Rolls-Royce said it expected the challenges linked to the war in Ukraine, inflationary pressures and supply chain constraints to continue into next year, as it reported a net loss for the first half of 2022.
“The external environment remains challenging,” Rolls-Royce said Aug. 4 as it reported its first-half (H1) results. “We expect these issues will persist into 2023 and have been managing our business to address and minimize the impact.”
The British engine-maker disclosed a £188 million ($228 million) underlying net loss for H1, down from a £104 underlying net profit in H1 2021. Rolls’ operating profit for the period of £125 million was below last year’s £307 million, largely because of a £270 million accounting adjustment made by the manufacturer. Underlying revenues reached £5.3 billion, up from £5.2 billion a year prior.
In a bid to withstand external pressures, Rolls-Royce said it was tightly controlling costs and had consolidated its supply chain, including focusing on buying from its best-performing suppliers.
One example is the signing of a long-term supply agreement for titanium with a U.S.-based supplier, reducing reliance on Russa, CFO Panos Kakoullis said during a webcast. The CFO added that Rolls-Royce had achieved a 10% reduction in parts costs on the Pearl 10X. This has been achieved through digital sourcing and consolidating spending with four suppliers, while hedging contracts on raw materials such as nickel and also on jet fuel.
“We have long-term agreements and hedges in place that offer reasonable protection against near-term price increases,” the group said. Rolls has been able to pass on some of the higher costs to customers under the terms of its long-term contracts.
Because of supply chain constraints, inventory has increased across the group. Management is aiming to reduce those inventories in the second half.
The group said demand for its products and services was growing, including through “continued recovery in civil aerospace engine flying hours,” which helped it to an improvement in free cash flow—up to minus £77 million from minus £1.15 billion for the group.
Civil aerospace engine flying hours, including regional and business segments, rose 33% year-on-year, Kakoullis said, showing a continued recovery in its large engine business and a sustained high level of demand in business aviation.
Flying hours reached around 60% of 2019 levels in the first half and are on track for 60-70% for the year as a whole, outgoing CEO Warren East told the webcast. East added that an easing of the lockdown in China should contribute to that growth, with airlines from the broader Asia region reporting strong demand.
Civil aerospace revenues rose 8% year-on-year with an operating loss of £79 million, versus a small profit last year including a foreign exchange profit. Adjusting for that left its underlying profitability flat, Kakoullis said, adding: “We see civil aerospace becoming the cash engine for the group.”
Rolls-Royce had “high visibility of future revenues in defense with a strong order book,” the company said, adding that although its defense business had not seen immediate benefits from geopolitical changes taking place around the world, “rising budgets in most western countries do underpin our confidence in the long-term outlook for this business.”
The defense business unit recorded an operating profit of £189 million.
The group, like others in the broader aviation industry, has also faced some challenges in hiring, particularly when looking to recruit experienced engineers.
Rolls kept its 2022 guidance, set out in February, unchanged. The group continues to expect low-to-mid-single digit underlying revenue growth, full-year underlying operating profit margin to be broadly unchanged on the 3.8% of 2021 and modestly positive free cash flow in 2022. That is based on expected improvement in civil aerospace in the second half driven by planned higher spare large engine sales and large engine shop visits, Rolls-Royce said.
Large engine shop visits reached around 400 in the first half, and should get up to around 1,100-1,200 in the second half, Kakoullis said. “The big driver of that is the flying hours growth: as that growth comes back, the shop visits follow,” he said.
Rolls said it had £7.3 billion of liquidity, including £2.8 billion in cash at the end of June and no significant debt maturities before 2024. No interim shareholder payment will be made for 2022.
The company said it received the required regulatory approvals for the sale of ITP Aero Aug. 3, and now expects the transaction to complete in the coming weeks. The proceeds will be used to reduce debt by repaying early a £2 billion loan, supported by an 80% guarantee from UK Export Finance.
Editor's note: This article has been updated to clarify that Rolls-Royce's defense business made an operating profit in H1 2022.
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