Two profit warnings in the space of eight months paint a gloomy picture ahead of full-year results from Rolls-Royce (RR.). After a decade of almost uninterrupted growth, deteriorating global economic conditions, plummeting commodity prices, anaemic defence spending and Russian trade sanctions prompted the engineering giant to cut its full-year guidance twice last year.
Power systems - the division that makes engines for marine and mining equipment - is likely to be one of the biggest casualties of the difficult markets. The company's October profit warning signalled that it would make 5-10 per cent less profit in 2014 than in the previous year due to weaker market conditions and the ripple effect of trade sanctions on Russia.
To manage these headwinds, management in November announced cost-cutting measures, including plans to axe 2,600 jobs. This is likely to cost £60m in both 2014 and 2015 and, after that, generate £80m of savings. Free cash flow is also expected to more than halve to about £350m because of declining revenues and sluggish inventories.
