| Underlying operating profit of £1.6bn and underlying margin of 10.3%, reflecting the impact of our strategic initiatives, with commercial optimisation and cost efficiency benefits across the Group | ||
| – | Record free cash flow of £1.3bn driven by operating profit and continued LTSA balance growth | |
| – | Return on capital more than doubled to 11.3% reflecting improved operating profit, disciplined capital allocation and working capital management | |
| – | Statutory net cash flow from operating activities of £2.5bn, £1.0bn higher year on year | |
| – | Net debt of £2.0bn, down from £3.3bn at the end of 2022, as we strengthen the balance sheet and build resilience | |
| – | 2024 guidance: continued progress with underlying operating profit between £1.7bn and £2.0bn and free cash flow between £1.7bn and £1.9bn |
Tufan Erginbilgic, CEO said: “Our transformation has delivered a record performance in 2023, driven by commercial optimisation, cost efficiencies and progress on our strategic initiatives. This step-change has been achieved across all our divisions, despite a volatile environment with geopolitical uncertainty, supply chain challenges and inflationary pressures.
We are managing the business differently and our significant performance improvement in the year reflects the hard work and focused actions of all our teams. We are also continuing to invest to drive future sustainable growth. Our strong delivery in 2023 gives us confidence in our 2024 guidance and is a significant step towards our mid-term targets. We are unlocking our full potential as a high-performing, competitive, resilient, and growing Rolls-Royce.”
Full Year 2023 Group continuing operations
| Underlying2023 | Underlying 2022 | Statutory 2023 | Statutory2022 | |
| £ million | ||||
| Revenue | 15,409 | 12,691 | 16,486 | 13,520 |
| Operating profit | 1,590 | 652 | 1,944 | 837 |
| Operating margin (%) | 10.3% | 5.1% | 11.8% | 6.2% |
| Profit/(loss) before taxation | 1,262 | 206 | 2,427 | (1,502) |
| Earnings/(loss) per share (pence) | 13.75 | 1.95 | 28.85 | (14.24) |
| Free cash flow | 1,285 | 505 | ||
| Return on capital (%) 1 | 11.3% | 4.9% | ||
| Net cash flow from operating activities 2 | 2,485 | 1,524 | ||
| Net debt | (1,952) | (3,251) |
1 Adjusted return on capital is defined on page 52 and is abbreviated to return on capital
2 Represented. See page 18 for further details
A reconciliation of alternative performance measures to their statutory equivalent is provided on pages 49 to 52
2023 performance summary
· Driving growth in attractive markets: Large engine flying hours (EFH) in Civil Aerospace recovered to 88% of 2019 levels, up from 65% in 2022. Large engine orders were the highest in more than 15 years, with major orders from Air India and Turkish Airlines. In Defence, the AUKUS submarine agreement was announced, which will be supported by the expansion of our submarines site in Raynesway, and work on our future programmes in the UK and US progressed well. In Power Systems, we are capturing strong demand for power generation solutions and services in the rapidly expanding data centre market.
· Significantly improved profit and margins: Underlying operating profit rose by £0.9bn to £1.6bn supported by our transformation programme and strategic initiatives, with commercial optimisation and cost efficiency benefits across the Group. Underlying operating margin more than doubled to 10.3%. Civil Aerospace, Defence and Power Systems all delivered materially higher margins compared to last year. The largest improvement was in Civil Aerospace, which delivered an operating margin of 11.6% compared to 2.5% in the previous year. This was driven by increased aftermarket profit, in both the large engines and business aviation segments, reflecting commercial optimisation and cost efficiencies, as well as volume growth. Defence delivered an improved operating margin of 13.8% (2022: 11.8%), which primarily reflected improved pricing and cost efficiencies. In Power Systems, which reported an operating margin of 10.4% (2022: 8.4%), pricing and cost efficiency actions in the first half of the year resulted in a significantly improved operating profit and margin in the second half and in the full year.
