Rolls Royce Q4 FY 2023 Earnings
Posted:
The Company's Profits Double Amid Turnaround Momentum
Rolls-Royce, known for manufacturing jet engines for commercial airplanes as well as power systems for marine vessels including ships and submarines, announced fourth-quarter results on 22nd February.
The UK engine maker reported an underlying operating profit of £1.6 billion in 2023, compared to £652 million in 2022, marking 143% growth on a year-on-year basis. This reflects the influence of the company's strategic initiatives, which have resulted in commercial optimization and cost-efficiency advantages across the entire group.
Additionally, the group announced a record free cash flow of £1.3 billion, propelled by robust operating profit and the ongoing expansion of its long-term service agreement (LTSA) portfolio.
Moreover, The return on capital more than doubled to 11.3%, showcasing enhanced operating profit, disciplined capital allocation, and efficient working capital management strategies.
The group reported a rise in revenues to £15.4 billion in 2023 as compared to £12.7 billion in 2022 representing a surge of 22% YoY. Furthermore, underlying operating margins surged from 5.1% to 10.3%.
In Civil Aerospace, large engine flying hours (EFH) rebounded to 88% of 2019 levels, marking a substantial increase from 65% in 2022. Moreover, large engine orders reached their highest point in over 15 years, fueled by significant orders from Air India and Turkish Airlines.
Rolls-Royce announced that large engine flying hours, a crucial metric as the company earns revenue based on the time its engines spend in operation, rebounded to 88% of pre-Covid 2019 levels. This marks a significant increase from 65% recorded in 2022.
Additionally, Profits for Power Systems surged by 44% to £413 million as Rolls-Royce capitalized on robust demand for power generation solutions and services within the rapidly expanding data center market.
Under the leadership of CEO Tufan Erginbilgic, the former BP executive who resumed the position a year ago, Rolls-Royce's stock has surged by over 200%. His transformation strategy, aimed at reducing costs and enhancing pricing to boost margins, has gained significant traction.
Erginbilgic has also declared a halt to accepting loss-making contracts, aiming to bolster Rolls-Royce’s resilience, fortify its balance sheet, and enhance profitability.
CEO Tufan Erginbilgic in a press release said that In 2023, the company's transformation has yielded a record performance, propelled by commercial optimization, cost efficiencies, and advancements in our strategic initiatives.
He further stated "Despite facing a volatile environment characterized by geopolitical uncertainty, supply chain challenges, and inflationary pressures, Rolls Royce has achieved this significant advancement across all its divisions.
The former oil industry executive is simplifying the organization and minimizing redundancy, with plans to reduce up to 6% of its workforce across its three divisions.
Outlook
Rolls Royce for 2024 anticipates a minimum 6% growth in underlying operating profit, projecting it to fall within the range of £1.7 billion to £2 billion, with free cash flow expected to range between £1.7 billion and £1.9 billion.
In Civil Aerospace, the group anticipates that by 2024, large engine flying hours (EFHs) will expand to 100-110% of 2019 levels, with an estimated 500-550 total original equipment (OE) deliveries and 1,300-1,400 total shop visits. Rolls Royce's 2024 free cash flow projection is anchored on civil net LTSA creditor growth at the lower end of the mid-term range (£0.8bn - £1.2bn), as compared to £1.1bn in 2023.
The UK engine giant estimates an underlying operating profit range of £2.5bn-£2.8bn, an operating margin of 13-15%, free cash flow between £2.8bn-£3.1bn, and a return on capital of 16-18%. These objectives are based on their expectations for achievement by 2027.
Despite its improved performance, Rolls-Royce has opted to defer reinstating dividend payouts to investors. This decision comes as dividends have been suspended since the onset of the COVID-19 pandemic, which significantly impacted the group, plunging it into crisis.
The company affirmed its commitment to reinstating dividend payments, stating that it intends to do so "once we are comfortably within an investment-grade profile and the strength of our balance sheet is assured."
The Shares in Britain’s leading engineering company surged by 9% to £364p on 22nd February afternoon in London.
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