Chief Executive (CEO) and Executive Director, Rolls-Royce Holdings plc
Tufan Erginbilgic, chief executive Rolls-Royce
Tufan Erginbilgic, chief executive of Rolls-Royce talks to Times Radio's Dominic O'Connell about his first year at the UK aero-engine maker. Rolls-Royce struggled with a succession of profit warnings and was then hit by the Covid-19 pandemic, which grounded airlines and drastically cut its revenue. After taking over from Warren East, Erginbilgic called the company "a burning platform" - but has since seen the share price more than double, and last week posted much stronger-than-forecast financial results. He talks about the changes he has made, Rolls-Royce's culture, net zero in aviation, Air...
About Tufan Erginbilgic
In a November 2024 interview with Bloomberg, Erginbilgic discussed Rolls-Royce's progress, stating the company had made "great progress" in a difficult supply chain environment and expanded the cash potential of the business across all divisions. He noted that the company's first-year results were a record and that they had upgraded guidance for the year. Regarding the UK market, he said that data showed a discount of the FTSE versus the world index after Brexit, but added that his experience showed that if a company delivers well, investors respond, noting that Rolls-Royce now has more US than UK investors. He said the government needs to attract companies by investing in infrastructure and cutting red tape. In a February 2024 interview with Times Radio, Erginbilgic said the company's transformation was delivering results, driven by commercial optimization, cost efficiencies, and strategic initiatives. He stated that Rolls-Royce delivered record cash when flying hours were at 88% of 2019 levels. On the UK as a place for manufacturing, he said the company is at the cutting edge of technology and that only the US and UK can do what Rolls-Royce does in civil aerospace, but noted that US competitors receive significantly more government technology support. He said a primary listing move to the US was not in the company's current plans.
Transcript (24 segments)
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Dominic O'Connell0:00
Well, we might say our names first. My name is Dominic O'Connell and I'm the business presenter on Times Radio, and joining me today is Tufan Erginbilgic, CEO of Rolls-Royce. Tufan, you had your results, Rolls-Royce had its results yesterday, a very strong set of results and probably beating most people's expectations. Are you there? There has been a recovery in civil flying, flying hours are about 88% of what they were pre-pandemic. Have you just been like Napoleon said, the lucky general? Have you just arrived at the right time, or is something else going on?
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Tufan Erginbilgic0:38
So I think as we said yesterday, our transformation is really delivering results here. And we can talk about it as a holistic transformation, but I'll give you some data points. We said actually the results have been driven by commercial optimization, cost efficiencies, and our strategic initiatives. Effectively we delivered record cash yesterday, best on record, when the flying hours is 88% of 2019. That tells you how much we are expanding the cash potential of the business. In 2022, civil aerospace had an investor day and said they would achieve single digit operating margin when flying hours return to 100%, expected in 2024 or 2025. We almost delivered 12% operating margin when flying hours is only 88%. Everybody wants to talk about civil aerospace, but let's take Power Systems. When I arrived I said if this business is managed well, there is lots of value creation potential. The results are best on record profit and cash in 114 years history. There is no recovery going on in that market because there was no collapse. The beat came from defense and Power Systems, not civil. People misunderstand our defense business. We don't produce weapons. Because of conflicts, we don't benefit at all in our defense business. It was all team's efforts to deliver these results.
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Dominic O'Connell3:45
Lots of chief executives talk about commercial optimization and doing better, but I think people struggle to understand what have you actually done. You've only been here for a year, and you were pretty tough when you arrived, you said a burning platform. Have you just gone around shouting at everyone and telling them to do better? How do you actually get those improvements?
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Tufan Erginbilgic4:07
Shouting wouldn't do that, that's not my style. First, we changed the pricing policy completely. I approve every deal. Then we looked at key OEM and airline contracts in civil aerospace. We concluded renegotiation of all of them or progressed some last year, remaining to conclude this year. When you do these things, it energizes the team. For example, because of COVID, we had written off some debt with an airline. Our team went to that airline, negotiated, and reclaimed that debt, 100 million, that nobody knew existed. If you go to a big customer and ask for another 10%, they would say no. But we are a partner, not just a supplier. Sustainable partnerships are win-win. That's what has been happening.
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Dominic O'Connell7:46
You talked about being systematic in management. Did the Rolls-Royce you arrived at have that systematic management system, those modern management systems that you would have encountered at other companies?
