Rolls-Royce share price falls as sales drop for the first time in a decade

 
Emma Haslett
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Rolls-Royce had a tough year in 2014 (Source: Getty)

The figures

Shares at troubled engineering giant Rolls-Royce opened 3.3 per cent lower this morning after it reported a sales drop of six per cent to £13.7bn in 2014, the company's first drop in sales in a decade. Revenues fell six per cent to £14.6bn, while underlying pre-tax profits dropped eight per cent to £1.6bn (dead on analyst expectations) and reported profits before tax plummeted 96 per cent to £1.7bn.

It said it expected a dividend of 23.1p per share.

Why it's interesting

It's safe to say 2014 wasn't great for Rolls-Royce. Having issued two profit warnings, its shares ended the year 25 per cent lower than they started it.

On Friday, the company warned lower oil prices would hurt its profits, but that's not the whole story. Falling demand from governments (lest we forget, the coalition has cut government defence spending) means its high-powered aircraft engines were not in demand as much last year as they have been.

And investors will also be concerned about the impact of Russian sanctions: they certainly were back in October, when Rolls-Royce's shares closed 11.5 per cent down after it warned sanctions against the country would dent its underlying revenue to the tune of 3.5-4.5 per cent.

That was one of two profit warnings it issued in 2014. Today, chief executive John Rishton said pre-tax profits are likely to be hit again this year, falling as much as four per cent to £1.4bn-£1.55bn.

However, today the company announced a new secret weapon: former HSBC banker Irene Dorner, who will replace non-exec director John Neill on its board in July. Meanwhile, James Guyette, the president and chief executive of its North American arm will retire.

Should investors be alarmed? The US' Federal Aviation Authority has found US carriers alone will experience passenger growth of 2.2 per cent a year over the next 20 years, while 30,000 new civil aircraft will launch over those two decades. Someone will need to build the engines to power those new planes.

What Rolls-Royce said

Rishton emphasised the company's plans for a restructuring programme, which is likely to result in the loss of 2,600 jobs.

2014 has been a mixed year during which underlying revenue fell for the first time in a decade, reflecting reduced spending by our defence customers, macroeconomic uncertainty, and falling commodity prices. In response to these headwinds, we are taking decisive action to improve the group's financial performance and accelerating our focus on the 4Cs: customer, concentration, cost and cash. This includes a major restructuring programme in our aerospace division and continued rationalisation of our land and sea division.
The fundamentals of our business remain solid, with long-term growth in demand for the complex power systems we deliver across our aerospace and land and sea divisions.
Our record order book demonstrates the faith our customers continue to place in our technology and underpins our confidence in future growth.

In short

After a decade of strong growth, things aren't going well for Rolls-Royce at the moment. But it has responded quickly to its problems, and orders should begin to pick up.

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