Rolls Royce(US:RYCEY)2024-08-01 14:17Financial Performance and Key Metrics Changes - Operating profit increased to £1.1 billion, a 74% year-on-year improvement, with an operating margin of 14%, up 4.4 percentage points from last year [6][19] - Free cash flow rose to £1.2 billion, compared to £0.4 billion in the first half of 2023, driven by higher operating profit and continued LTSA balance growth [7][20] - Return on capital improved to 13.8%, indicating significant value creation [8][20] Business Line Data and Key Metrics Changes Civil Aerospace - Operating profit grew to £740 million, an 85% increase year-on-year, with operating margins rising to 18%, a 5.6% increase [20][21] - Revenues increased by 27% to £4.1 billion, driven by higher shop visits and OE deliveries [19][21] - Large engine OE deliveries grew by 26% to 236, with business aviation deliveries reaching 116 [21] Defense - Operating profit increased to £345 million, a 34% year-on-year growth, with revenue growing by 18% to £2.2 billion [24][25] - Order intake for the period was £1.7 billion, with a book-to-bill ratio of 0.8x and an order backlog of £8.5 billion [24] Power Systems - Operating profit grew to £189 million, a 56% increase, with operating margins rising to 10.3% [26][27] - Order intake was £2.4 billion, with a book-to-bill ratio of 1.3x, indicating strong demand particularly in power generation [27] Market Data and Key Metrics Changes - The company reported a significant year-on-year improvement across all divisions, with strong growth in aftermarket services and commercial optimization [5][19] - The supply chain challenges are being actively managed, with a focus on 15 suppliers requiring intervention [9] Company Strategy and Development Direction - The company is focused on building a sustainably distinctive Rolls-Royce that is high-performing, competitive, resilient, and growing with improving profitability and cash flow [4][5] - Strategic initiatives include commercial optimization, cost efficiencies, and operational excellence, aimed at improving customer service and financial performance [4][5] - The company plans to reinstate shareholder distributions for full-year 2024 results, based on a 30% payout ratio of underlying profit after tax [5][34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in raising guidance for 2024, expecting operating profit of £2.1 billion to £2.3 billion and free cash flow of £2.1 billion to £2.2 billion [36][37] - The supply chain is expected to remain challenging for another 18 to 24 months, but the benefits of the transformation program will become more visible as it stabilizes [39] Other Important Information - The company has made significant progress in reducing net debt to £822 million, the lowest position in over five years [20][32] - The organization has undergone a redesign to become simpler and more agile, with a focus on efficiency and simplification [14] Q&A Session Summary Question: Medium-term guidance and targets - Management acknowledged progress but emphasized that targets are milestones and will not be raised formally until strategic progress is consistently achieved [42][44] Question: Power Systems growth - Management clarified that while growth was 6%, power generation saw a 15% increase, with data center demand expected to accelerate [46][47] Question: Working capital expectations - Management indicated that working capital initiatives are ongoing, with expectations for a release in the second half of the year [48][49] Question: Capital structure and dividends - Management stated that a strong balance sheet is a priority, and while dividends are being reinstated, the focus remains on maintaining a resilient capital structure [54][60] Question: Tax losses and deferred tax - Management confirmed that they are closely monitoring deferred tax balances and will consider recognizing them as earnings potential expands [59]