Rolls-Royce hikes guidance after bumper first half

Rolls-Royce surpassed market expectations in its first half, it said in an update on Wednesday, as its ongoing transformation efforts drove improved margins and bolstered its full-year outlook.

The FTSE 100 company said its financial results for the first six months of the year were expected to be significantly higher than consensus expectations.

Its underlying operating profit was estimated to be in the range of £660m to £680m, more than doubling the consensus estimate for £328m.

Additionally, the firm’s free cash flow was expected to reach between £340m and £360m, far exceeding the consensus estimate of £50m.

Rolls-Royce put the figures down to continued growth in end markets, and a focus on optimising commercial strategies and cost efficiencies across the organisation.

As a result of its strong first-half performance and optimistic outlook, Rolls-Royce raised its full-year guidance.

The company said it now expected underlying operating profit for 2023 to be in the range of £1.2bn to £1.4bn, surpassing the consensus estimate for £934m.

Furthermore, its projected free cash flow for the full year was upgraded to between £0.9bn and £1bn, well above the consensus estimate for £732m.

The board said the positive adjustments were underpinned by the early benefits of its ongoing transformation programme.

Margin improvement was a highlight of the first half, with the civil and defence divisions leading the way, as higher volumes, commercial enhancements and cost efficiencies contributed to improved margins in those sectors.

On the other hand, power systems margins were lower in the first half, but the firm said it foresaw an improvement in the latter six months of the year due to pricing actions it had taken.

“Our multi-year transformation programme has started well with progress already evident in our strong initial results and increased full year guidance for 2023,” said chief executive officer Tufan Erginbilgic.

“There is much more to do to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient, and growing business.”

Erginbilgic said that, despite a challenging external environment bringing up supply chain constraints in particular, the company was starting to see the early impact of its transformation in all divisions.

“Better profit and cash generation reflects greater productivity, efficiency and improved commercial outcomes.”

Reporting by Josh White for Sharecast.com.