Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Rolls-Royce Holdings PLC (RLLCF.PFD, Financial) reported a significant year-on-year improvement in operating profit and free cash flow across all three divisions.
- The company raised its guidance for 2024, both for operating profit and free cash flow, reflecting strong performance and strategic initiatives.
- Operating profit increased by 74% to GBP1.1 billion, with an operating margin of 14%, up by 4.4 percentage points from the previous year.
- Free cash flow was GBP1.2 billion, a substantial increase from GBP0.4 billion in the first half of 2023.
- The company announced the reinstatement of shareholder distributions for the full year 2024, based on a 30% payout ratio of underlying profit after tax.
Negative Points
- The supply chain remains a significant challenge, causing delays to OE deliveries and shop visits, and impacting overall performance.
- Despite improvements, the Trent 1000 engine still faces issues with time-on-wing, which the company expects to address by the end of 2025.
- The company took a GBP208 million charge related to prolonged supply chain challenges, impacting both onerous and catch-up contracts.
- The second half of the year is expected to see a lower operating margin due to a higher number of OE deliveries and an increased number of Trent 1000 major refurbishments.
- The company anticipates continued supply chain challenges for another 18 to 24 months, which could impact future performance and financial results.
Q & A Highlights
Q: On the medium-term guidance you conveyed in your presentation, you are really on track, probably ahead of plan. So just wondering what is it that's stopping you from formally raising the targets or officially pulling forward what you define as the midterm?
A: We are making good progress and expanding the earnings and cash potential of the business in an accelerated way. Our focus is on making strategic progress and improving the business every day. This front-end delivery derisks our midterm target delivery, and if we can achieve the targets before 2027, we will. However, the delivery won't be linear, and we are focused on sustainable and quality profit and cash flow growth.
Q: Could you unpick the growth in Power Systems? How much is driven by data centers, and what segments were down?
A: Power Systems growth was 6%, with Power Generation growing by 15%, driven by data centers. Governmental growth was 12%. However, Marine was flat year-on-year, and Industrial, which includes the business we recently sold, shrank. Data centers specifically grew by 17%.
Q: On working capital, what do you think the number will be for the full year? Neutral or positive?
A: We expect a release of working capital in the second half of the year. We have made progress on working capital initiatives, improving inventory days by 12 days and debtor days by 10 days year-on-year. We will continue to see improvements across inventory and debtors.
Q: Rolls-Royce has built a lot of working capital over recent years. Do we need to get past the supply chain crisis to release some of that? Can those day numbers get back to pre-COVID levels?
A: We have a program to underpin GBP2 billion of working capital release, and we have already delivered GBP0.4 billion of that. We have improved inventory days by more than 20 and debtor days by more than 10 since the end of 2022. We expect further improvements as we continue to manage the supply chain challenges.
Q: What is the appropriate capital structure for Rolls-Royce looking forward? Should it be a net cash business like Airbus?
A: We aim to maintain a strong balance sheet with a strong investment-grade profile. Currently, our net debt-to-EBITDA ratio is 0.3x. In the short term, we are comfortable with a net cash position, especially 18 months into a material transformation program. We will always be disciplined in our capital allocation, balancing investments and shareholder distributions.
Q: On the Civil margin, you took a GBP410 million onerous contract provision last year. Does the higher number of shop visits in the second half include any assumption of further release from what you're seeing?
A: The second half margins will be lower due to a higher number of OE deliveries and an increased number of Trent 1000 major refurbs, which have higher costs. The GBP410 million provision taken last year is not built into future margins, and the GBP208 million taken this year is for the current period.
Q: Regarding SMR, you mentioned calling on the UK government to offer a contract by the end of the year. Should we infer anything on that timeline in terms of strategic decisions?
A: The technology selection decision by GBM is due by November-December, and it is crucial for the UK to make this decision without delay to avoid missing out on SMR supply chain development. We need a clear, committed project by the end of Q1 next year to move into the execution phase. Other countries are watching the GBM process closely.
Q: Could you help us understand the commentary from Airbus in June regarding the Trent 7000? Is there any issue with your supply chain on this engine?
A: We were one engine behind in the first half, but there is no significant issue caused by us. The supply chain remains challenging, but we are managing it proactively.
Q: Is the GBP150 million to GBP200 million cash impact due to the supply chain already assumed in the guidance at the time of March?
A: In our February guidance, we had a small assumption for supply chain costs, but not to the extent of GBP150 million to GBP200 million. This cash impact is more pronounced in the second half, and we are taking actions to mitigate it.
Q: What's your confidence in regaining market share on Trent 1000 given the time-on-wing improvements you've scheduled?
A: We are confident in regaining market share with our structured program to improve time-on-wing. The recent successful flight test of the new HPT blade is a significant milestone. Once certified, it will double the time-on-wing, making our engine competitive. We expect to see market share improvements as we deliver these enhancements.
Q: Are you seeing a prolonged impact on the supply chain, and is there a risk of future charges?
A: The supply chain remains challenging, and we expect it to be so for another 18 to 24 months. We are taking actions to mitigate the impact, but there is always a risk of future charges. We are managing the situation proactively to minimize any additional hits.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
