Rolls-Royce Holdings Plc 2022 Full Year Results

Improved profit and cash in 2022; transformation programme underway to create a high-performing, growing and competitive business

• Improved orders, revenue, profit and cash flow in 2022
  • Strong new order wins in Civil Aerospace and Defence and a record order book in Power Systems
  • Underlying operating profit of £652m, £238m higher than the prior year, with the increase driven by Civil Aerospace and Power Systems
  • Free cash flow from continuing operations of £505m, £2.0bn higher than the prior year, led by engine flying hour recovery
  • Net debt of £3.3bn, down from £5.2bn at end 2021, due to disposals and improved cash flow

• Focused on delivering significant performance improvement in 2023 and beyond
  • Transformation programme in place to deliver further performance improvements from 2023, informed by rigorous benchmarking
  • Underlying operating profit guidance of £0.8-£1.0bn and free cash flow of £0.6-£0.8bn in 2023; includes early benefits from transformation
  • Strategic review underway to identify investment priorities; medium-term financial targets to be set in the second half of 2023

Tufan Erginbilgic, CEO said: “It is an honour to lead Rolls-Royce, one of the world’s most trusted brands and a business with strong positions in growing markets. Our people take tremendous pride in our innovation and engineering solutions. Together, we must now move at pace and harness that pride to create a high-performing, growing and competitive business.

While our performance improved in 2022, we are capable of much more. Our transformation programme will improve our efficiency and commercial outcomes, and deliver a sustainable reduction in working capital. This will require a winning culture, underpinned by more effective performance management and a shared determination to deliver cash and reduce debt. Our success will enable us to reward investors for their support and invest in future growth.

Our transformation programme is already underway and is moving at pace. It will include a strategic review so that we can prioritise our investment towards the most profitable opportunities. We will report the findings together with our medium-term goals in the second half of this year.”

Full Year 2022 Group continuing operations

¹Includes discontinued operations
A reconciliation of alternative performance measures to their statutory equivalent is provided on pages 48 to 51

2022 performance summary

• Recovering demand. Large engine flying hours (EFH) in Civil Aerospace grew by 35% year on year as recovery in international travel continued. New large engine orders were received from Malaysia Aviation Group, Norse Atlantic Airways and Qantas. The Bell V-280 Valor, powered by our AE1107F engines, was selected by the US Army for the Future Long Range Assault Aircraft programme. Order intake in Power Systems grew 29% to £4.3bn.
• Higher profit and margins. The year on year increase in Group operating profit was driven by higher profits in Civil Aerospace and Power Systems, partly offset by lower profit in Defence and increased investment in New Markets. The higher Group margin versus the prior year was driven by improvements in long-term service agreement (LTSA) contract margins and increased spare engines profit in Civil Aerospace. This was partly offset by the non-repeat of a foreign exchange revaluation credit in Civil Aerospace and legacy spare parts sales in Defence in 2021, and lower margins in Power Systems due to cost increases.
• Stronger cash flows. Free cash flow from continuing operations improved from an outflow of £1.5bn in 2021 to an inflow of £0.5bn, driven by 35% growth in large engine flying hours, comparatively lower growth in large engine major shop visits at 19%, and higher Defence cash flow. Higher inventory in Power Systems saw its cash conversion ratio fall. Free cash flow benefitted from higher Civil Aerospace LTSA invoiced flying hour receipts of £3,564m (2021: £2,289m), the collection of overdue balances in Civil Aerospace (c£180), and a customer advance in Defence (£63m) and Power Systems (year on year increase of c£150m).
• Lower net debt. Net debt was reduced from £5.2bn to £3.3bn, as we completed our disposal programme. We have £4.1bn of drawn debt, of which £0.5bn matures in 2024, £0.8bn in 2025 and £2.8bn in 2026-2028, and £1.8bn of lease liabilities. We have £2.6bn cash and £5.5bn undrawn facilities.
• Shareholder payments will not be made for 2022. We are committed to returning to an investment grade credit rating through performance improvement, and to resuming shareholder payments.

Transformation programme and strategic review

We have carried out extensive work to benchmark our performance against that of our peers. This work shows that there is significant scope for us to deliver materially higher profit, cash flows and returns. We will create a stronger, growing business with a clear proposition for investors based upon delivering:

• a high quality and competitive business, focused on profitable performance and operational efficiency;
• growing sustainable cash flows, generated from operations and disciplined capital investment; and
• a strong balance sheet and growing shareholder returns.

We have already begun an ambitious transformation programme to deliver a step-change in our performance. It consists of seven workstreams, each led by a senior executive:

Efficiency and simplification - delivering sustainable cost efficiencies.

Commercial optimisation - getting the right reward for the risks we take and the value we create for customers.

Working capital – delivering a significant and structural reduction across the Group.

Business improvement – each business unit building and delivering plans to address performance gaps to realise its potential.

Strategic review – enabling prioritisation of investment opportunities.

Performance management – delivering on our expectations of high performance from all businesses and employees.

Purpose and culture – instilling our people with the right mindset to be confident, proactive and timely in our actions.

The outcomes of these workstreams will drive a clear and granular plan. We will communicate this to you alongside medium-term financial targets in the second half of the year.

Outlook and 2023 Guidance

A continued recovery in our end markets and the actions we are taking give us confidence in delivering higher profit and cash flows in 2023.

Underlying 2023 financial guidance

Our 2023 operating profit guidance of £0.8-1.0bn assumes £100-200m of targeted contract improvements (2022: £319m).

Our 2023 free cash flow guidance of £0.6-0.8bn is based on c£500-700m growth in the Civil LTSA Creditor (2022: £792m), a year on year headwind of approximately £200m associated with legacy Boeing OE concessions and a c£100m adverse impact in 2023 due to fires at two suppliers’ premises in late 2022 and early 2023. This cash impact will reverse in 2024.

In 2023, we assume large engine flying hours at 80-90% of 2019’s level and 1,200-1,300 total shop visits.

Additional detail is included in the results presentation and supplementary data slides.

Results meeting and conference call

Our results presentation will be held at the London Stock Exchange and webcast live at 08:30 (GMT) today. Downloadable materials will also be available on the Investor Relations section of the Rolls-Royce website. https://www.rolls-royce.com/investors/results-and-events.aspx

To register for the webcast, including Q&A participation, please visit the following link: https://app.webinar.net/0LPb3yGpVaO

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

Enquiries:

This results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and Rolls-Royce Holdings plc and its directors accept no liability to any other person other than under English law.

Notes:

Statutory results were referred to as “reported” results in the 2021 full year results statement.

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