FY22 results from Rolls-Royce this morning prove not only visibility of the tremendous recovery achieved following several extremely difficult and traumatic years for the company but importantly, before he departed at the end of last year, former CEO, Warren East has delivered everything that he promised.
New CEO, Tufan Erginbilgic who took over the CEO role on January 1st has hit the ground running and his opening words in the FY22 results statement show not only his belief that Rolls-Royce will need to do a lot better in the years ahead but also that what he has today outlined as a ‘transformation programme’ to move forward he is absolutely determined to make achieve better and more consistent and sustainable performance and future results.
First, let me show Tufan Erginbilgic opening remarks:
“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.”
Transformation priorities that the new CEO outlined and need to be delivered if the unarguable potential that Rolls-Royce clearly has in respect of its market and technology opportunities include significantly improving operating profit and cash, delivering significant efficiency improvements, generating sustainable cash flows, reducing debt and with a strengthened balance sheet, improving shareholder returns and importantly, developing a clear and ‘granular’ strategy in order to play a key role in energy transition.
The Transformation Planning Group will look at efficiencies and simplification of operation and across the Rolls-Royce organisation, unlocking synergies where these may have been ignored in the past, reducing working capital requirements and putting in place disciplines in order to sustain improvement. This will include what is termed ‘commercial optimisation and look closely at contract profitability and commercial edge. The strategic review as such will look at differentiated and executable strategies, measurable medium-term targets and overall, business improvement through creation of higher margins and improved operational performance. Performance management is crucial but the transformation programme will also look at purpose and culture.
In respect of commercial optimisation, this is also an attempt to look at what the CEO believes should be the right level of reward in regard of value delivered and the risk taken for customers.
The focus will clearly be on Civil Aerospace and Power Systems divisions but that does not imply in any way that defence is not an equally important part of Rolls-Royce. Finally, this is planned to be about building capabilities, governance and accountability I order to upskill across all parts of Rolls-Royce.
With a renewed and intensified focus on performance and efficiency and recognising recovery in end markets particularly in respect of Civil Aerospace and notwithstanding the external environment remains fragile and challenging, what the new CEO has determined is an aim to create a high performing, competitive, resilient and growing business – one that has significant national and international opportunities but clearly requires to improve and expand cash generation and profitability.
Sceptics may well argue that many have tried in the past to improve the underlying performance of Rolls-Royce but I would remind that the level of international civil aerospace industry collapse in 2020/21 and the corresponding impact on Rolls-Royce balance sheet and profitability was unprecedented and that for some time prior to that the company was also heavily engaged in sorting out a number of serious technology related issues and which pleasingly it successfully achieved but that came at a heavy cost.
Nevertheless, it has been well recognised by analysts and investors for many years that while the company has long been at the top of its game in respect of developing engine technology with reduced fuel burn and thus, improving aircraft emissions and investing in other related technology developments, that it needs to improve the bottom line.
None of the transition plans announced today are meant to take anything away from what the former CEO, Warren East and his team achieved. I would put it this way – by what they did and achieved, Warren East and Finance Director Panos Kakoullis and his predecessor, Stephen Daintith saved Rolls-Royce from the real prospect of oblivion.
Turban Erginbilgic now has the task of determining a future medium and long-term strategy and ensuring that Rolls-Royce better performs for its shareholders. In listening to him this morning and whilst we have not yet met, I believe that his determination to succeed is both realistic and achievable.
As to the realities of what the former CEO and his excellent team managed to achieve over the past year, we should not that there were some great new order wins in civil aerospace and Defence and a record order book achieved in Power Systems. Group revenues increased by 14% to £12.7bn while underlying operating profits were £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 prior year, led by engine flying hour recovery Net debt at year end was of £3.3bn, down from £5.2bn, due in the main to disposals and improved cash flow. Profit before taxation was £158 million compared to £10m. Civil Aerospace returned a profit of £143 million compared to a £172 million loss in FY21, those in Power Systems rose from £242m to £281m last year while Defence operating profits slipped to £432 million from a previous £457 million on revenue of £3.66bn which was 2% up.
Rolls-Royce is now as far as I am concerned very much on the up and while no-one can predict geo-political or other unforeseen outcomes, with his predecessor having delivered what was promised new CEO Tufan Erginbilgic begins the task of commercial and operational optimisation. The transformation programme provides and new and interesting dynamic at Rolls-Royce but it is without doubt timely.
A new momentum has now begun – one that is in itself transformational and that importantly, will not ignore the issue of culture. Specific transition strategy detail will not appear until the second half of the year but if it can achieve the purpose of improving the underlying performance weakness inherent in Rolls-Royce which I believe it will, it will be very worthy of investor support.
CHW (London – 23rd February 2023)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785
Skype: chwheeldon