ROLLS-ROYCE Holdings set a new medium-term target of higher cash flow and return on capital as chief executive officer Tufan Erginbilgic takes his turnaround effort at the UK engine maker to the next phase.

The company expects to achieve operating profit of as much as £2.8 billion (S$4.7 billion) and free cash flow of as much as £3.1 billion by 2027, with a return on capital of as much as 18 per cent by then, it said in a stock exchange filing ahead of its capital markets day presentation on Tuesday (Nov 28). The manufacturer will also look to divest assets that don’t meet profitability goals and continue a saving push that will generate as much as £500 million in the mid-tern.

Erginbilgic has embarked on an extensive overhaul of the prime UK manufacturer, which he described as a “burning platform” shortly after taking over at the start of this year. The company has said it plans to cut as many as 2,500 jobs, or 6 per cent of worldwide workforce, as the CEO presses ahead with his effort to streamline operations and boost profitability.

The former BP executive has taken a much tougher approach to pricing as Rolls-Royce focuses on profit instead of offering steep discounts to win business. That’s led to some missed sales opportunities – and tension with partner Airbus, which relies exclusively on the company’s turbines for its widebody jets.

Those strains were on display at the recently concluded Dubai Air Show, where Airbus failed to secure a major order from local carrier Emirates for the biggest variant of the A350 widebody. The airline’s president, Tim Clark, was looking for as many as 50 A350-1000s, but settled for a 15-plane deal for the smaller A350-900 instead. He called the larger model “defective” because of what he said are overly frequent maintenance cycles on the engines, as the negotiations played out publicly during the show.

Rolls-Royce said on Tuesday that it’s “well positioned” to re-enter the lucrative market for narrowbody aircraft, by far the most widely flown category in commercial aviation, after leaving a partnership on the Airbus A320 model years ago. The company would do so again via a partnership, most likely leveraging its so-called Ultrafan technology for the next-generation engine, it said.

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Stock rise

Investors, though, have cheered Erginbilgic’s tough line on costs, driving the shares up 161 per cent this year through Monday – by far the best performance on the FTSE 100 index.

Over a longer term, Rolls-Royce’s performance has lagged its peers because it rang up deals that sacrificed up-front cash in favour of market share, according to Nick Cunningham, an analyst at Agency Partners. That’s changing under Erginbilgic, he wrote in a note ahead of Tuesday’s event.

“We believe working capital can improve substantially and probably more quickly than our forecasts suggest,” Cunningham wrote. “This may be the biggest near-term lever for management to pull.”

In 2018, Rolls-Royce set a mid-term target of achieving more than £1 billion in free cash flow by 2020. That forecast was upended by issues with its Trent 1000 engine, used on Boeing’s 787 Dreamliner, and the Covid-19 pandemic, which decimated air travel and forced the company to cut thousands of jobs. BLOOMBERG