View transcript - Rolls-Royce

Rolls Royce Investor Briefing
Farnborough Airshow – 20 July 2010
Dan Korte
President, Defence Aerospace
Good morning. Talk to you just a little bit about the defence portion of the
business, spend a few minutes. We’ll walk through a little bit of an
overview, and mark our position first, and we’ve got three other sections
we’ll go through. So, first a little bit about the market. And you can see
from the chart here, of course the defence business is still dominated by the
US marketplace.
That’s the largest market in the world. But there’s a good spread across the
rest of the globe, and, actually, the dynamics are changing around the world
and where some of that spend is taking place, and we’re pretty wellpositioned
to take advantage of that growth. But that kind of gives you the
spread.
Currently, we serve 160 armed forces in 103 countries. So, it is a very
broad portfolio in defence. On the other side of the chart there, you see the
breakout of where the money gets spent. Of course, most of the attention
seems to get focused, often, on the new procurements and what’s happening
in acquisition, but the largest portion of the spend, actually is in the
operations and maintenance part of the business.
So, as you’ve heard the two prior speakers, Mark and Mike, speak about the
importance of the services business - that rings true in the defence portfolio
as well. That piece of strength continues to endure and continues to serve us
well. This is just a quick graphic of some of the things that are happening in
the defence portfolio.
Mike talked about first flights. Actually, we’ve had six first flights just in
the defence portfolio alone over about the last year. Some of the major ones
include the first flight, the first vertical hover and landing of the lift system
on the Joint Strike Fighter. Very proud of that. The first flight of the A400
which, if many of you were at the show over the last day or so, over the
weekend in RIAT, you could see the A400M flying.
We’re very proud of the accomplishments there. Also, the first flight of the
Mantis which is an unmanned vehicle - a UK programme that also uses our
engine. And we had three others as well in the helicopter business all
around our CTS800 engine. So, a lot of investment in the future going on in
the defence portfolio today, just as in the civil market. It’s very balanced
from that standpoint.

We’re also spending a lot of time developing the services opportunities for
the markets, as they’re evolving. Some customers are moving more towards
a long term service model. Some are trying to figure out what the approach.
The one dynamic that’s of interest in this
market, to me, particularly, is that, as budgets get constrained, and as
people run into budgetary issues, they actually tend to look more and more
at the “TotalCare” model, the long term service models, because they’re
actually usually more cost efficient than their own approach.
Because we get to spread the cost, we get to take the efficiencies across that
broad portfolio.
I mentioned the breadth and depth of customers we have around the world.
When we can leverage the spares pipeline and we can leverage the
infrastructure we have in our logistics train, and make sure that we are
servicing all of our customers, we can do it a lot more cost effectively. So,
they’re all looking at availability contracts, just as Mark described in civil.
We can guarantee that mission criticality – that they will have the engine
when they need it for their mission, anywhere around the world, 24/7. And
they can have it to produce the capability that they need. It’s all well and
good to have a large pipeline of spares, but if they don’t have the right
engine at the right time and the aircraft isn’t able to eventually perform the
mission – so it turns into reliability of the product as well with guaranteed
reliability in the defence market, we can provide that kind of service.
Again, it gives our customer the confidence so they can complete their
mission. To do that, we continue to invest in our own capabilities, One of
the nice things about the high level of integration across the Rolls Royce
group, is that we get to leverage each other’s strengths. So, actually the first
operation centre started up in Derby in the civil business. We now have an
operation centre in defence in Bristol that’s running 24 hours a day, 7 days
a week that’s monitoring numerous customers around the world and all
their products.
And, as we learn things about the defence business, we get to feed that right
back into Mark’s business as we learn things and how to run our operation
centre more efficiently. So, we improving that, we’re improving our
response times, we’re broadening our capabilities, we’re putting more
engine types into that kind of Total Care solution, and that’s helping all of
our customers.
So, this is just a glimpse of the current portfolio today, inside of defence. It
shows how we break out. You can see two key numbers very quickly –
52% of the defence portfolio is service, and also, 52% is in the transport
segment. So, you can see transport and ISR are two very strong market

