Rolls-Royce shows improved financials in first half 2023 performance

Photo Credit: Rolls-Royce, Artist interpretation of new UltraFan Engine

Aircraft engine manufacturer Rolls-Royce has released its performance data for the first half of 2023, showing significantly improved first half results.

The company has reported a significantly higher underlying operating profit of £673 million and free cash flow of £356 million, showcasing sustained growth within its end markets.

By focusing on commercial optimization and cost efficiencies across the group, Rolls-Royce has managed to achieve these impressive results.

Raising Full Year Guidance

Rolls-Royce’s forward trajectory looks promising as it raised its full-year guidance on July 26th. The company upgraded its 2023 guidance for underlying operating profit to a range of £1.2 billion to £1.4 billion, while also forecasting a free cash flow between £0.9 billion and £1.0 billion.

This upward revision indicates that the transformation efforts undertaken by the company are significantly accelerating its financial performance.

Rolls-Royce PGS1
Rolls-Royce PGS1 (Photo: Rolls-Royce)


Rolls-Royce H1 Performance Summary

One of the standout features of Rolls-Royce’s performance in the first half of 2023 is the substantial increase in profitability, largely attributed to its Civil Aerospace division.

The group’s underlying operating margin soared to 9.7%, marking a substantial improvement from the 2.4% recorded in the previous period.

This sound growth was fueled by sustained revenue expansion and early benefits arising from the ongoing transformation initiatives, including commercial optimization and cost efficiencies across the organization.

The Civil Aerospace operating margin was even more noteworthy, reaching an impressive 12.4%, in stark contrast to the (3.4)% margin reported in the prior period.

This uptick in margin was driven by heightened aftermarket profitability, increased sales of large spare engines, and the successful execution of cost efficiencies and commercial optimization strategies.

Rolls-Royce’s Defence division also achieved a commendable 13.6% operating margin, reflecting robust revenue growth and effective cost management.

The Power Systems segment, though experiencing a slight dip in its margin at 7.0%, remains optimistic about better performance in the second half of the year. The anticipation stems from pricing actions, cost efficiencies, and seasonally higher volumes.

However, as anticipated, New Markets reported increased losses due to planned growth activities.

A Rolls-Royce hydrogen engine on display.
Photo Credit: Rolls-Royce

Cash Flow and Profitability

The company’s cash flow also experienced significant enhancement, with free cash flow from continuing operations reaching £356 million. This impressive figure is a notable improvement from the £(68) million outflow reported in the preceding period.

The underlying operating profit also witnessed a substantial boost, jumping from £125 million to an impressive £673 million.

A key contributor to this improved cash flow was a long-term service agreement (LTSA) balance change of £727 million. This change was driven by significant engine flying hour (EFH) growth, accounting for 83% of 2019 levels.

Additionally, the company’s commercial optimization endeavors, including increased pricing and the successful collection of overdue debts, played a pivotal role.

Financial Delivery and Transformation

Rolls-Royce’s financial achievements in the first half of 2023 underscore the positive impact of ongoing transformation efforts and robust performance management practices.

The company’s stringent cost base management has been instrumental in mitigating inflationary cost pressures. Furthermore, the company’s pricing initiatives across its business divisions are already yielding results, with further positive outcomes anticipated in the second half of the year.

Each of Rolls-Royce’s business units has been meticulously crafting and executing plans to enhance operational and financial performance. This concerted effort is expected to lead to a significant step-change in the company’s overall performance.

CEO Perspective

Tufan Erginbilgic, the CEO of Rolls-Royce, expressed optimism about the company’s transformation journey. He noted that the multi-year transformation program has yielded promising initial results and prompted an upward revision of the full-year guidance for 2023.

While acknowledging the challenges presented by external factors like supply chain constraints, Erginbilgic highlighted the positive impact of the ongoing transformation across all business segments.

The improved profitability and cash generation can be attributed to increased productivity, enhanced efficiency, and better commercial outcomes.

The company’s steadfast focus on managing its cost base has been crucial in balancing inflationary pressures.

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By Len Varley - Assistant Editor 5 Min Read
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