Rolls-Royce has reported underlying revenues up 4% to £5.31bn, which were boosted by a market recovery in its power systems business and an improvement in civil aerospace. The company said that it had cut its cash burn by £1.1bn to £68mn compared to the prior-year period but despite this, the expected underlying operating profit of £125million was lower than expected, down from £307million a year earlier.
The £1.1bn free cash flow improvement was due to “commercial discipline and increased flying hours”, said Rolls-Royce, which added that even though underlying profit margins were lower in the first half, they are expected to improve in the second half of the year.
Warren East, Rolls-Royce’s outgoing CEO, said: “We have progressed well in the first half of the year, with more than a £1bn improvement in free cash flow, strong order intake in Power Systems, increased engine flying hours and commercial discipline in Civil Aerospace, and targeted investment to support longer-term growth in Defence and New Markets. We are actively managing the impacts of a number of challenges, including rising inflation and ongoing supply chain disruption, with a sharper focus on pricing, productivity and costs. As a result of the actions we have taken over the last few years, our Civil Aerospace business is becoming leaner and more agile, and we are executing on the levers of value creation we shared at our investor event in May. This is setting us up to deliver on our commitments this year and in the future. We are making choices to manage the current challenges, deliver better returns, reduce debt, and generate long-term sustainable value.”
The company stated that it was managing external challenges with “operational and commercial discipline” and concentrating spend with leading suppliers and has increased inventory to address supply constraints.
East said: “Demand for our products and services is growing with another period of record order intake in Power Systems, continued recovery in Civil Aerospace engine flying hours and high visibility of future revenues in Defence with a strong order book. We are focusing on operational and commercial drivers to drive better performance. For example, we are strategically partnering with key suppliers, robustly applying contractual pricing protection in long-term contracts and utilising commodity hedges and fixed price purchasing agreements. We are also focused on maximising efficiency and productivity in manufacturing, such as increasing the repair and reuse of spare parts in services and de-risking original equipment (OE) deliveries with a temporary increase in inventory.”
Free cash outflow from continuing operations of £68m improved by £1.1bn on the prior period, led mostly by increased flying hour receipts in the Civil Aerospace segment. Working capital (excluding long term service agreement (LTSA) balance movements) was a £269m outflow in 2022 H1 with higher inventory resulting from the impact of supply chain disruption partly offset by improved payables performance.
Rolls-Royce pointed toward the continued challenges in hiring, particularly for experienced engineers with certain skills and technical expertise. “We are addressing this with actions to attract, train and retain talent. Our early years recruitment has been strong and our retention rates are good,” said East.
Rolls-Royce’s liquidity position remains strong with £7.3bn of liquidity including £2.8bn in cash at the period end. Net debt of £(5.1)bn included £1.9bn leases. There are no significant debt maturities before 2024. No interim shareholder payment will be made for 2022, confirmed the company.
Rolls-Royce also announced that the Spanish government has approved the sale of ITP Aero to a consortium of investors led by Bain Capital Private Equity. This follows the approval of all other relevant regulatory authorities. As a result, the completion of the transaction, at an enterprise value of approximately €1.8 billion, is expected “in the coming weeks”. Upon completion, sale proceeds of approximately €1.7 billion will be used to help rebuild the Rolls-Royce balance sheet, in support of its ambition to return to an investment grade credit profile in the medium term.
Group guidance for 2022 remains unchanged, with expectations for low-to-mid-single digit underlying revenue growth, and full year underlying operating profit margin to be broadly unchanged on the prior year (2021 FY: 3.8%) and modestly positive free cash flow in 2022.