segments. You’ll hear our customers talk a lot about that.
We also have a strong presence in combat, but it’s a nice, balanced
portfolio, whether you’re looking at it from the standpoint of development
versus long term care, or whether you’re looking at it from market segment.
If you exclude the commercial, the civil helicopter business, we’ve got
about 18,000 engines in service around the world. A nice, broad portfolio.
So, that’s where that 52% service opportunity comes from. Good
positioning on both fixed and rotary wing. Our STOVL experience, our
ability to create aircraft that can take off in very short runway situations,
and land vertically, i.e., the LiftSystem for the Joint Strike Fighter is a
technology that only Rolls Royce has. No other company in the world can
do that.
So, we talk about Blue Ocean kind of positions. I mean, that’s one of them
that we have today, and it goes all the way to, really, the Harriers, but it
goes up through technologies like what we have on the V22-Osprey, and
then into that LiftSystem. If you get out to the show, take a stop by the
stand and look at the technology that goes into that – the swivelling of the
nozzles, and what we can do with that lift, and the amount of thrust we can
put through that fan is unprecedented in the industry.
And the ability to essentially get the exact same thrust out of an engine, and
put it through a Lift Fan with no losses, essentially. And thrust is really a
feat of physics that is unmatched by anyone in the industry.
And then we’re a leader in the transport segment. It’s an incredibly robust
piece of the market today. Transport is maybe one of the things that, it’s not
the most talked about portion of the portfolio, but it’s needed day in and
day out in the types of missions that our customers are doing, and that’s a
very strong part of our portfolio.
We’ll talk about market outlook. So, first, a little bit on trends in defence
aerospace. Indeed, global defence budgets are under pressure in a number
of markets, but there’s increased spending power in a lot of emerging
markets – places like India, Saudi Arabia, South Korea – all very robust
markets that are spending at high percentage points of their GDP on
defence procurement.
Who would have thought three years ago, that India, in the last three years,
would have spent $27 billion on defence acquisitions. Those are the types
of growth opportunities that, quite frankly, are offsetting some of the
budgetary pressures in other parts of the world. Opportunities for services
because of the sustained deployments.
The deployments that are happening today in Afghanistan are driving the
need to service all those aircraft, all those rotary wing platforms that are out

there, but are also driving a lot of transport requirements. That’s really a,
you know, you see that around the world, and we tend to focus on places
like Iraq and Afghanistan, but there’s actually large transport demands in
Africa and a lot of other portions in the world that also drive our business.
And then, finally, one of the trends in our business is, research and
technology dollars, and I say dollars correctly, because most of them are
still coming out of the US. A lot of them are shared now, which is both a
good and a bad thing.
From a negative standpoint, we have to come up with the capital to invest
in future programmes, but from a good standpoint, we can control more of
the intellectual property and have that IPR in our own portfolio, so we can
capitalise on that in the future much like civil is able to capitalise on a lot of
their IPR. So, it’s a little bit of a change in the marketplace and how
research and technology is happening today, and I’ll come back to R&T a
little bit later.
If you look at just the propulsion market – this gives you a snap shot of
what it looks like around the world. It’s about a $450 billion market over
the next 20 years. We understand the customer requirements very well over
the next 10 years.
We’ve got a very good insight into where this market is moving. Cost
reduction is actually driving some opportunities for us. As I mentioned
earlier, as customers look to find ways to improve the way they do their
business, many times they come to Rolls Royce because we can do it more
efficiently, we can do it more effectively. And then the trends where the
growth
markets are shifting. I mentioned Indian as an example. Brazil is another
interesting part of the world right now. They’re investing quite heavily in
the defence marketplace, and looking for new capabilities. So, let’s talk a
little bit about the priorities in the sector. First in the transport and ISR
market. Our strongest market – the backbone, today, is between the
AE2100 family of engines and the T56, which drives a lot of the current
fleet.
There are over 7,000 T56 engines in service today around the world. One of
the nice things about this market – we own the market today and we
continue to protect the market as we move forward. So, for instance, in the
T56, we’re just finishing development of an upgrade to that engine.
The 3.5 is going to be the latest standard of that engine. Just a couple of
facts and figures about it – the engine saves 12.5% fuel burn off the prior
standard of engines, and that’s very important to our customers. It lowers
the operating temperature of the turbine, which gives you improved
reliability and increased life. It actually, at the same time it does those two
things, it gives increased performance to our customers.

So, you’ve got those 7,000 engines out there in service today, that we have
a cost effective upgrade to this 3.5 standard that’ll help them solve some of
the near term problems they have. Every upgrade that occurs from the
current standard to a 3.5 T56, is the equivalent of taking 52 automobiles off
the roads today, just in the amount of fuel that it saves.
So, it’s a nice solution set for our customer, but it helps us protect our
current markets from the competition, and that’s the thing we continue to
do. We invest in new markets and new opportunities, but we also protect
our current markets by continuing to innovate, continuing to drive new
technology and new capability into those platforms. Also, the TP400, for
the A400M – the entry into service is scheduled for 2013.
We’ve made very good progress in the flight test schedule on that
programme. The engine is performing very well today. We’re extremely
happy with that as the development continues, and we’ll continue to work
very closely with the customer to make sure we’re responding to any issues
that might come out of the flight test programme, but, to date, we haven’t
seen any significant issues in that flight test programme.
Combat engines – first is the LiftSystem, as I mentioned earlier. We’ve got
four of those installed in flight test. They’re performing exceptionally well,
and we’re extremely happy as we continue to develop that product for that
marketplace.
There’s a lot of customers that need vertical lift in their capability portfolio
– the US Marine Corps being one of the strongest customers for that –
they’re completely reliant on this particular engine variant for their mission
in the future.
The next one is the F136 engine for the JSF, often referred to as the
alternate engine. It obviously gets a lot of press these days. We’re teamed
with General Electric to deliver this engine. We have 40% of this particular
engine programme. We’ve got three engines delivered. We’ve got three
more on the way that are going to deliver this year. So far, we’ve
accumulated over 850 hours of test time on the engines – performing very,
very well. Every report card we’ve gotten from our customer – the US DoD
has a process where they give contractor performance assessment reports
out to industry.
Everyone has been exceptional or very good in their scoring criteria, so it’s
actually, contrary to what you might hear in certain press, it’s performing
very well in the development programme.
And, one of the things I think is a high point for this alternate engine, and
it’s the same point that Mark was making on the Trent 700 – this is a
custom design solution for the Joint Strike Fighter. Between GE and Rolls
Royce, we have designed this engine. It’s a highly integrated engine with a
Joint Strike Fighter.

