Rolls-Royce (RR., ) reported an improving financial performance in its latest trading update to 30 April 2023, driven by its transformation programme and strong end market demand.
Despite this, Rolls Royce said it faces challenges in supply chain management, particularly in Civil Aerospace, as volumes increase. Yet, the company's financial performance remains in line with expectations, with underlying operating profit guidance of £0.8-£1.0bn and free cash flow guidance of £0.6-£0.8bn in 2023 remaining unchanged.
In Civil Aerospace, long-term agreement large engine flying hours are on track to reach 80%-90% of 2019 levels for the full year, with shop visit volumes and OE deliveries also meeting expectations. The company has secured new business, including its biggest ever order of Trent XWB-97 engines from Air India.
In Defence, Rolls Royce has secured key programme awards, including the AUKUS submarine programme that will be powered by its nuclear reactors.
In Power Systems, revenue growth is being driven by demand for aftermarket services and high order intake in the prior year, with improved pricing on new orders expected to drive margins up in the second half of the year.
Rolls Royce's transformation programme is progressing well, with an increased focus on efficiency and simplification, helping to keep costs down and identify savings.
Executive Tufan Erginbilgic commented: "We are transforming Rolls-Royce into a high quality and competitive business with a strong balance sheet and growing profit, cash flows and returns.”
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Despite the overall positive update, Rolls Royce shares took a dip this morning, down 4% in early trading. This comes as a surprise given the company’s surge in share price when it posted a largely similar update in February - operating profit guidance of £0.8-£1.0bn and free cash flow guidance of £0.6-£0.8bn with its shares jumping 20% to a 13-month high of 129.5 pence on the news.
The news today demonstrates that Rolls Royce continues to make progress in its aerospace division, mirroring the recovery in the wider aviation sector that is edging back towards pre-pandemic levels. According to the International Air Transport Association, airlines are expected to see their ridership levels fully return to ‘normal’ or pre-pandemic level by 2025.
The industry is making strides toward an eventual full recovery, with global passenger traffic forecast to reach 92% of 2019 levels in 2023. Despite macroeconomic headwinds, traveller sentiment remains strong, and China's reopening earlier this year has supported the recovery in 2023.
Overall, Rolls Royce continues to see strong progress across its Civil Aerospace, Defence and Power Systems divisions, meeting expectations across the board. Rolls Royce’s half-year 2023 results will be announced on 3 August 2023, so make sure to to not miss this update.