· Record cash generation: Free cash flow from continuing operations grew by approximately 150% to £1.3bn, principally due to higher operating profit. Civil net LTSA creditor growth net of risk and revenue sharing agreements (RRSAs) was £1.1bn (2022: £0.8bn). Continued LTSA balance growth reflects higher EFHs and the benefit of commercial optimisation, with LTSA invoiced flying hour receipts of £4.6bn (2022: £3.6bn). Our focus on working capital resulted in a release in the second half despite ongoing supply chain challenges. For the full year there was a net working capital outflow of £0.4bn (2022: £0.5bn). Inventory and debtor days both improved year on year building further confidence in the actions we are taking to improve the quality of cash delivery.
· Building financial resilience: Total underlying cash costs as a proportion of underlying gross margin (TCC/GM) ratio improved to 0.59x in 2023 from 0.80x in 2022. Net debt improved to £2.0bn (2022: £3.3bn). We have £4.1bn of drawn debt, of which £0.5bn matures in 2024, £0.8bn in 2025 and £2.8bn in 2026-2028, and £1.7bn of lease liabilities. We have £3.7bn in cash and cash equivalents and £3.5bn undrawn facilities, totalling £7.2bn of liquidity, and expect to repay the 2024 and 2025 bonds from cash. We cancelled a £1.0bn undrawn UK Export Finance (UKEF) backed facility in the year, and a £1.0bn undrawn bank loan facility reflecting our higher cash balance and more resilient financial position.
· Shareholder payments: We are not making shareholder payments for 2023. As we shared at our capital markets day in November 2023, once we are comfortably within an investment grade profile and the strength of our balance sheet is assured, we are committed to reinstating and growing shareholder distributions.
Transformation programme and strategic review
The early results of our transformation programme and strategic initiatives are already evident in the step-change in performance reported for 2023, but there is more still to do. Our strategy framework is founded on four pillars:
· Portfolio choices & partnerships: We have clear plans for the markets we will operate and invest in. In Civil Aerospace, we successfully tested our UltraFan demonstrator engine to full power and achieved certification for our Pearl 700 business jet engine. In Defence, investment continued in the growing combat, transport and submarines markets and we progressed well with testing and development on the GCAP and B-52 programmes. In Power Systems, we successfully tested a new engine prototype that will join our portfolio alongside our current Series 4000 and acquired a yacht automation and bridge specialist business to extend our Marine offering. We also identified areas for divestment, which we expect to generate £1.0bn-£1.5bn gross proceeds by 2028. We are in advanced discussions to sell the off-highway lower power range engines division in Power Systems and we decided to exit Electrical in the short term or alternatively, for the right value, reduce our position to a minority with an intention to exit fully in the mid-term.
· Advantaged businesses & strategic initiatives: In Civil Aerospace, we have now retrofitted 20% of the Trent 7000 fleet with the improved HPT blade, which has doubled its time on wing, and we expect the same improvement to be certified on the Trent 1000 TEN in 2024. All key Civil Aerospace OEM and major airline contract renegotiations were either concluded or progressed. Our cost initiatives reduced total shop visit costs across large engines dispatched in 2023, which helped to deliver an improved LTSA margin. In Defence, cost efficiencies and value-based pricing helped to deliver improved performance and we delivered strong growth in combat and submarines. In Power Systems, in addition to our pricing and cost actions, we commissioned one of the largest battery and energy storage systems in Europe, helping to integrate renewable energy into the Dutch public grid and grow our power generation business.
· Efficiency & simplification: Our actions to deliver sustainable cost efficiencies and improve competitiveness are well underway. In 2023, we delivered around £150m towards an annualised total Efficiency & Simplification savings target of £400m-£500m in the mid-term. We announced a reduction of 2,000-2,500 roles by the end of 2025 with expected annual benefits of approximately £200m and associated severance costs of £200m-£250m, which will be taken as an exceptional charge in 2024. We also have a renewed focus on third party costs, where we delivered gross savings of £130m in the year, making a strong start towards our target to save £1bn gross procurement spend by the mid-term, helping to partly offset inflationary pressures. In 2024, we have launched zero based budgeting, focusing initially on Civil Aerospace.
