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Rolls-Royce seeking a 'step change' in its mid-term financial performance

28th November 2023

By: Rebecca Campbell

Creamer Media Senior Deputy Editor


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UK-based global major propulsion and power systems group Rolls-Royce announced on Tuesday, as part of a Capital Markets Day that it is hosting, that it is targeting a major uplift in its performance, over the medium term (that is, until 2027). The intent is to create a business that is (in the order given by the group) high-performing, competitive, resilient and growing.

In terms of numbers, the company is seeking, in this timeframe, to achieve an operating profit of between £2.5-billion and £2.8-billion and a free cash flow of £2.8-billion to £3.1-billion. The targeted operating margin is from 13% to 15%, and for the return on capital, from 16% to 18%.

“Rolls-Royce is at a pivotal point in its history,” asserted CEO Tufan Erginbilgic. “After a strong start to our transformation programme, we are today laying out a clear vision for the journey we need to take and the areas we must focus. We are creating a high-performing, competitive, resilient and growing Rolls-Royce that will have the financial strength to control and shape its own destiny. We are confident in our ability to achieve these ambitions and have a clear and granular plan to deliver on our targets. We have made significant progress, with 2023 profit and cash forecast to be materially ahead of 2022.”

The plan identifies areas in which the group will invest, areas in which it will seek partnerships, and areas from which it will divest (although this will be a phased process because assets will only be sold at the right time and for the right price, and the sale of a specific asset might also be a phased process). A cross-group approach will drive synergies and simplify the way it operates, making it more competitive. Implementation will be progressive but not necessarily linear. Should it be possible to accelerate the process, that will be done. The divestment programme will have a gross value of between £1-billion and £1.5-billion, over the next five years. The plan also assigns targets to each of the company’s three divisions, Civil Aerospace, Defence and Power Systems.

Civil Aerospace will have to achieve the biggest increase in operating margin, from 2.5% last year, to 15% to 17%. The division will focus on its current commercial airline widebody airliner and business jet markets, to get maximum value from its Trent and Pearl engine families. For the future, it will pursue the UltraFan engine programme, which the group sees as “world-leading”. But the company also believes that it is in a good position to re-enter the single-aisle airliner engine market, in partnership with another enterprise.

For the Defence business, the aim is to increase the operating margin, from 11.8% last year, to 14% to 16%. The division is set to benefit from customer-funded investments in the Combat, Submarines and Transport areas. The submarines area (Rolls-Royce designed and built the nuclear reactors for British atomic submarines) will benefit from international cooperation programmes which will drive growth (clearly a reference to the AUKUS – Australia, UK, US – joint nuclear submarine programme). The division’s expertise could also be applied to “adjacent” nuclear applications, particularly small modular reactors (SMR) and micro-reactors. (The group’s SMR project is being developed in partnership with several other companies.)

Power Systems is the group’s most diverse and shortest cycle business. For this division, the aim is to increase operating margin from 2022’s 8.4% to 12% to 14%. This business will focus on power generation. But the group will also consider partnerships in both power generation and battery energy storage systems.

“We are setting compelling and achievable financial targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance,” affirmed Erginbilgic. “This will benefit not just our shareholders but our people, customers and partners. We are building ‘one Rolls-Royce’. A company that can fully realise its potential, ensuring the excellence and innovation that helped shape the modern world, endures long into the future.”

Edited by Creamer Media Reporter


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