Rolls-Royce’s underlying operating margin demonstrated significant improvement, reaching 9.7% compared to 2.4% in the previous period. This positive change was fuelled by continuous revenue growth and early transformational benefits, particularly in commercial optimisation and cost efficiencies across the group.
Civil Aerospace achieved an operating margin of 12.4% (versus (3.4)% in the prior period) due to higher aftermarket profitability, increased sales of large spare engines, and successful cost efficiencies and commercial optimisation efforts.
The Defence segment also performed well, achieving a robust operating margin of 13.6%, attributed to strong revenue growth and effective cost efficiencies.
Although Power Systems’ margin of 7.0% was lower than the previous period, the company expects better performance in the second half of the year, thanks to pricing actions, cost efficiencies, and an anticipated increase in seasonal volumes.
New Markets experienced increased losses as expected, mainly due to planned growth activities.
Rolls-Royce also witnessed a notable improvement in cash flow, with free cash flow from continuing operations amounting to £356 million, a significant turnaround from the (£68) million outflow in the prior period. The underlying operating profit also saw substantial improvement, rising from £125 million to £673 million during this period.
A long-term service agreement (LTSA) balance change of £727 million (compared to £433 million in 2022 H1) can be attributed to substantial EFH (engine flying hour) growth, reaching 83% of 2019 levels, and successful commercial optimization actions, including increased pricing and the anticipated collection of overdue debts that were previously accounted for. However, a portion of the LTSA receipts is payable to risk and revenue sharing partners (RRSPs), which reduces the net cash retained. Out of the total LTSA balance growth, approximately £0.5 billion positively impacted cash flows in the period.
Working capital proved to be a challenge with an outflow of (£576) million in the first half of the year (compared to (£269) million in 2022 H1), largely influenced by a (£0.6) billion outflow from higher inventories due to supply chain difficulties and the need to meet volume growth demands in the second half of 2023.
Despite these challenges, net debt improved to £2.8 billion (compared to £3.3 billion in 2022 FY), and Rolls-Royce remains committed to achieving an investment-grade credit rating.
The accelerated financial delivery can be attributed to improved end-markets, aided by early transformational benefits and effective performance management. Rolls-Royce has been proactive in managing its cost base to counter inflationary pressures. Pricing strategies implemented across the Group have already started to show positive results, with further improvements anticipated in the second half of the year. Each business unit has diligently worked on plans to enhance performance and achieve a significant step-change in both operational and financial aspects.
