Shares in Rolls-Royce Holdings PLC (LSE:RR.) fell more than 5% in early trade after the UK engineering group fell into the red in the first half as margins were squeezed.
The engineering group generated an underlying loss of £188mln compared with a profit of £104mln a year earlier. This amounted to a loss per share of 2.24p versus a profit of 1.25p previously.
A statement today also revealed underlying profit margins were lower in the first half, but are expected to improve in the second half.
However, group revenue still exceeded last year’s first half at £5.3bn, up from £5.23bn a year earlier, after a record quarter for its power systems business.
Despite posting lower underlying profits, Rolls-Royce maintained its guidance of a “high single-digit percentage” operating margin for the full year, expecting its civil aerospace segment to drive growth later in the year.
Rolls-Royce chief executive Warren East said: "We have progressed well in the first half of the year, with more than a £1bn improvement in free cash flow, strong order intake in power systems, increased engine flying hours and commercial discipline in civil aerospace, and targeted investment to support longer-term growth in defence and new markets.
“We are actively managing the impacts of a number of challenges, including rising inflation and ongoing supply chain disruption, with a sharper focus on pricing, productivity and costs.”
Rolls-Royce continues to be impacted by the war in Ukraine, inflation and supply chain constraints, increasing its inventory in the first half to manage these challenges, which it aims to reduce later this year.
It said it has put in place long-term agreements and hedging to protect against near-term price increases, and increased contract pricing to pass on higher costs.
The company’s full-year guidance remains unchanged from February as it continues to expect “low-to-mid-single digit underlying revenue growth”, an underlying operating profit margin comparable with last year’s 3.8%, and “modestly positive” free cash flow in 2022.
It said it expects an improvement in its civil aerospace segment in the second half due to planned higher spare large engine sales.
Civil aerospace, its largest segment, boosted revenues 8% year on year to £2.34bn, though it generated an underlying operating loss of £79mln for the period.
Rolls Royce said it has recovered about 60% of its pre-pandemic engine flying hours contracted under long-term service agreements. It expects to return to pre-pandemic levels in 2024 “as global travel restrictions are lifted”.
Its contracted engine flying hours increased by a third to 6.1 million in the first half of this year.
Revenue in its second-biggest sector of defence fell 9% to £1.6bn but an increase in military activity and spending this year “has further underpinned the longer-term outlook for the business”, the company said.
It reported a record quarter for power systems orders, mainly mission-critical backup power for datacentres, as power systems revenue grew 20% to £1.37bn.
Order intake was 53% higher than the prior period at £2.1bn, it said, and included its “highest quarter for order intake on record”, with the strongest growth in demand for power generation in government and industry.
Incoming chief executive Tufan Erginbilgic will take up the mantle next January.