· Lower carbon & digitally enabled businesses: We remain committed to becoming a net zero company by 2050 and supporting our customers to do the same. In 2023 we powered the first 100% sustainable aviation fuelled commercial flight across the Atlantic and met our target for 100% SAF compatibility testing for our in production commercial aero engines. Our S2000 and S4000 engines in Power Systems were approved for use with sustainable fuels and we also progressed our hydrogen test programmes. We invested in digital tools as we look to unlock the potential to remove 20% of repetitive tasks with digital and AI capability.
Delivery of our strategic framework and clear plans for the mid-term will realise our Rolls-Royce proposition to become a high-performing, competitive, resilient and growing business. Our people are energised and aligned to the new One Rolls-Royce ways of working and our progress to date further strengthens our confidence in the delivery of our mid-term targets.
Outlook and 2024 Guidance
As we continue to deliver our strategy, we expect further improvements towards all our mid-term targets. This is despite the impact of continued supply chain challenges, which we expect to persist for 18-24 months, geopolitical uncertainty and inflationary pressures.
| 2024 financial guidance | |
| Underlying operating profit | £1.7bn-£2.0bn |
| Free cash flow | £1.7bn-£1.9bn |
In Civil Aerospace, we expect 2024 large EFHs will grow to 100-110% of 2019’s level, 500-550 total original equipment (OE) deliveries and 1,300-1,400 total shop visits. Our 2024 free cash flow guidance is based on civil net LTSA creditor growth at the low end of the mid-term range (£0.8bn – £1.2bn), compared to £1.1bn in 2023. Additional detail is included in the results presentation and supplementary data slides.
Strong progress in the early years of our plan demonstrates a front-end loaded delivery of performance improvement. Our 2023 performance and 2024 guidance on operating profit and free cash flow means that by 2024 we will have delivered more than 50% of the improvement set out in our mid-term targets. As a reminder, we are targeting underlying operating profit of £2.5bn-£2.8bn, operating margin of 13-15%, free cash flow of £2.8bn-£3.1bn and return on capital of 16-18% in the mid-term. These targets are based upon our expectations for a 2027 timeframe.
Underlying financial performance by division
| £ million | Underlying revenue | Organic Change 1 | Underlying operating profit/(loss) | Organic change 1 | Underlying operating margin | Organic margin change (pts) |
| Civil Aerospace | 7,348 | 29% | 850 | 497% | 11.6% | 9.1pt |
| Defence | 4,077 | 12% | 562 | 30% | 13.8% | 1.9pt |
| Power Systems | 3,968 | 16% | 413 | 44% | 10.4% | 2.0pt |
| New Markets | 4 | nm | (160) | (20)% | nm | nm |
| Other businesses | 12 | nm | (15) | 52% | nm | nm |
| Corporate/eliminations | − | nm | (60) | (49)% | nm | nm |
| Total (continuing operations) | 15,409 | 21% | 1,590 | 143% | 10.3% | 5.2pt |
1 Organic change is the measure of change at constant translational currency applying full year 2022 average rates to 2023. All underlying income statement commentary is provided on an organic basis unless otherwise stated
All results are shown for Group continuing operations, on an underlying basis, excluding discontinued operations (ITP Aero). For more details, see note 2 of the Condensed Consolidated Financial Statements (page 22).
nm is defined as not meaningful
Trading cash flow
| £ million | 2023 | 2022 |
| Civil Aerospace | 626 | 226 |
| Defence | 511 | 426 |
| Power Systems | 461 | 158 |
| New Markets | (63) | (57) |
| Other businesses | 5 | 5 |
| Corporate/eliminations | (57) | (49) |
| Total trading cash flow (continuing operations) | 1,483 | 709 |
| Underlying operating profit charge exceeded by contributions to defined benefit schemes | (26) | (32) |
| Taxation | (172) | (172) |
| Total free cash flow (continuing operations) | 1,285 | 505 |