Rolls-Royce Holdings Plc 2023 Half Year Results

Improved financial results and upgraded guidance helped by early successes on transformation

• Significantly improved first half results: higher underlying operating profit of £673m and free cash flow of £356m reflects continued end-market growth and our focus on commercial optimisation and cost efficiencies across the Group
• Full year guidance raised: on 26 July we upgraded 2023 guidance for underlying operating profit to
  £1.2bn-£1.4bn and free cash flow to £0.9bn-£1.0bn; transformation efforts are accelerating our financial delivery
• Margin improvement led by Civil and Defence: driven by higher volumes, commercial improvements, and cost efficiencies; Power Systems margins were lower, but are expected to improve in the second half due to our pricing actions
• Accelerated financial delivery driven by transformation: our multi-year programme has started well with strong initial results
• Delivering in an uncertain environment: an increased focus on costs and productivity has helped to offset the impact of inflation and supply chain pressures

Tufan Erginbilgic, CEO, said: “Our multi-year transformation programme has started well with progress already evident in our strong initial results and increased full year guidance for 2023. There is much more to do to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient, and growing business. We will share the outcome of our strategy review along with medium-term goals for the Group in November.

Our people are committed, passionate and full of energy. Despite a challenging external environment, notably supply chain constraints, we are starting to see the early impact of our transformation in all our businesses. Better profit and cash generation reflect greater productivity, efficiency, and improved commercial outcomes. We have tightly managed our cost base to offset inflationary cost pressures.

We have a strong portfolio of products and technologies in growing end markets and have secured key contract wins that will create future value and profitable growth. Our continued transformation will grow our business and allow us to play a stronger role in the energy transition.”

Half Year 2023 Group continuing operations

2023 Half Year performance summary

• Higher profitability led by Civil Aerospace: The Group’s underlying operating margin was 9.7% versus 2.4% in the prior period. This was driven by continued revenue growth coupled with early transformation benefits, notably commercial optimisation and cost efficiencies across the Group. Civil Aerospace’s operating margin was 12.4% versus (3.4)% in the prior period due to higher aftermarket profitability and increased large spare engine sales, coupled with cost efficiencies and our commercial optimisation actions. The 13.6% Defence operating margin reflected strong revenue growth and cost efficiencies. Power Systems’ margin of 7.0% was lower than the prior period but we expect better performance in the second half of the year because of pricing actions, cost efficiencies and seasonally higher volumes. Losses increased in New Markets as expected due to planned growth activities.
• Stronger cash flow: Free cash flow from continuing operations of £356m compared to an outflow of £(68)m in the prior period. Underlying operating profit improved from £125m to £673m in the period. A long-term service agreement (LTSA) balance change of £727m (2022 H1: £433m) reflected large EFH (engine flying hour) growth to 83% of 2019 levels and our commercial optimisation actions, notably increased pricing and the anticipated collection of overdue debts that had previously been provided against. A portion of our LTSA receipts are payable to our RRSPs (risk and revenue sharing partners), which reduces the amount of cash retained. Of the total LTSA balance growth of £727m, c.£0.5bn benefited our cash flows in the period. Working capital was an outflow of £(576)m in the first half of the year (2022 H1: £(269)m), mainly driven by a £(0.6)bn outflow from higher inventories as a result of supply chain challenges and to satisfy volume growth in the second half of 2023. Net debt improved to £2.8bn (2022 FY £3.3bn). We remain committed to returning to an investment grade credit rating.
• Accelerated financial delivery: Our financial performance reflects improved end-markets helped by the early benefits of transformation and rigorous performance management. We have tightly managed our cost base which has helped to offset inflationary cost pressures. Our actions on pricing across the Group have already started to deliver results with more expected in the second half of the year. Each business has been building and delivering plans to address performance and deliver a step-change in operational and financial performance.
• Capital Markets Day: We will communicate the findings of our strategic review and set medium-term financial targets at a Capital Markets Day on 28 November in London. Further details will be provided in due course.

Outlook and 2023 Guidance

First half performance and the progress of our transformation programme give us confidence in delivering higher profit and cash flows in 2023.  

Operating profit guidance of £1.2bn-£1.4bn assumes £200m-£250m of targeted contract improvements.

Free cash flow guidance of £0.9bn-£1.0bn comprises higher underlying operating profit and assumes £1.0bn-£1.2bn growth in the Civil LTSA balance (2022 FY: £792m). Of the total LTSA creditor growth, £800m-£900m is expected to benefit our cash flows in the period. We continue to anticipate a year-on-year headwind of c.£200m associated with legacy Boeing original equipment (OE) concessions, an increased c.£150m adverse impact due to fires at two suppliers’ premises, and a new expected outflow of c.£100m in respect of the outcome of a legal judgment.

Results meeting and conference call

Our results presentation will be held at UBS and webcast live at 09:00 (BST) today. Downloadable materials will also be available on the Investors section of the Rolls-Royce website. www.rolls-royce.com

To register for the webcast, including Q&A participation, please visit the following link: https://app.webinar.net/8m6Mp2Vpzya.

Please use this same link to access the webcast replay which will be made available shortly after the event concludes. Photographs and broadcast-standard video are available at www.rolls-royce.com.

Download the full press release.