Rolls-Royce announced today that its first half 2023 financial results are expected to be "materially above consensus expectations" and as a result has updated its full year guidance.
The aeros engine manufacturer expects significantly improved first half results with a higher underlying operating profit of £660 million-£680 million compared to the expected consensus of £328million. Free cash flow is also expected to be above the £50 million consensus to between £340 million -£360 million, which the company said reflects "continued end-market growth" and its focus on "commercial optimisation and cost efficiencies across the Group".
Rolls-Royce now expects a full year underlying operating profit of £1.2bn-£1.4bn - significantly higher than the consensus of £934million - and free cash flow of £0.9bn-£1.0bn (consensus: £732m) in 2023, helped the company said by "early transformation benefits".
Civil and Defence units led the margin improvement, reflecting higher volumes, commercial improvements and cost efficiencies. The Civil Aerospace unit's first half underlying operating profit is now expected to be in the region of £400million compared to a loss of £79million in the prior period. Rolls-Royce said that the increase in operating profit was primarily driven by "higher aftermarket profitability, which reflects higher volumes and our commercial optimisation actions". Operating profit also benefited from higher spare engines sales and cost efficiencies, the firm added.
CEO Tufan Erginbilgic, who took over control in January said: "Our multi-year transformation programme has started well with progress already evident in our strong initial results and increased full year guidance for 2023. There is much more to do to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient, and growing business. Despite a challenging external environment, notably supply chain constraints, we are starting to see the early impact of our transformation in all our divisions. Better profit and cash generation reflects greater productivity, efficiency and improved commercial outcomes."
The uplift in first half free cash flow was also driven by an improvement in its Long Term Service Agreements (LTSA) balance that increased by approximately £700 million in the first half of the year, compared to £433 million in the year-ago period, which Rolls-Royce said reflected large EFH (engine flying hour) growth to 83% of 2019 levels and the company's commercial optimisation actions, notably "increased pricing and the anticipated collection of overdue debts that had previously been provided for". Of the total LTSA creditor growth, Rolls-Royce expects £800million-£900million to benefit its cash flows for the full year period.
Rolls-Royce continues to expect large EFHs to continue to increase, with full year levels expected to be at 80%-90% of 2019 levels. The engine. maker will also work to make 400-500 total engine deliveries and 1,200-1,300 total LTSA shop visits in the full year 2023.