Rolls Royce Plunges On Bombshell Profit Warning, Dividend Review; Faces "Near Death Experience"

You’d think that with balance sheets full of cash, record high stock prices, and a record low cost of capital, corporate management teams and their newly-minted billionaire executives could afford to splurge on a private jet or two, but apparently, the outlook isn’t looking good for 2016.

Today, Thursday, Rolls Royce (RYCEY) delivered a stunner of a profit warning as new CEO Warren East said the company will take a hit of some $990 million on expected “sharply lower” sales of corporate jets along with headwinds facing the offshore oil market where the company’s customers use vessels powered by Rolls Royce engines.

“The 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,” East noted, adding that “the fixed costs in this business are simply too high, so that small, relatively modest changes in the top line driven by market conditions just make too big an impact on our profit.”

Here are some other highlights from East’s “review” (available here):

Although many Land & Sea businesses had good order intake in the quarter, the offshore business intake was very weak. New contracts included MT30 gas turbines for the Royal Navy’s Type 26 Global Combat Ship, MTU diesel engines for the refit of the Royal Navy’s fleet of Type 23 Frigates and a new agreement for the supply of engines for a range of Sunseeker luxury yachts.

Compared to the expected outturn in 2015, the key areas of demand weakness are affecting selected aerospace and offshore marine markets. In aerospace, these mainly relate to the themes emerging in the third quarter, including sharply lower volumes of corporate jets powered by Rolls-Royce engines, further weakness in demand for corporate jet aftermarket services, further significant declines in aftermarket service demand for our engines on 50-70 seat regional jets and more conservative assumptions on demand reductions for some legacy programs. Together, these impacts on our corporate and regional business account for roughly £100m of our incremental profit headwind.

We have begun to see reduced utilization by some specific operators of older wide-bodied engines. This management of short-term excess capacity, as the market takes delivery of newer, more fuel efficient airplanes, is already starting to impact aftermarket revenue and profit. Together with other changes, the incremental profit headwinds for our wide-bodied engine business are expected to be roughly £100-150m.