Rolls-Royce reported outstanding 2024 results, and has substantially increased its near- and medium-term guidance. 2024 EBITDA beat expectations by 8%, with Free Cash Flow £193 million above targets, The company continues to execute its turnaround plan, and now expects 2025 results for EBITDA and cash flow to be close to their 2027 targets initially set in late 2023. The company has also initiated a £1 billion share buyback for 2025.
Earnings Highlights
- Revenues grew to £ 17,848 million in 2024 from £ 15,409 million in 2023
- Operating profit was £ 2,464 million in 2024 from £ 1,590 million in 2023
- Operating margin grew from 10.3% in 2023 to 13.8% in 2024
- Pre-tax profits rose to £ 2,293 million in 2024 from £ 1,262 million in 2023
- Free cash flow improved to £ 2,425 million in 2024, up from £ 1,285 million in 2023
Tufan Erginbilgic, CEO said: “Strong 2024 results build on our progress last year, as we transform Rolls-Royce into a high-performing, competitive, resilient, and growing business. All core divisions delivered significantly improved performance, despite a supply chain environment that remains challenging.
We are moving with pace and intensity. Based on our 2025 guidance, we now expect to deliver underlying operating profit and free cash flow within the target ranges set at our Capital Markets Day, two years earlier than planned. Significantly improved performance and a stronger balance sheet gives us confidence to reinstate shareholder dividends and announce a £1bn share buyback in 2025.
Our upgraded mid-term targets include underlying operating profit of £3.6bn-£3.9bn and free cash flow of £4.2bn-£4.5bn. These mid-term targets are a milestone, not a destination, and we see strong growth prospects beyond the mid-term.”
Behind the Numbers
The company is making great strides in increasing the time on wing for its new Trent XWB-84 engines up to 80%, up from its prior target of 40%. Because time on wing drives the profitability of long-term service agreements, which typically cover about 60%-70% of new engines sold, that will dramatically improve the company’s profitability.
Engines are like a razor and blade business, with low margins on initial sales but high margins on MRO and services. The longer the time on wing for the engine, the more profitable the outcome for both airline customers and the engine OEM, both of whom want to minimize unscheduled maintenance. The dramatic improvements in reliability will drop through to the bottom line, which is reflected in the revised guidance from the company.
The company has implemented multiple strategic initiatives aimed at improving profitability. These include improvements to the commercial terms for long-term MRO contracts to increase margins. An initiative to improve time on wing by 40% has been exceeded and the target raised to 80%, much of which will be achieved in 2025. Testing of a new high-pressure turbine blade for the Trent 1000 TEN is being introduced and retrofit over the next two years to double time on wing of that engine. Further improvements for the Trent 1000 and Trent 7000 will deliver a 30% benefit by year-end 2025. The Trent XWB-84 EP has now been certified, providing both durability and fuel efficiency benefits, and a compressor blade modification will result in raising the cycle limit for critical parts. The Pearl engine, used on aircraft from Gulfstream, Bombardier and Dassault in the large cabin market, has a 70% market share, contributing to the success of that new engine family.
The Bottom Line
Rolls-Royce reported stronger than expected results, and the modifications to its engine programs are delivering the performance gains that are driving profitability of long-term maintenance agreements. Those gains are quickly reflected in financial results given that airline and business jet customers and the OEM each benefit significantly from those performance improvements.
If the company can continue to execute on its strategic initiatives, Rolls-Royce should be able to grow its profitability over the short- and medium-term, despite supply chain concerns and a weak financial position post-pandemic. The turn-around plan appears to be working.
Views: 73
