Rolls-Royce expects margins to lift but industry turbulence set to continue

Aero and marine engine maker Rolls-Royce has warned that pressures from soaring inflation and supply chain woes are set to continue throughout next year, but profitability is expected to improve over the closing months of 2022.

The engineering giant saw underlying operating profits more than halve to £125 million for the first six months of 2022, down from £307m a year earlier. It said operating margins had been squeezed in the first half, with the “war in Ukraine, inflationary pressures, and supply chain constraints all impacting our business”.

Rolls added: “We expect these issues will persist into 2023 and have been managing our business to address and minimise the impact.”

But the group said margins are set to improve over the second half of the year as it kept its full-year guidance unchanged, with a boost from the recovery in the airline sector and higher flight demand.

Engineering giant Rolls-Royce is one of the world's biggest makers of aero engines.

Engine flying hours - a key performance measure for the business - have now reached 60 per cent of pre-pandemic levels, helping the group sharply narrow cash outflows by £1.1 billion and it said it is set to become cash flow positive over the year as a whole.

The half-year results showed revenues lifted to £5.6bn from £5.2bn a year ago.

Chief executive Warren East said the group had taken “lots of necessary actions” to manage soaring costs and wider challenges, including by keeping a tight rein on costs, increasing contract pricing where able and boosting inventory to overcome supply issues.

East, who is due to leave the firm at the end of year, said: “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.”

Michael Hewson, chief market analyst at CMC Markets UK, noted: “All in all, today’s [first-half] numbers are disappointing. Progress is being made in civil aerospace and power systems, but the deterioration in margins is concerning and something that new chief executive Tufan Erginbilgic will need to get to grips with when he replaces Warren East at the end of the year,” he added.