.
He declined to say if Rolls was looking for similar deals.
On costs, which Rishton focused on last year after
describing them as "unacceptable", the company has made progress
by cutting 11 percent of indirect headcount in 2013, and has
been moving production away from high-cost countries, he said.
He also said Rolls-Royce was helping Britain's Serious Fraud
Office "completely" with its probe into the firm's dealings in
Asia. Two men were arrested on Wednesday by the anti-fraud
watchdog in connection with the investigation.