Rolls-Royce CEO Erginbilgic on Growth, Boeing and Supply

Yeah, I mean, what we were trying to do, Francine, is really create a company which is actually competitive, resilient, growing and high performing company. And frankly, Rolls-Royce has never been any of that. So that was actually our vision. So if you actually come to our progress, I would say we really in a very difficult supply chain environment, we made a great progress in spite of that, and we expanded earnings and cash potential of the business significantly. And it didn't come from one division. It came from all divisions. So step change in all divisions. In fact, in the first year, our results were based on record. Now, this year we said we obviously first of results, we upgraded our guidance for the year. When we deliver this year's results, we are going to when we set the mid-term targets. I call it strategic goals, but mid-term target is people told they were really ambitious. Now, in two years when we deliver this year's results, we are going to achieve on profit more than 75% of the performance improvement and on cash more than 65%. So we are actually accelerating the transformation of the business to fund a new share price was the best performing share price on the Footsie last year.

No, I mean, here's what I think about share price. I don't actually look at share price. What we need to do is we have a very, very clear agenda. So we need to implement that really well. And in fact, transformations. This is my third transformation. I actually have four sort of pillars in every transformation that enables it. Then actually you build on it, right? So effectively, they are put the mirror up with the full assessment of the business. Second, very clear strategic plan there so that it becomes alignment, performance management and engagement tool and good performance culture. Because this is a transformation, right? You change everything about and you do all those three. It's high pace intensity and with three good. So that is that actually it's not only sustains it, excels it.

So we now I talk about green list, the benefit of that really, we don't have sort of lots of things. We have 17 strategic initiatives. We are to execute. That's what it is. And next six months will be about that is what we can talk about beyond that outlook. But next six months, execute that and it is going to deliver, frankly, what transformation does you have a view what you can achieve when you transform the business. Now you can do things that you couldn't do before. That opens up even more opportunities. And that is the point we are in right now.

I mean, it is delivering the strategic initiatives. But let me give you some of the things we are implementing. But benefits are not there. That will come next year onwards. Like all our products, we are investing £1 billion to make all our products competitively advantage so that we do not actually benefit from that yet. And we said in our strategy, we will improve. We call it time on wing, i.e. engines on wing. How long they are on wing, which is very important. We are going to improve that 40%. We said that's enormous for the business and we do not yet benefit from that. So those things will come. We are investing in it, but we didn't benefit that next couple of years we will. All are contract renegotiations. New contracts are coming with better profitability. It is actually changing the mix of contract portfolio. That is still to come as well. So I'm just giving you a couple of examples, but one example from data centre business. Our power systems have around 25% in datacenter given the air in the world. I'm sure you know that. So there is a phenomenal growth there. It's double digit growth that we are capturing.

That's a great question, Francine. I think so far, as I said, all of them actually grew from nothing. I think civil aerospace, we still have more performance improvement to do and the market is growing and we are growing more than the market. For example, this year, deliveries I'm talking about why by the market this year deliveries. Our market share is 61% and our installed engine market share is only 35%. So that tells you we are actually growing. So civil aerospace, we fixed the business model. Now the growth is coming. So it is profitable growth. Second area of power systems, datacenter growth. Again, we fixed the business model, I used to say 1 million times zero because our margin was zero in power systems, we made zero money. Now it is very profitable business. We are growing. But then these are immediate growth areas. Defense will grow. We actually have great wins. That growth will come from 28 onwards. Then we have other things we are working on Narrowbody. We want to enter Narrowbody and some hours ideas, small and micro reactors. Very interesting world, doesn't recognize Francine, but Rolls-Royce nuclear capability is unique in the world. There is no other private company with this kind of nuclear capability. It solves civil nuclear. I'm ahead, by the way. It's propulsion. And that's our in turn. But that's very unique. So that makes us natural leaders in, say, Mars micro reactors and so on.

Absolutely. So, of course, we have concerns otherwise. Life would be really boring, but I think so that is effectively what's going on with Trent 1000. Let's talk about that. I think the 21,000 is a very good engine and people actually confuse reliability versus durability. Very reliable engine. It has been flying 19,000,000 hours since it was actually in the market. The problem has been the durability. I talked about time on wing, how long it has been on the wing versus the competitive product. What we are doing, we have been doing as part of this £1 billion project, actually get that time on wing to really competitive level. And this year we have two upgrades. This year we are making one upgrade. It is going to be in the market in coming months, next year, another one by the end of next year. We have a very competitive product and that is frankly done. We are going to push that product because it is a very good product. But durability has been the issue.

Well, obviously, we are optimistic because it is going to be a very good engine.

