The long period of hard work and considerable effort to bring Rolls-Royce through its long and difficult period are finally showing that the ongoing work now in the hands of new CEO Tufan Erginbilgic are paying off. Confirmation of first half year 2023 results announced today provided a welcome relief and reassurance. There may well still be some way to go yet but this latest set of results from Rolls-Royce make for very pleasing reading.
Improved operational metrics are very visible across the group and a growing order book, Free Cash Flow, lower net debt and high margins, profitability and overall strengthening of the balance sheet are all extremely relevant. The Transformation programme announced by Tufan Erginbilgic in February this year has already demonstrated positive effects.
This together with work done over previous years to endure that the company could survive the huge impact that COVID had on its markets and operation and to make the company more efficient and competitive along with currency benefits and further improvement in the civil aerospace large engine market have all played a significant part in the visibility and strength of financial improvement.
The Rolls-Royce strategy under the new CEO remains to be the best and perform better than its peers. The company has always prided itself being the best and investing in its future. Research and development will thus remain key. Commercial optimisation and cost efficiencies have and will continue to help deliver further improvements in financial performance, competitiveness and cost of operation.
Free cash flow (FCF) was £356m compared to a previous cash outflow of £68mand Net Debt reduced to £2.845m against a previous year end figure of £3,251m.
First half year profits at Rolls-Royce were expected to be good following the trading and guidance update issued just a week ago and so it was that the company has reported underlying half-year revenues of £6.95bn which are themselves up by 30%, operating profits rose to £673m. Importantly, underlying operating margins rose to 9.7%.
Driven by much improved performance from civil aerospace and defence, pre-tax profits and rose to £524m for the period. In Civil Aerospace the company received 240 new engine orders compared to 96 in the same period a year earlier. This included a record order for 68 Trent XWB-97 engines from Air India announced earlier this year. The overall order backlog on large engines stood at 1,405 at period end and guidance for 2023 engine deliveries remains unchanged at between 400 to 500. Importantly, large engine flying hours improved from 65% of pre COVID 2019 levels to 83%. LTSA engine flying hours was 7.7m. Full year guidance on large engine flying hours remains at between 80% to 90% of 2019 levels.
Defence enjoyed a much better half year period with highlights including new orders worth £2.7bn and which included an order for engines for the US Bell V-280 Valor tiltrotor. Power Systems revenue improvements showed a 24% increase were less remarkable but profits remained relatively flat. However, one detects noticeable expectations for performance improvement of this division from here. Order intake was £1.9bn and order backlog stands at £3.9bn.
The New Markets division which includes Rolls-Royce ‘Small Modular Reactor’ nuclear reactor technology developed by the company and on which there are great hopes for the future has remained a drag on profits. However, SMR technology will be crucial to future UK Government energy supply strategy and suffice to say that this has now entered stage 2 of the Generic Design Assessment process in order to meet regulatory requirements. See below for further comments on this.
Group Operating profit guidance remains at £1.2bn to £1.4bn and Free Cash Flow in the £0.9bn to £1bn range. The basis for this is Large Engine Flying Hours at 80% to 90% of 2019 levels and total shop visits in the region of 1,200 to 1,300.
Given the post Covid circumstances that the new CEO found when he arrived at the company in January these are excellent results. They demonstrate the hard work that has and continues to be put in to make Rolls-Royce more efficient and to provide shareholders with decent returns.
One of the future areas of excitement that I previously alluded to above was Small Modular Reactors, an area of development that is hugely important to the UK and that last week Rolls-Royce rightly joined MPs in urging a fast-paced rollout of prospective mini nuclear reactor technology in the UK. They were all responding to a report from the Parliamentary Science Committee that called for more detail from the government on the UK’s nuclear energy strategy.
The report accurately reflected what the industry and Rolls-Royce have been calling for – a faster pace by HMG in decision making”.
Although it is true that HMG has laid out ambitions to increase the UK’s nuclear capacity more than fourfold to 24GW by 2050, critics question how this will be done. “The role of the recently launched Great British Nuclear is unclear beyond its initial task of running a selection between competing small modular reactor developers,” ministers said in Monday’s report.
CHW (London – 3rd August 2023)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785