Rolls-Royce: Turbines and Tribulations

**Matt** (0:00)
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**SPEAKER_2** (1:55)
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**Matt** (2:43)
Welcome back to Business Breakdowns. Today, we are covering Rolls Royce. A fair warning to those expecting to hear about luxury automobiles. That division was split from this business in the 1970s. But as we discuss the history of Rolls Royce on this episode, you will hear how the DNA of this company still ties together from its early 1900s origins. Our guest is Graeme Forster from Orbis Investments. Graeme walks us through the core business of Rolls Royce in the aerospace market, the evolving duopoly of the wide body aircraft engine manufacturers and the ups and downs of properly capturing the economic opportunity. We've talked about other duopolies in the aerospace market. Heiko, Transdime come to mind. The performance here has been different, particularly over the long term. You've seen more ups and downs and I really appreciated Graeme's intellectual honesty discussing Rolls. And I expect you will too. Now on to the episode.
All right, Graeme, I am excited to have you here to talk Rolls-Royce. I think this is a brand that pretty much everyone is familiar with. But the business that is a publicly traded entity might be a little different than the Rolls-Royce that many people think of. So, I thought we could just start there with a simple overview of Rolls-Royce, Holdings, the publicly traded entity. What is that business today?

**Graeme Forster** (4:16)
Thanks, Matt. Given this is a British business, one of the few remaining high-quality global British businesses, it's nice to have a Brit. So, thank you for inviting me on today.

**Matt** (4:27)
Amen.

**Graeme Forster** (4:29)
The company, at its core, the way I think about it is as a power business, so mainly converting stored energy into kinetic energy, right? Would be the fancy way of saying they make big engines effectively, such as airplane engines and the like. This core goes way back to their roots in the early 1900s, and that started with early motor engines. The thing that people know about Rolls-Royce motor, the cars, they actually don't do that anymore, but they still have that consistent DNA that they have had for the last 120 years. I would characterize the culture as one of engineering excellence. So they try to do a few things, do them exceptionally well. Henry Royce, one of the co-founders with Charles Rolls, was quoted as saying, whatever is rightly done, however humble is noble. And that philosophy, I think, has really stood the test of time. The crown jewel in the non-car Rolls Royce, so the one we're here to talk about today, is really the civil aerospace business. So that's engines for large commercial planes, as well as business jets. And they also make a bunch of other powertrains, so marine trains, industrial machinery, nuclear, including military, such as nuclear subs for the British Navy.