By Tom Batchelor
February 23, 2024, © Leeham News: The turnaround at Rolls Royce is well-underway as the company revealed a more than doubling of its annual profit – ahead of expectations – at its full year 2023 results announcement on Thursday.
Just a year after the incoming CEO Tufan Erginbilgic warned that the engine group was a “burning platform”, revenues climbed to £15.4bn ($19.4bn at current rates), up from £12.7bn ($16bn) in 2022, and profits soared by 143% to £1.6bn ($2bn), from £652m ($823m). Analysts had estimated profits closer to £1.3bn ($1.6bn) for 2023.
Key financial indicators for Rolls Royce in 2023. Click to enlarge. Credit: Rolls Royce
RR delivered a total of 458 engines last year, including 262 destined for large civil aircraft, alongside orders for around 700 powerplants.
Speaking during a briefing call, former BP executive Erginbilgic called it a “transformation” which had “delivered a record performance in 2023”.
Notably, progress is being made on improvements to the Trent XWB-97 and Trent 1000 engines, designed to address durability issues reported by customers operating widebodies in dry and dusty environments.
“We are creating momentum and a track record of significant delivery,” Erginbilgic said, though “bottlenecks” caused by both labor and parts shortages would continue to be a factor into 2026.
“We expect the supply chain to remain challenging for another 18-24 months,” he said.
Transformation plan
The 143% year-on-year rise in operating profit has been driven by Erginbilgic’s cost-cutting plan as well as improved pricing on RR products.
It was also helped by the recovery of large engine flying hours (EFH) in civil aerospace to 88% of 2019 levels, up from 65% in 2022, and increased aftermarket profits.
“We have a growing market share in [the] widebody [market] and we expect to benefit from a continuing recovery in global travel, and in particular international travel in Asia,” he told analysts.
“In defence we see more long term support for defence and governmental spending resulting from geopolitical tensions.”
Rolls Royce’s Civil Aerospace division has performed particularly well. Click to enlarge. Credit: Rolls Royce
The company’s operating margin has risen from 5.1% in 2022 to 10.3% last year, and free cash flow is up from £505m ($637m) to nearly £1.3bn ($1.6bn).
Civil Aerospace has been the star of the show, with an operating margin of 11.6% – up 9.1 percentage points. Operating profit rose in this division from £143m to £850m, a near 500% increase.
Defence and Power Systems also delivered higher margins compared to last year.
The transformation was reflected in the company’s share price of 368 pence on Thursday – a high last seen in 2018.
Erginbilgic called it a “significant step up in performance” as the company seeks to become “competitive, resilient, and growing”.
Engine issues
The fly in the ointment for RR remains durability issues affecting some of its engines.
Emirates Airline president Sir Tim Clark publicly scolded RR last year for the durability of the Trent XWB-97 engine, which powers the Airbus A350-1000.
However, it is hoped that a £1bn ($1.3bn) program to improve on-wing time will yield results, with “big improvements” promised for both the Trent XWB-97 and Trent 1000, one of two engine options for the Boeing 787 Dreamliner.
The Trent XWB-97 will benefit from a new coating for the high-pressure turbine (HPT) blade that is more resilient. That should result in a doubling of the time-on-wing in “non-benign” environments (i.e. the sandy and dusty conditions of Emirates’ Dubai base), and increase this by 50% in “benign” environments.
Finalising work on the project will take two-to-three years before it is then brought to market, but Erginbilgic said he met with Sir Tim last week and that the airline chief was “very happy” with the planned improvements.
RR is also certifying a new Trent 1000 TEN (Thrust, Efficiency and New technology) blade for the 787 program, having already certified the same blade improvement for the Trent 7000, which powers the Airbus A330neo. RR has retrofitted 20% of that installed fleet.
Erginbilgic acknowledged the timeframe for the Trent 1000 TEN had slipped from an expected certification in 2023, but that the upgraded blade, when it arrived, would double time-on-wing for the powerplant.
Guidance for 2024
RR is forecasting an operating profit of £1.7bn-£2bn ($2.15bn-$2.5bn) in 2024, with free cash flow rising to £1.7bn-£1.9bn ($2.15bn-$2.4bn).
Large EFHs in the civil aerospace division are expected to match or exceed the pre-COVID benchmark (100-110% of 2019’s level), with 500-550 forecasted engine deliveries and 1,300-1,400 total shop visits.
The company is targeting an operating profit of £2.5bn-£2.8bn ($3.2bn-$3.5bn), operating margin of 13-15%, free cash flow of £2.8bn-£3.1bn ($3.5bn-$3.9bn) by 2027.
The latest numbers suggest it is well on its way to achieving this.
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