TIDMRR.
RNS Number : 8289U
Rolls-Royce Holdings plc
28 November 2023
28 November 2023
ROLLS-ROYCE TARGETS A STEP CHANGE IN MID-TERM PERFORMANCE
-- Clear vision and strategy will create a high performing,
competitive, resilient and growing business
-- Mid-term targets set to deliver record future performance:
operating profit of GBP2.5bn-GBP2.8bn, operating margin
of 13-15%, free cashflow of GBP2.8bn-GBP3.1bn and return
on capital of 16-18%
-- Improved financial performance will create a stronger balance
sheet and investment grade profile for the benefit of all
stakeholders
-- Focused strategy has identified investment priorities, partnership
opportunities and supports a GBP1bn-GBP1.5bn gross disposal
programme over next 5 years
-- Current trading is in line with expectations and guidance
for 2023 reconfirmed
Rolls-Royce is today holding a Capital Markets Day in which we
are setting mid-term financial targets that will represent a step
change in our financial performance.
Chief Executive Tufan Erginbilgic said:
"Rolls-Royce is at a pivotal point in its history. After a
strong start to our transformation programme, we are today laying
out a clear vision for the journey we need to take and the areas
where we must focus. We are creating a high performing,
competitive, resilient and growing Rolls-Royce that will have the
financial strength to control and shape its own destiny. We are
confident in our ability to achieve these ambitions and have a
clear and granular plan to deliver on our targets. We have made
significant progress, with 2023 profit and cash forecast to be
materially ahead of 2022.
"We are setting compelling and achievable financial targets for
the mid-term which will take Rolls-Royce significantly beyond any
previous financial performance. This will benefit not just our
shareholders but our people, customers and partners. We are
building 'one Rolls-Royce'. A company that can fully realise its
potential, ensuring the excellence and innovation that helped shape
the modern world, endures long into the future."
Mid-term targets
We aim to make Rolls-Royce financially stronger and more
resilient than it has been before. In the mid-term this means
achieving:
-- Operating profit of GBP2.5bn-GBP2.8bn,
-- Operating margin of 13-15% with
-- Free Cash Flow of GBP2.8bn-GBP3.1bn and
-- Return on capital of 16-18%.
We have also set divisional mid-term targets for operating
margin:
-- Civil Aerospace has the biggest step change, improving from 2.5% in 2022 to 15-17%.
-- In Defence we plan to improve from 11.8% in 2022 to 14-16%.
-- In Power Systems, our shortest cycle and most diverse business, we plan to improve from 8.4%
in 2022 to 12-14%.
These targets are based upon our expectations for a 2027
timeframe. We expect a progressive, but not necessarily linear,
improvement year-on-year, and if we can accelerate the achievement
of our ambitions we will. These targets, the performance
improvements that underpin them and the actions we require to
achieve them, are owned across the Group and supported through
rigorous performance management and clear lines of accountability.
Our strong start to 2023 provides further confidence in our ability
to deliver.
Strategic update
In February, we launched our transformation programme and
strategic review to set out what we needed to do to take us to a
new level of performance. We are building on our strong foundations
and advantaged businesses to create a Rolls-Royce that can unlock
its full potential.
Our new strategy will deliver our Rolls-Royce proposition
to:
-- build a high performing, competitive and resilient business with profitable growth,
-- grow sustainable free cash flows and
-- build a strong balance sheet and grow shareholder returns.
It is based on four pillars:
1. Portfolio choices & partnerships: The markets we are
choosing to operate in, businesses we want to invest
in, and partnerships that will create truly winning positions.
2. Advantaged businesses & strategic initiatives: How we
will create a competitive business, expand our earnings
potential and improve our performance.
3. Efficiency & simplification: The importance of a company-wide
focus to drive synergies that enable us to be more competitive
and simplify the way we operate; and
4. Lower carbon & digitally enabled businesses: Our commitment
to the energy transition, building on the tangible progress
we have made to date, and capturing the benefits of becoming
more digitally enabled.
Portfolio choices and partnerships: We are today setting out the
strategic choices that we have made across the Group and providing
details of the strategic initiatives that will deliver the step
change in financial performance we are targeting.
In Civil Aerospace, we will focus on the widebody commercial
airline market and business aviation where we can leverage the
value from our Trent and Pearl engine families while investing for
the future with our world-leading UltraFan engine programme. In
Defence, we have opportunities for stronger performance and an
increase in customer-funded investment across Transport, Combat and
Submarines, where recently announced platform wins and
international co-operations will drive further future growth. We
can also leverage our expertise in adjacent nuclear fields such as
Small Modular Reactors (SMRs) and micro-reactors, which have both
defence and civilian applications. In Power Systems, we will focus
on our Power Generation, Governmental and Marine end-markets, where
we see the strongest demand and an opportunity for better returns
from our power-dense and reliable solutions.
