Rolls-Royce first-half profits fall but FY guidance backed

Underlying operating profit fell to £125m from £307m in the same period a year ago. This was due to lower underlying gross profit and included £371m in research and development costs with an increase in spend in Defence, Power Systems and New Markets balanced by lower spend in Civil Aerospace.

Rolls-Royce said demand for its products and services is growing, with another period of record order intake in Power Systems, continued recovery in Civil Aerospace engine flying hours and high visibility of future revenues in Defence, with a strong order book.

The company cautioned that the external environment "remains challenging", with the war in Ukraine, inflationary pressures, and supply chain constraints all impacting the business.

"We expect these issues will persist into 2023 and have been managing our business to address and minimise the impact," it said. "We are tightly controlling costs and have consolidated our supply chain, focusing on the best performing suppliers, and we have long-term agreements and hedges in place that offer reasonable protection against near-term price increases."

Rolls reaffirmed its full-year guidance for low-to-mid-single digit underlying revenue growth and for the underlying operating profit margin to be broadly unchanged on the prior year’s 3.8%. It also continues to expect "modestly" positive free cash flow in 2022.

Rolls-Royce said the guidance is based on an expected improvement in Civil Aerospace in the second half, driven by planned higher spare large engine sales and large engine shop visits.

Chief executive Warren East said: "We have progressed well in the first half of the year, with more than a £1bn improvement in free cash flow, strong order intake in Power Systems, increased engine flying hours and commercial discipline in Civil Aerospace, and targeted investment to support longer-term growth in Defence and New Markets.

"We are actively managing the impacts of a number of challenges, including rising inflation and ongoing supply chain disruption, with a sharper focus on pricing, productivity and costs. As a result of the actions we have taken over the last few years, our Civil Aerospace business is becoming leaner and more agile, and we are executing on the levers of value creation we shared at our investor event in May."