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London - British engineer Rolls-Royce warned on Friday that deteriorating economic conditions meant its profit would not rise next year as previously forecast, sending its shares plunging as much as 16%.
Rolls-Royce 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 cancelling 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% lower at worst.
The downgrade was the second this year by the world's second-largest maker of aircraft engines after US group General Electric. 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% of profits in 2013, is expected to be concluded by the end of the year.
World stocks hit a nine-month low on Friday as investors worried about a range of issues from the fragile state of the European economy following recent weak German data, the impact the Ebola virus and unrest in the Middle East.
Rolls-Royce was by far the biggest faller among 300 European blue-chips.
Its shares slumped as much as 16.3% to 787.5 pence, the lowest since September 5, 2012 and the sharpest one-day loss since the last profit warning in February when they plunged 17.8% before ending down 13.6%.
"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, which as a "neutral" rating on Rolls-Royce shares.
Rolls-Royce said in February that government defence 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 soaring demand for fuel-efficient engines for passenger jets made by Airbus and Boeing boosted its civil aerospace unit, which accounted for 43% of sales in 2013.
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 plane, also announced on Friday, 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.
Espirito Santo analyst Edward Stacey said the 2015 downgrade amounted to an 8 to 10% cut to the market consensus forecast for Rolls-Royce earnings per share (EPS).
Thomson Reuters StarMine showed analysts have been reviewing their forecasts recently: in the past 30 days, 10 of 25 analysts cut Rolls-Royce EPS forecasts for 2014 by an average 0.5%.
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 also said on Friday that in the medium term it expected group return on sales of 13.5% to 14.5%, helped by slightly stronger margins of 14.5% to 15.5% at its civil aerospace unit.
