Rolls-Royce warns defence cuts to take toll on 2014 revenues and profits

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Rolls-Royce warned that revenue and profit would be flat in 2014 – its first year without growth for a decade – as defence cuts in major markets take their toll.

The engine maker said this year would see a "pause" in revenue and profit growth after a strong 2013 and that sales would pick up again the following year. Its shares tumbled more than 10% in early trading, wiping £2bn off its market capitalisation.

The chief executive, John Rishton, said: "This is a break in a 10-year trend that will be followed by more growth in 2015. In the last two years we have surprised on the upside in terms of defence performance.

"We have defied gravity for a couple of years compared with other defence companies and the impact of a couple of things is coming together in 2014."

The world's second-biggest aircraft engine maker expects revenue to fall between 15% and 20% at its defence business and a small reduction in revenue but modest profit growth at its marine division. The defence arm will feel the effects of "well-publicised cuts" in the US and the end of delivery programmes in India and the Middle East.

Rolls-Royce's underlying pre-tax profit for 2013, excluding an acquisition, rose 23% to £1.76bn – near the top of analyst forecasts of between £1.36bn and £1.89bn according to Thomson Reuters.

Rishton said a record order book of £71.6bn – up 18% – underpinned the group's prospects for many years to come and that a flat 2014 would be "a pause, not a change in direction". He said confidence on growth allowed Rolls-Royce to increase its annual dividend by 13% to 22p.

But his assurances could not stop the company's shares plunging on the news. They were down 10.3% to £10.84 in early trading and were the second biggest fallers in the FTSE 100 behind Tate & Lyle, which also warned on profits.

Analysts at City broker Jefferies, who recommend buying Rolls-Royce shares, said: "In short, defence takes a sharp step back to where it was in 2010. Then, RR indicates growth will resume. We saw it coming to a degree, but were wrong-footed by defence doing better than we expected between 2011 and 2013."

Rolls-Royce is the latest big UK company to warn about its trading as governments cut spending and emerging markets slow down in a still-fragile world economy. Royal Dutch Shell, BG Group and Pearson have all shaken investors with profit warnings this year.

Rolls-Royce said its internal inquiry into alleged bribery and corruption in Indonesia and China was making progress. Rishton declined to comment on two arrests made by the Serious Fraud Office on Wednesday in connection with the affair. Neither of those arrested had been a Rolls-Royce employee but were said to have been agents used by the company.

"It's a matter for the authorities," Rishton said.

Powered by Guardian.co.ukThis article was written by Sean Farrell, for theguardian.com on Thursday 13th February 2014 09.22 Europe/London

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