British engineering giant Rolls-Royce has posted strong financial results for the first half of 2024, overcoming ongoing supply chain difficulties to significantly boost its profits and raise its full-year guidance.
Investors can now also look forward to distributions for the full year as the company reinstates payouts.
Underlying operating profit skyrocketed to £1.1 billion, a staggering 74% increase compared to the same period last year. Increased profitability saw underlying margin up by 4.4% to 14.0%. These figures reflect the early success of Rolls-Royce’s transformation programme and strategic initiatives designed to streamline the business.
Rolls Royce has been one of the best-performing FTSE 100 stocks since the pandemic, and today’s results are a validation of the sharp rally.
“Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity. We are expanding the earnings and cash potential of the business in a challenging supply chain environment, which we are proactively managing. We are on track to deliver our mid-term targets,” said Tufan Erginbilgic, CEO of Rolls Royce.
The Civil Aerospace division emerged as a standout performer, with its operating margin soaring to 18.0% from 12.4% in H1 2023. This leap was fuelled by a resurgence in large engine flying hours and a stronger showing in the business aviation sector. Defence and Power Systems divisions also reported significant margin improvements, contributing to the overall stellar performance.
Free cash flow more than tripled to £1.2 billion, driven by the surge in operating profit and continued growth in long-term service agreement (LTSA) balances. This financial strength has allowed Rolls-Royce to slash its net debt to a mere £0.8 billion – this progress shouldn’t be underestimated.
In light of these achievements, Rolls-Royce has raised its full-year guidance for 2024. The company now expects underlying operating profit to reach between £2.1 billion and £2.3 billion, up from the previous forecast of £1.7 billion to £2.0 billion. Free cash flow projections have also been revised upwards to £2.1 billion to £2.2 billion.
However, it’s not all smooth sailing. Rolls-Royce acknowledges the persistent challenges in the supply chain, which are expected to impact free cash flow by £150-200 million this year. The company anticipates these hurdles to continue for another 18-24 months but is actively working to mitigate their effects.
In a move that will surely please investors, Rolls-Royce has announced plans to reinstate shareholder distributions for the 2024 financial year. The company will start with a 30% pay-out ratio of underlying profit after tax, with the potential to increase this to 30-40% in subsequent years.