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Tufan Erginbilgic8:00
Performance management we definitely improved. The mindset around strategic progress: are you making the business better tomorrow than today rather than chasing budget numbers that may mean nothing. We changed management information completely. Now it tells you what's going on so you can act. Many investors complained our numbers weren't clear because internally we weren't clear. We are definitely running this business differently.
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Dominic O'Connell9:38
One of your predecessors once said to me that one of the problems with the culture was the name above the door; if you work for Rolls-Royce, you must be the best in the world. Is that part of it, that people were a bit complacent?
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Tufan Erginbilgic9:57
I'll put it positively. There are lots of high quality people and deep engineering expertise. What we are looking to do is a more proactive culture, performance management, people thinking about strategic progress. I want everybody to think 'I am here to make a difference.' We developed a very granular strategy. When granular, you can cascade it down and make it relevant to everybody. That aligns the organization and gives accountability to act. Culture doesn't change in one year, but mindset we started to change.
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Dominic O'Connell12:25
What about the future? Rolls-Royce is a multinational company with operations in America, Singapore, all over. Is the UK still a good place for high value manufacturing? Is there any danger to Rolls-Royce's industrial footprint in the UK?
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Tufan Erginbilgic12:46
We are a global company. We are at the cutting edge of technology. Only the US and UK can do what we do in civil aerospace. But you cannot stand still. Our competitors get significant support from the US government, more than twice as much as we do. We need technology support like ATI funding. We can stay in the UK, we should, but with support.
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Dominic O'Connell14:22
Airbus is talking about a new aircraft for the mid 2030s, a replacement for their bestselling family. Rolls-Royce is not on that plane currently. Do you have to be on that? Are you talking about the A320 narrow body?
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Tufan Erginbilgic14:40
We don't have to be, but we are well positioned to participate in narrow body. I'm even more confident now. We will participate if it works for Rolls-Royce. It will be a conventional gas turbine engine, not hydrogen or electric. Ultrafan is 10% more efficient than the most efficient engine available, our XWB-84. That plus sustainable aviation fuel will decarbonize aviation in the next 20 years.
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Dominic O'Connell17:15
Do you think that combination of sustainable aviation fuel and more efficient engines is a realistic way to get to net zero? Because producing that fuel is not in your control.
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Tufan Erginbilgic17:34
Right now SAF is biobased, but the world needs to incentivize synthetic fuels, which are hydrogen derivatives. If you go to synthetic, you can scale up using green hydrogen from renewables. We are not in the SAF business, but with sufficient incentives, people will invest.
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Dominic O'Connell19:13
Small modular reactors, direct carbon capture, AI data centers. The Americans are looking at nuclear for those. Is it an opportunity Rolls-Royce can do by itself? Doesn't have the money?
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Tufan Erginbilgic19:33
We are already in partnerships and will look for more. SMRs have a role in energy transition. Europe must use nuclear to achieve net zero. Big nuclear plants have cost and duration issues. SMRs are lower risk because they are smaller and modular, produced in manufacturing, reducing construction risk. UK needs to go at pace to secure first mover advantage. It will create significant export.
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Dominic O'Connell22:32
Do you think the UK government has the appetite to fund pilot projects because of the long-term benefit?
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Tufan Erginbilgic22:44
If you look at the landscape, the government wants to support distinctive industries that give competitive advantage. SMRs can be one of those. That kind of investment will pay off.
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Dominic O'Connell23:12
Are you talking to the government about where that might happen, individual sites and the time scale? They are looking at current nuclear sites which makes sense. If commitments are made this year, the first plant could be commissioned early 2030s. Do you think it's likely the first Rolls-Royce SMR will be here or somewhere else?
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Tufan Erginbilgic23:58
I would like that to be here, but we are looking at other options. We have serious work with the Czech Republic. I was there last December meeting the prime minister. That may be an option.
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Dominic O'Connell24:56
One final point. We've seen large companies leave the London Stock Market. Another said it would do it yesterday. At the same time, there is enormous tech investment in the US. Those seven tech companies are now worth four times the whole UK stock market. If you had a primary listing in the US, would Rolls-Royce's market value be a lot higher?
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Tufan Erginbilgic25:22
We have an ADR listing. It's not in our plans currently because we demonstrated 220% improvement last year. If you perform, you attract investors. Our investor base is more US based than UK based. There may be liquidity issues in the UK market. But if you perform, there is interest from everywhere.
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Dominic O'Connell26:38
That's interesting that you have a big US investor base. Does the golden share or the articles of association prevent you from moving your primary listing to the US?
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Tufan Erginbilgic26:52
I don't think it does. So we could move, but it is not in our current plans, Dominic.