Unlike our competition which has taken an engine from another aircraft and
modified it for use in the Joint Strike Fighter, we’ve designed one to be
highly integrated with this platform. So, we actually have a larger fan,
we’re able to create some additional growth opportunities for the customer
in the future if they need it, but it’s a form fit and function replaceable
engine.
You can put either one in, but this one will offer a lot more growth
capability in the future, so it’s one of the things that the customer is worried
about mission critical needs are very attuned to. We continue to have strong
support in congress, but we’ll have to wait and see how it turns out. We had
a nice support where they asked the House Armed Services Committee to
put in $485 million for this alternate engine.
There was a full house vote a few weeks back that you might have heard
about, where they affirmed the need to continue the alternate engine
programme, but they’re now getting ready to go into conference before
long, and we have to work through that process and continue to work with
our customers to deliver this need. The EJ200 – operating on the Euro
Fighter Typhoon.
Over 150,000 hours in service – continues to perform very well, and we
also see the ability to export this engine into other markets around the
world. Technology – one of the things that we do across Rolls Royce, but is
also a very strong push for us in defence, is leveraging our technology
centres around the world. It’s always nice to use other people’s money to
work on your research and technology, and so we look at universities as a
strong place, and we also invest in the universities, but it’s joint investment
in research and technology to drive propulsion.
The US government, as I mentioned earlier, in addition to other
governments around the world, continue to invest in research and
technology. So, we take that, we leverage that, and we can leverage it
across our business because we are a broad based power systems company.
We can take the best of technologies from around our business, and use
them as appropriate, within export control laws, of course.
One of those technology thrusts, right now, on the one end I’d like to spend
just a minute or two on, is Advent. Advent is a US-led technology
programme, really trying to develop the next generation in engine
technologies that can be used on numerous aircraft types. It’s the
cornerstone of all R&T that’s going into propulsion in the word today.
It’s driving for 25% greater fuel efficiency in aircraft propulsion. The way
it does that, and what makes it so unique, is that it’s able to vary,
essentially, the configuration of the engine to the type of mission you’re
doing at that point in time. So, it can be a very efficient engine when you’re

in cruise or loitering in a platform, but when you need high capability,
when you need
a lot of thrust in, maybe, a combat environment, it’s able to, essentially,
morph into a different type of engine using a variable fan plate and variable
core technology to do that. There was the phase 2 investment, there was
only one winner of that contract in the US, and that was Rolls Royce.
Rolls Royce beat both General Electric and Pratt and Whitney to get the
lion share of the funds, to do a full engine demonstrator in the phase 2
Advent programmes. We think we’ve got some pretty nice technology here,
that’s going to take us into that next generation of engine technology. So,
we talk about today, this is out into the next decade of military needs, and,
again, that technology, one of the things we’re working very closely with
our US customer on, is the exportability of that technology, so some if it
can find its way into commercial marketplaces as well, into Mark’s
business.
Again, that tight linkage between all of our businesses is very crucial in
Rolls Royce, and one of the underpinnings of our success. That investment
continues to occur. I was just speaking to some customers yesterday, and
following this phase 2, there’ll be a technical maturation programme, and
the US military is very committed to make that programme happen.
So, we look forward to that. So, in summary, we’ve got a very wellbalanced
portfolio across a number of segments of the defence marketplace.
We support a very broad customer base as I mentioned.
We’ve got good market positions in the markets that we serve today. And,
going forward, we’ve got a nice balance between development, original
equipment manufacturer, production of engines today, and of aftermarket
solutions and after market service revenue.
We have long product lives, and we’ve got a strong mix of both and
established engines in many of those key markets. And the services
business continues to drive a substantial revenue inside the sector. So, with
that, I’d like to turn it back over to Mike Terrett. I think he’s going to wrap
us up. Thank you.