The new boss of Rolls-Royce has launched a sweeping review of the aircraft engine maker, pledging that there is “much more” to come after last year beat expectations, sending shares up more than 20%.
Tufan Erginbilgic, who joined as chief executive on 1 January, said the FTSE 100 manufacturer had been underperforming financially for years and outlined key areas for reform that he said would deliver materially higher profit, cashflows and returns.
The comments follow his warning to employees last month that Rolls-Royce is a “burning platform” that must transform to survive.
Erginbilgic pledged to do better in future, even as the company reported a 57% increase in underlying profits to £652m, £505m generated in cash and revenues up 16% to £12.7bn in 2022 – well above analysts’ expectations.
Rolls-Royce shares rose by 24% on Thursday to 133p, their highest level for more than a year as investors welcomed the stronger than expected recovery.
The company, which earns maintenance revenues depending on the hours flown by the engines it makes, said engine flying hours were at 65% of pre-pandemic 2019 levels and were expected to rise to 80-90% of 2019 levels this year thanks to the easing of travel restrictions in China.
The pandemic presented a serious threat to Rolls-Royce as revenues from its civil aerospace business dried up. Yet Erginbilgic, who replaced the retiring Warren East, said Rolls-Royce had serious problems before Covid-19 struck, and outlined plans to increase the company’s profitability.
Erginbilgic, previously a senior executive at BP, raised the prospect of big changes at the company, including announcing a review of where to invest in the future and potential changes to “footprint” that would probably spark concern over the possible closure of some factories or offices. The transformation programme follows thousands of redundancies in recent years under East, including 7,000 job cuts in response to the pandemic.
He said it would be “very, very premature to speculate either way” on whether his review, due to report in the second half of this year, would include further job cuts, but added that the company would look at finding synergies and simplifying the business and its footprint.
However, the chief executive cautioned: “This is not, ‘Let’s slash and burn and go.’ This is about creating a company that is highly sustainable.”
Rolls-Royce’s civil aerospace business – making and servicing jet engines – and its power systems operation – making engines for vehicles such as yachts and trains – will be a focus of the review as he hopes to increase investor returns, which he repeatedly highlighted were lagging behind rivals. On the other hand, the defence business was “an enormously good business” with high returns, he said.
Erginbilgic added that his “first priority” was to raise Rolls-Royce’s credit rating to investment grade, which would allow it to borrow from a wider range of investors. One key ratings agency, Moody’s Investors Service, said on Thursday Rolls-Royce’s results were “credit positive”, with the chief’s plans “key to improve profitability and repair balance sheet strength”.
Erginbilgic’s comments focused on improving financial returns but he also recommitted to Rolls-Royce’s goal of producing net zero carbon emissions. Sustainable aviation fuel – synthetic fuel using carbon from the air, rather than fossil fuels – would play the key role in that goal, he said, describing hydrogen fuel cells as a “longer-dated technology potential”.
The company’s small modular nuclear reactors could play a big role in net zero for the UK, as well as ensuring energy security, he said, but there needed to be a “sense of urgency” for the UK government to commit to orders of the reactors.
Rolls-Royce and rivals in Europe and the US hope to build smaller reactors in factories, which would theoretically allow them to be produced more cheaply.
Asked about how the staff would respond to the prospect of further upheaval, Erginbilgic said a stronger Rolls-Royce that was better able to generate cash would benefit employees.
“There is more excitement than anything else,” he said. “Who doesn’t want to work in a successful company?”