So I think after COVID, all the supply chains have been really stressed. But because I can see multiple because our power systems, different supply chain. It's already destabilized aerospace at this V-shape because a big capacity disappeared, had to disappear because of COVID, because that industry was impacted by that. Now it is coming back and it is coming back very fast. And if you are a supply chain company, I'm talking about smaller companies, you are effectively chasing a moving target. You are not chasing a steady target. So that is the issue in aerospace supply chain. Are you talking about tariffs? I hope they are not going to impact the aerospace supply chain, but obviously they may impact other things, frankly, and in our view, always is a free market. It creates win-win outcomes. So I think we will see where that goes. But I would like to think that's not going to impact us. But one thing I want to make is we are effectively in many dimensions an American company. So let me give you some dimensions. We have 6,000 employees in the U.S. We actually support 52,000 employees in supply chain. And you talk about supply chain, our GDP contribution, $10 billion and growing because we are growing with that. It is actually growing. And we power some of the most vital military and civil aircraft in the US and our coming programs that we want, like this long range attack aircraft Flora with Bell and also re-engineered B-52. That shows you we are seen and trusted as an American company and they are vital programs for the US as well.

I mean, the reality is, I think if we start with defence, given you talk about geopolitics in the world and defence, obviously spending has been going up in the world already. If you look at actually some of the highest defence spending in the world relative to the history, so that trend may continue. But one thing I'm going to say, I already said we are not a weapon company. Sometimes people confuse. Are you benefiting from this? Actually, the defence segment doesn't benefit from that because we are a propulsion company. Our growth is enormous regardless of current geopolitics because of the RINs I talk about.

Are there already bottlenecks? Some of the supply chain issues, raw materials actually includes titanium, but we have been actually transitioning to alternative source already. And that's what we have been doing the last couple of years and different.

Definitely. I met him because Boeing is a very important customer, but also very important industry player. So we had a good conversation about Rolls-Royce experience as well. Of course, I don't want to go into the details, but my wish is I hope they are going to recover very quickly, although there are some challenges because really aerospace industry needs strong Boeing. I really mean it, by the way. So I think hopefully after now that the strike is over, they can actually move to the recovery. And I hope it is a fast recovery.

He obviously had a private conversation. But these things take some people are saying this year Boeing will recover. These things take a couple of years at least. Because you need to look at the culture, you need to look at how the company is run. I mean, we changed everything on Rolls-Royce. I always say people will never understand what we are doing and how we are delivering results until they understand how. Because how includes everything, the culture. It is how you run the company, how you run the performance management, lots of things. So therefore, frankly, they will do some of that, I'm sure.

I think they came up with eight sectors under industrial strategy. It is good. But I would say I've seen lots of even if they develop good strategies, lots of companies struggle to implement their strategy. I think the issue will be on the implementation really. Can you actually cut the red tape? Can you accelerate the things and some of the things we are still experiencing need to accelerate like the smart process. For example, it has been delayed. There is no excuse for that to be delayed. It needs to be accelerated. And underneath that, my wish is they focus on competitively advantage industries. Why am I saying that? Because if you support competitive advantage industry, that's a sustainable growth machine for you. In terms of exports, for example, we have two areas we are actually competitively advantaged. You chase competitively advantage one is gas turbines. I'll tell you, there are only two countries in the world and three companies in the world can do what we do and we are one of them. By the way, the government understands that. That's the point. Under industrial strategy, I will argue aerospace and nuclear needs to be subsectors, and nuclear. I told you we have and UK has unique capability. There is no single private company in the world with that capability, but we can be and should be in some others, like small modular reactors, market leaders in the world. Because you have the capability, we can actually move first mover advantage, create supply chain in the country. But for that to happen, the government process needs to accelerate significantly. Current timeline doesn't work at all.

I hope so. And that needs to happen. So you ask what needs to happen. So, yes, some red tape needs to go, processes need to accelerate done. Frankly, that's my point on implementation of industrial strategy. Because these things I'm sure they will come up with a great industrial strategy. I'm actually less worried about the implementation I always worry about.

So far we haven't considered. I know there is a debate. Is Footsie sort of undervalued, overvalued? I don't have conclusive comments on that, but I have some. Yes. If you look at the data after Brexit, discount Footsie versus world index increase. That's factual. And so that may be one factor. Second factor is when you look at the profitability of two companies. That is effective. In fact, our experience shows, frankly, if you deliver well, investors — we have lots of US investors investing in us, in fact, we have more US than UK at this point, frankly. So that's another factor. I think what the government needs to do. The problem with Footsie is there are not many IPOs, new companies coming in and some companies are leaving. How do you actually attract them? If you invest in infrastructure, cut the red tape and so on, then companies will be more inclined to come here.