Rolls-Royce takes wraps off mid-term financial targets

The FTSE 100 company said its targets included achieving an operating profit within the range of £2.5bn to £2.8bn, an operating margin of 13% to 15%, free cash flow between £2.8bn and £3.1bn, and a return on capital ranging from 16% to 18%.

It said the targets, spanning various divisions, were set for 2027 and built on the expectation of progressive improvements year-on-year.

Civil aerospace was notable among its divisional targets, which was expected to make a remarkable leap from a 2.5% operating margin in 2022 to a range of 15% to 17%.

In defence, the aim was to improve from 11.8% in 2022 to 14% to 16%, while in power systems, the target was to enhance performance from 8.4% in 2022 to 12% to 14%.

Rolls-Royce said its strategic update, launched in February, was based on four key pillars - portfolio choices and partnerships, advantaged businesses and strategic initiatives, efficiency and simplification, and lower carbon and digitally enabled businesses.

The firm aimed to focus on specific markets and businesses where it could leverage its strengths and achieve profitable growth.

One key strategy was exploring partnerships in areas where they could enhance market positions, build capabilities, and reduce capital investment.

While the mid-term targets were not dependent on securing new partnerships, Rolls-Royce said it was open to collaborations that create additional value.

Such partnerships could span civil aerospace, small modular reactors (SMRs), power generation, and battery energy storage systems.

Furthermore, Rolls-Royce announced a divestment program targeting gross proceeds of £1bn to £1.5bn over the next five years.

The move was intended to reallocate capital to areas where the company could generate more value.

Rolls-Royce Electrical, for instance, could exit or reduce its position to minority in the short to mid-term.

The firm said its strategic initiatives, including efficiency measures, were expected to deliver sustainable savings of £400m to £500m in the mid-term.

It was also focused on strengthening its balance sheet, aiming for an investment-grade profile and optimising shareholder distributions.

In terms of current trading, Rolls-Royce reported that it was in line with expectations and has reconfirmed its guidance for 2023.

Engine flying hours for large civil engines on long-term service agreements were at 86% of 2019 levels for the first ten months of 2023, aligning with expectations for the full year.

Rolls-Royce said it would provide its next update on 22 February, when it would publish its full-year 2023 results and offer guidance for 2024.

“Rolls-Royce is at a pivotal point in its history - 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 where we must focus,” said chief executive officer Tufan Erginbilgic.

“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.”

Erginbilgic said Rolls-Royce had made significant progress, with 2023 profit and cash forecast materially ahead of 2022.

“We are setting compelling and achievable financial targets for the mid-term, which will take Rolls-Royce significantly beyond any previous financial performance.

“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, and endures long into the future.”

At 0804 GMT, shares in Rolls-Royce Holdings were up 3.58% at 251.9p.

Reporting by Josh White for Sharecast.com.