Rolls-Royce’s turnaround has been hailed as the fastest in British corporate history.
Tufan Erginbilgic has been the chief executive for nearly 14 months. He also promises to increase profits and cash flows every year over the next four.
The company that makes engines for long haul passenger jets, and nucleo-propulsion for the Royal Navy submarine fleet reported an operating profit of £1.59 billion in 2023, up from £652 million in 2022. The margins increased from 5.1 to 10.3 percent, with revenues up 21 per cent at £15.4 Billion. In the past 12 months, Rolls-Royce has never seen a cash infusion of £1.28 billion.
For the current year, Erginbilgic, a former BP executive who came in after the seven-and-a-half-year tenure of Warren East, is promising operating profits of up to £2 billion and free cash-flow of £1.9 billion. He says that by 2027, Rolls is on track to achieve operating profits up to £2.8billion, profit margins upto 15% and net cash flows of £3.1billion.
The analysts have missed the mark in their forecasts of Rolls’ recovery. Their consensus forecasts are below the latest guidance from the company. The City expects the shares to continue their upward trajectory from the current ten-year trading highs, which values the company at over £30 billion.
Rolls-Royce shares closed at 356 3/4p, up by 27 1/4p or 8.3 percent.
Since Erginbilgic became’s CEO, the stock price has almost quadrupled. The shares have nearly quadrupled since Erginbilgic took over.
Erginbilgic responded to those who believed that Rolls’s recovery had at least as much do with the recovery of its end markets. He said the performance of the company was “driven” by the actions we take, our commercial optimization, and our strategic initiatives which create momentum and significant deliveries.
Analysts are in agreement. Nick Cunningham of the independent research firm Agency Partners said, “This is faster than we anticipated.” This performance across the board suggests that management actions and not just external recovery play a major role in this performance.
As long-haul flights recovered to 88 percent of their pre-pandemic level last year, Rolls’ margins in its largest division – civil aerospace – which primarily makes Trent engines for Airbus A350s and Boeing 787s – went from 2,5 per cent in 2020 to 11,6 per cent, the company saw its margins increase. Rolls makes money based on how many engines are sold. The company thinks long-haul flights could be 10 per cent higher than 2019 levels.
Since the new boss has taken over, the company’s stock price has almost quadrupled.
In the Power Systems division, which produces diesel engines for trains as well as generator backup for data centres and data centres, margins rose from 8,4 to 10,4 percent. Margins in defence rose by two basis points, to 13.8%.
The sharp appreciation of the shares has been a reward for those who have kept faith, as well as for those who have joined the bandwagon after the pandemic ended. However, the dividend that was last paid out in 2019 is not being reinstated.
This will be triggered by the re-instatement of investment grade credit status at the rating agencies. The company believes that this is imminent, after the cashflows have reduced the net debt from £3.3bn to £2bn.
Rolls-Royce boss, who was eager to highlight a few firsts for those who still wondered if Tufan Erginbilgic got one thing right – the timing of the appointment of Erginbilgic to the top leadership position just as the markets turned – pointed out some of the firsts. Or, to put it another way: Things that Rolls had never done before.
Cash inflows are at an all-time high. The record profits in the power systems division, where the market was not in recession, are credited to him, he says, for the recovery. The double-digit profits in the stuttering Civil Aerospace division should be compared to the previous management’s ambitions which were only single-digit margins even after the business returned to its pre-pandemic state.
Erginbilgic, not one to leave it to historians to recount his role in recovering Rolls-Royce’s history, is eager to share the story himself.
The chief executive’s turnaround plan was based on “not only what we do, but also how we do it.” “We do things differently.”
He claims that Rolls has never had a strategy like this in its entire history. What is the measurement of management performance, exactly? He said, “Frankly there wasn’t any.” Quarterly reviews of business divisions? He noted that there had been no reviews of the divisions in the past. In his first year at Rolls, he said, every contract for engines and maintenance was renegotiated. He said that this “has never before been done” by Rolls.
Analysts consistently lag behind the CEO’s results or promises for the future, proving that not everyone believes in Erginbilgic ability to perform miracles.
It is tempting to say that a company with a chequered history like Rolls-Royce needs not only a good general, but also a lucky one. Erginbilgic will tell you you can make your own fortune.