Rolls-Royce’s new boss has launched a sweeping review of the aircraft engine maker, saying “much more” was to come after it exceeded expectations last year, sending shares up nearly 20%.
Tufan Erginbilgic, who joined as chief executive on 1 January, said the FTSE 100 producer had been “underperforming financially for years” and outlined key areas for improvement which he said would “materially deliver high profits, cash flows and returns”. It followed his warning to staff last month that Rolls-Royce was a “burning platform” that would need to change to survive.
Erginbilgic promised to do better, even as the company reported a 57% rise in underlying profits to £652m, cash to £505m, and revenue up 16% to £12.7bn in 2022 – well above analysts’ expectations.
Shares in Rolls-Royce rose nearly 18% to hit 129p on Thursday morning, their highest level in more than a year as investors welcomed a stronger-than-expected recovery. The company, which earns maintenance revenue based on the hours flown by engines it makes, said engine flight hours were 65% of pre-pandemic 2019 levels, and 80-90% of 2019 levels this year. % was expected to increase. Travel restrictions eased in China.
The pandemic presented a serious threat to Rolls-Royce as revenue from its civilian aerospace business dried up. Yet Erginbilgik, who replaced the retiring Warren East, said Rolls-Royce had serious problems before Covid-19 hit, and outlined plans to boost the company’s profitability.
Erginbilgik, previously a senior executive at oil company BP, predicted major changes at the company, including announcing a review of future investments and possible changes to the “footprint” that some fear over the possible closure of Will create factories or offices. The new transformation program follows thousands of redundancies in recent years under the former, including 7,000 job cuts in response to the pandemic.
Erginbilgik said it would be “very, very premature to speculate in any way” on whether his review would include further job cuts, due for reports in the second half of this year. However, he added that the company will focus on finding synergies and simplifying the business, and “we will also look at the footprint.”
The company’s civil aerospace business — making and servicing jet engines — and its power systems business — making engines for vehicles such as yachts and trains — will be the focus of the review as it hopes to boost investor returns, which it has repeatedly underlined. That he was a lagging opponent. On the other hand, the defense business is “a very good business” with high returns, he said.
Erginbilgic’s comments focused on improving financial returns, but he also re-committed to Rolls-Royce’s goal of net zero carbon emissions. Sustainable aviation fuel — a synthetic fuel that uses carbon from the air instead of fossil fuels — will play a key role in that goal, he said. He added that hydrogen fuel cells are a “long-term technology potential”.
He also said the company’s small modular nuclear reactors “could really play a big part in net zero for the UK” as well as ensuring energy security. But he said there must be a “sense of urgency” for the UK government to place orders for the reactors. Rolls-Royce and rival factories in Europe and the US are hoping to build smaller reactors, which would theoretically allow them to be produced more cheaply.
Asked about how employees would react to the prospect of further upheaval, Erginbilgik said: “There is more excitement than anything. Who doesn’t want to work for a successful company?”