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Rolls-Royce Warns Again On Profit

Rolls-Royce warned that deteriorating economic conditions meant its profit would not rise next year as previously forecast.

Rolls said the market for its main aircraft engine business would strengthen but customers in the oil and gas, mining, construction, industrial and agricultural sectors were canceling or delaying orders.

"The economic environment has deteriorated, and it has deteriorated quite quickly," chief executive John Rishton said.

Wherever you look there were signs of economic slowdown such as the fall in oil and iron ore prices, an absence of growth in Europe and a slowdown in China, Rishton said.

The company, which as recently as July predicted growth in 2015, said underlying profit next year would at best be unchanged from 2014 and 3 percent lower at worst.

The downgrade was the second this year by Rolls. It paves the way for another year of stagnation after more than a decade of strong growth.

Oil prices have slumped more than a fifth since June, prompting customers in that sector to cancel orders, the company said. Rolls-Royce also blamed tightening sanctions on Russia over the Ukraine crisis for hitting its results.

The company said while its direct exposure to Russia was limited, clients with projects in Russia, or exposure to Russia, were not buying as many diesel generators, for instance, as Rolls had expected prior to the sanctions.

One of the businesses dragging on Rolls' performance -- its energy gas turbine and compressor division -- is being sold to Siemens. The sale of the business, which accounted for about 4 percent of profits in 2013, is expected to be concluded by the end of the year.

"This is the second profit warning within eight months for Rolls. People don't like that, and they don't like it especially from a company that has given them the impression that they have highly visible revenues and earnings. There is a big sentiment component to the price movement today," said Harry Breach, an analyst at Westhouse Securities.

Rolls said in February that government military budget cuts would mean flat profits for 2014. It said then: "This is a pause, not a change in direction, and growth will resume in 2015."

Until this year, the company had enjoyed 11 years of strong profit and revenue growth as high demand for fuel-efficient engines for passenger aircraft boosted its civil aerospace unit, which accounted for 43 percent of sales in 2013.

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Rolls-Royce reassured investors that the outlook for its aero engine business remained good, thanks to increasing demand for travel in emerging economies and the need to replace older aircraft with new, fuel efficient models.

Analysts said a small cut to the production rates of the Airbus A330 would only have a marginal impact on the company.

"The message from management today is that civil aerospace is fine, but what they're saying today is the profit warning today is really about the other segments," said Breach.

For this year, Rolls said it was on track to post unchanged underlying profit from 2013, excluding adverse foreign exchange impacts and a one-off charge already announced, as cost cutting had helped stave off the impact of delayed or cancelled orders.

Releasing medium-term guidance three days earlier than scheduled, the company said that in the medium term it expected group return on sales of 13.5 percent to 14.5 percent, helped by slightly stronger margins of 14.5 percent to 15.5 percent at its civil aerospace unit.

(Reuters)