Tufan Erginbilgic has certainly made an impact since he took charge of Rolls-Royce at the start of the year.
The 63-year-old former BP executive, who previously led a seven-year turnaround at the oil giant’s downstream business, created controversy just days into his tenure at the engineering group by telling employees and investors that they were standing on a “burning platform”.
The new chief executive also had a strong message to the government, saying that ministers needed to get their act together over the stalled plans for the localised installation of Rolls-Royce’s small modular nuclear reactors, which risk weakening the UK’s energy security and missing the opportunity for large job creation and export potential.
“We can play a key role in the UK’s aspiration for the transition to net zero,” he said. “Supply security, after what we have seen in Ukraine, is important. We can contribute to the UK economy in creating employment and by producing exports. But it will be hard to export if the UK does not go there by investing in our small modular reactors.
“There needs to be a sense of urgency and it is important that we engage with the UK government. We have built a very capable team and I believe being a first mover is important because we are not in isolation here, there is competition from elsewhere.”
Yesterday he reported on his predecessor Warren East’s performance for 2022: underlying operating profits of £652 million up from £414 million in 2021, and two years of cashburn reversed to £505 million of cash inflow.
That, however, was not a good result according to Erginbilgic, who instead preferred to take a five-year view of “significant underperformance,” of a 67 per cent crash in shareholder returns and 3.5 per cent return on capital employed.
“Yes there have been improvements in profitability and cash — but that is from a low base,” he said.
“We have momentum this year and the transformation programme will take us to a different level. Just catching up with the competition would be realising our full potential. But we can go beyond that. We have underperformed for too many years. This is the reality we face and we need to change. No company can continue like that. Cash generation is too low and debt is too high. A weak balance sheet limits our ability to invest.”
Rolls-Royce’s net debt, which ballooned after the £7 billion debt and equity rescue of the company in the depths of the pandemic, fell from £5.1 billion at the end of 2021 to £3.2 billion by the end of 2022, though much of that was down to a disposal programme notably of its Spanish business, ITP.
Rolls-Royce’s credit remains junk-rated with the agencies, with no sign of a dividend to shareholders this year.
Of the need for “commercial optimisation” of the company, he said: “Rolls-Royce produces some of the best engines in the industry but the risks we take in the design and development to create value for our customers, we want our fair share of that.”
In terms of his transformation plan, he said: “Efficiency and simplification will identify synergies across functions and divisions and footprint. We can galvanise the organisation by demonstrating clarity in what we are doing and getting employees to align around the change needed. That will cascade down so everyone knows their role.
“Who does not want to work in a successful company? There is more excitement here than anything else, [employees] appreciate that we are setting that target.”
Of a new strategic review to be published later this year, he said: “The strategic plan will determine where we invest and where we will not.”
He said other businesses — and that could include Rolls-Royce, the investments in electric aircraft and the Spirit of Innovation, the fastest battery plane in the world — might need “partnerships”, likely to be other investors or industrial concerns, to spread the risk.
Erginbilgic said he believed the future of aviation would be in sustainable fuels. “It is here where the biggest opportunities are,” he said. Aircraft running solely on hydrogen, he added, was a “longer-dated technology”.
Fresh face, familiar plan, may just workQuite how much of yesterday’s share price rise was down to far better profitability and cashflow figures for 2022, or a reaction to the upbeat analysis of Rolls-Royce’s new chief executive, is up for debate (Robert Lea writes).
It was a bit of both. Just as Tufan Erginbilgic made the point that the financial results are up from a low base, so a leap of more than 20 per cent in the shares came from a burnt-out stock price.
Erginbilgic is intent on reinventing the “significantly underperforming” company, which he has accused of hiding behind the challenges of the pandemic and of not having had a “granular strategic plan” in the past few years, if ever.
Whereas his predecessor Warren East would talk lyrically of uncluttering all the pointing and guttering on the ivy-clad Rolls-Royce mansion, trying to right a storm-tossed ship or removing mud from the machine, Erginbilgic has provocatively told investors and employees that they are standing on a “burning platform”.
Much of a seven-point transformation plan he has unveiled before publication of a strategic plan later in the year is not so different from the old plan. East spoke repeatedly during the seven years of his tenure of the need to simplify and become more efficient, for commercial optimisation, and to improve management performance and change the culture.
Asked why anyone would expect the latest Rolls-Royce transformation plan to be any different this time, Erginbilgic cited his success in shaking up BP Downstream. He says that was a much bigger job than Rolls-Royce. But this, as he will find out, is Rolls-Royce.
Success, Erginbilgic says, will be matching and bettering the returns of GE of the US.
Quite how that is done, shrinking the company or splitting off parts, will be in the next chapter: the strategic review to be revealed, probably, in the summer.