In specific instances, partnerships can help to strengthen our
market positions, build capability and scale, as well as de-risk
and reduce capital investment. Our mid-term targets are not reliant
upon securing such new partnerships and we will only partner if the
potential for further value creation exists. In Civil Aerospace, we
believe we are well positioned to re-enter the narrowbody market,
by choosing a partnership approach for the next new engine
programme, and our UltraFan technology is a vital step towards
this. For our SMR venture, a broad set of partners will strengthen
our position to deliver the overall solution and reduce the future
capital call. In Power Systems, our focused strategy in power
generation will make this business more efficient and competitive,
and drive faster, profitable growth. We are also considering
potential partnerships in Power Generation and Battery Energy
Storage Systems to further grow our market position, broaden our
offering and benefit from cross business synergies.
We are also clear where we will not invest and re-allocate
capital to parts of the business where we can generate more value.
We are today announcing a Group-wide divestment program, targeting
gross proceeds of between GBP1.0bn and GBP1.5bn over the next five
years, which do not form part of our Free Cash Flow targets. We
will only sell assets at the right time and at the right price. For
example, in Rolls-Royce Electrical we are looking at options to
exit in the short run or alternatively for the right value, reduce
our position to minority with an intention to exit fully in the
mid-term. We believe, given the world-class capability we have
built in Advanced Air Mobility, that this will represent good value
to a third party and will allow us to focus on our core electrical
engineering activities in Power Systems, Defence and Civil
Aerospace.
Strategic Initiatives and Efficiency & Simplification
Our strategy is underpinned by granular strategic initiatives
that are owned by each division. The largest step change in
performance is in our Civil Aerospace division, where our 6 levers
to improve widebody LTSA margins (extending time on wing, lowering
shop visit costs, reducing product costs, keeping engines earning,
implementing a new value-driven pricing strategy, and driving
rigour on contractual terms and conditions) are key to achieving
our targets. Time and material, spare engines and original
equipment also contribute to improving profitability. Business
Aviation initiatives also deliver strong performance improvement.
In Power Systems, significant improvements are expected from
initiatives focused on cost optimisation and key accounts in Power
Generation and near-term growth in Governmental. In Defence,
performance was already good, but there is still an opportunity to
improve with commercial optimisation and efficiency initiatives.
Across all of our businesses our efficiency initiatives and the
choices we make will deliver sustainable savings of GBP400m-GBP500m
in the mid-term, making us more competitively advantaged, resilient
and fit for the future.
Financial Framework
We are building a stronger balance sheet and aiming to achieve
an investment grade profile in the near-term. From a leverage
perspective, we will significantly improve our net debt to EBITDA
ratio. This is supported by our sustainable growth in free cash
flows, some of which we will deploy to reduce our gross debt. The
increasing strength of our resulting liquidity position means we
may look to close some of our more expensive undrawn facilities
early. Once we have strengthened the balance sheet, we intend to
re-establish shareholder distributions. Thereafter, we will
optimise between shareholder distributions and further investing in
the business.
Trading update and outlook
Our current trading is in line with the guidance provided with
our Half Year results on 3 August 2023 and our guidance for the
year is unchanged. Engine flying hours for large civil engines on
long term service agreements were 86% of 2019 levels for the 10
months to end of October and in line with our expectation for
80%-90% for the full year. Our next scheduled update will be on 22
February 2024, when we will publish our Full Year 2023 results and
provide guidance for 2024.
Due to physical capacity constraints, the Capital Markets Day
event is by invitation only but there will also be a webcast
starting at 12:30pm UK time today lasting for approximately four
hours. The webcast details are available our website
www.rolls-royce.com/investors and a replay will be made available
after the event.
For further information, please contact:
Investors
Isabel Green
Head of Investor Relations, Rolls-Royce plc
Tel +44 (0) 7880 160976
Isabel.Green@Rolls-Royce.com
Media
Richard Wray
Director of External Communications & Brand, Rolls-Royce
plc
Tel +44 (0) 7810 850055
Richard.Wray@Rolls-Royce.com
About Rolls-Royce Holdings plc
1. Rolls-Royce develops and delivers complex power and
propulsion solutions for safety-critical applications in the air,
at sea and on land. Our products and service packages enable our
customers to connect people, societies, cultures and economies
together; they meet the growing need for power generation across
multiple industries; and enable governments to equip their armed
forces with the power required to protect their citizens.
2. Rolls-Royce has customers in more than 150 countries,
comprising more than 400 airlines and leasing customers, 160 armed
forces and navies, and more than 5,000 power and nuclear customers.
We are committed to making our products compatible with net zero
carbon emissions to meet customer demand for more sustainable
solutions.
3. Annual underlying revenue was GBP12.69 billion in 2022, and
underlying operating profit was GBP652m.
4. Rolls-Royce Holdings plc is a publicly traded company (LSE:
RR., ADR: RYCEY, LEI: 213800EC7997ZBLZJH69)
www.rolls-royce.com
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