Rolls-Royce Shares Hit 4-Year Low As Earnings Forecast Cut

By Bridge News Shares of UK engines and aerospace group Rolls-Royce PLC slumped 20% to a four-year low in early trading Aug. 24, after the company warned that it now expects underlying earnings growth in 2001 to be flat from the year before. The outlook came as a surprise to the market, as Rolls-Royce had previously forecast "double-digit" growth next year. The negative outlook for 2001 overshadowed the release of robust profits, sales, and order book figures for the first half of 2000. Underlying pretax profit rose 26% to 195 million sterling (US$293 million), up from 155 million sterling a year ago. Rolls-Royce said it is on course to achieve double-digit earnings growth for the full year. The company is optimistic the earnings growth setback will not last for more than one year, and there will be a return to "double-digit" underlying earnings growth in 2002. But the market was unimpressed, and Rolls-Royce shares closed down 22.43% at 169.50 pence. Three factors will combine to dent earnings growth in 2001: an adverse mix of business in civil aerospace; a delay in sales of its industrial Trent engine; and ongoing operational restructuring charges. "It's a cumulative effect," John Rose, Rolls-Royce chief executive, told journalists after the results were announced. But he added: "We don't believe this will persist beyond one year." Results for the first half of 2000 were firm on almost all fronts. Half-year sales increased by one-third to 2.801 billion sterling, and the order book stood at 11.8 billion sterling at mid-year, up 15% from 10.3 billion sterling a year earlier. Rolls-Royce also said the expansion of its aerospace business is also creating a growing fleet of engines. "As this fleet matures, the company will benefit from the long-term stream of spare part sales and related services," it said. The increase in sales has opened up the opportunity to further rationalize its operations, the company said. Rose said the rationalization program will require investment of about 50 million sterling per year over the next three years. The restructuring will result in about 3,000 job losses this year, and a further 2,000 jobs in each of the next three years, with half the losses through natural wastage and half through redundancies.

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