Chief Executive's Review

During 2010, we have continued our programme of investment, funding world-class facilities in all major geographies, providing capacity for future growth, contributing to improved productivity and delivering products with operational lives which may well extend to half a century. We remain confident in our ability to double revenues in the coming decade through organic growth alone. However, we also have the management and financial capability to accelerate growth through acquisition and partnership.

Our consistent strategy, applied over many years, has helped deliver a more broadly based, better balanced and more resilient portfolio. This strategy has five key elements:

• address four global markets, civil aerospace, defence aerospace, marine and energy;
• invest in technology, infrastructure and capability;
• develop a competitive portfolio of products and services;
• grow market share and our installed product base; and
• add value for customers through the provision of product-related services.

We have high barriers to entry as a result of the technology required for the design, systems integration, manufacture and support of our products. In addition we work hard to transfer intellectual property, products and innovation across businesses to achieve competitive advantage in the markets which we serve.

The business today is the consequence of decisions and investments made over many years. When I first joined the Company in 1984, Rolls-Royce had a narrow product range and its business was mainly UK focused with some presence in the US. This position has changed fundamentally. We are now able to trade successfully on a global basis and are developing our presence around the world. This brings us closer to customers and allows us access to funding and skills. Our customer insight and our ability to develop technologies and integrate them into complex power systems, give us access to markets where demand remains strong for the products and services that we provide.

The decision to locate the head office of our marine business in Singapore will have a profound impact on our ability to develop a global view. We now manage about one third of our revenue from Singapore, a further third from North America and the balance from the United Kingdom and Europe. This means that management teams, running businesses that in themselves are the size of FTSE 100 companies, will think about challenges and opportunities from a different perspective. This will be of huge benefit to the Group as we respond to customer requirements and competition.

In 2010, rapid progress was made in the construction of our major new aerospace facilities at Crosspointe in the US to manufacture discs and at Seletar in Singapore where we will assemble and test large civil engines and manufacture wide-chord fan blades. During the year we also opened a new Mechanical Test complex at Dahlewitz in Germany to conduct testing for our businesses worldwide.

We continue to expand our marine services. We already have 34 facilities around the world and the network is growing fast, ensuring that our locations match our customers’ requirements. Of course our supply chain has also become increasingly global with around 8,000 suppliers in North and South America, Europe and Asia. We continue to invest in improving our supply chain management, to integrate these suppliers into our worldwide operations and to improve our quality and capabilities.

Our business is conducted through four major customer focused businesses:

Civil aerospace

We have seen signs of recovery in the civil aerospace sector, although the strength of this recovery varies between regions. Nonetheless, we have continued to sign significant new orders, particularly with customers based in Asia and the Middle East. This includes two individual orders worth more than £1 billion pounds from China and the Middle East. In all, new orders amounted to £7.5 billion during 2010, demonstrating the continued confidence of our customers in our portfolio.

The two new members of the Trent family continued their development programmes through 2010. The Trent 1000 is powering the Boeing 787 on the aircraft’s flight test schedule. The engine for the Airbus A350 XWB , which is due to enter service in 2013, ran for the first time in June. This promises to be the most successful member of the Trent family with 1,150 engines already on order. Across the portfolio, our order book requires us to more than double our output of Trent engines by the middle of this decade.

An uncontained disc release occurred on a Trent 900 engine on board a Qantas operated Airbus A380 in November 2010. This regrettable incident attracted widespread attention. Uncontained disc failures happen with a frequency of about once a year on the world's large civil aircraft fleet. However, this was the first time an event of this nature had occurred on a large civil Rolls-Royce engine since 1994.

The safety of our products is our highest priority and each time a serious incident happens
Rolls-Royce and the aviation industry learns lessons. These are embedded in the rigorous certification requirements, safety procedures and standards of regulation which make flying an extraordinarily safe form of transport. In line with this regime, Rolls-Royce worked closely with the regulators, Airbus and our customers to put in place an effective inspection programme, to identify root cause and to achieve a rapid return of the Trent 900 fleet to normal operation.

Marine

The growth of our marine business over the past decade has been a major feature in the broadening of our portfolio. In that time revenues have grown by six times, and we now have equipment on board 30,000 vessels. This growth is a consequence of our focus on power systems integration for increasingly complex and efficient vessels.

Rolls-Royce has a strong position in the offshore support industry with production facilities in nine countries and a growing support network. The acquisition of ODIM ASA during 2010 has added significantly to our systems capability and gives us greater access to the growing markets of seismic surveying and subsea deepwater installation. This will be particularly important as oil and gas exploration moves into ever deeper waters, for instance in Brazil, where more complex and capable vessels are required.

Our naval business secured a breakthrough order from the US Navy to power ten Littoral Combat Ships with MT 30 marine gas turbine engines. This represents the largest naval surface vessel contract the Company has signed. In the UK, all six Type 45 Destroyers for the Royal Navy have now been launched, equipped with our highly-efficient WR-21 gas turbine power system.

In the merchant sector, our technology enables us to respond to the growing demand for improved environmental performance of marine engines. As just one example of this, in 2010 we signed a contract for the world’s largest gas powered ferry which will operate in the environmentally sensitive coastal waters of Norway, fuelled by liquefied natural gas. This technology dramatically reduces CO² emissions and virtually eliminates soot and sulphur emissions.

Defence aerospace

Our defence aerospace business is highly diversified with 160 customers in more than 100 countries. Despite the pressure on public spending in its traditional markets we continue to benefit from our investment in a broad product and services portfolio, all of which have global applications. In particular, we see growth opportunities in emerging economies in Asia, the Middle East and South America.

In the UK, the Strategic Defence and Security Review has impacted a number of long-standing programmes, including the Harrier jump jet, which was taken out of service during 2010. However, new products and our substantial service activities will both ensure the resilience of this part of the defence business and create opportunities.

New European collaborative ventures are progressing well and are expected to have a strong export market. In particular, the TP400 turboprop on the Airbus A400M has now successfully completed 3,000 hours of flight testing. Rolls-Royce is also the leading supplier of engines for transport aircraft globally, powering large fleets such as the C-130, C-130J, Spartan C-27 and Osprey V-22.

In the US, the government approved 2010 funding for the development of the F136 engine for the Joint Strike Fighter. We believe this is an important programme not just for the aircraft but to ensure competition and value for taxpayers and customers.

We are also involved in major research projects such as Adoptive Versatile Engine Technology (ADVENT), which is designed to significantly reduce fuel consumption. These position us well for future military programmes.

Energy and nuclear

Our energy business has two main activities. These are supplying power to the oil and gas sector and the provision of power generation products and services.

Rolls-Royce has been a major supplier of power systems for rigs and platforms since the earliest days of offshore oil and gas production. Our gas turbines and compressors operate in harsh conditions and remote locations on behalf of major oil companies. For example, our RB211, Avon and industrial Trent units are now employed on 60 major pipelines around the world. New discoveries and the associated distribution of their output are creating strong demand for our products and services.

The power generation market continues to be restrained by weak demand for electricity in our traditional markets. However, we have secured significant new orders in emerging economies including India and Venezuela and we see good opportunities for long-term growth for both our gas turbine and reciprocal engine portfolio. It is clear that future developments in this sector are likely to be driven by the need for affordable, efficient, distributed multi-fuel systems. Our gas turbine and reciprocating engine portfolio provides a good basis to address these markets.

In addition, over the past decade, the Company has invested in new technologies such as tidal power and fuel cells. During 2010, we conducted a full scale test of a tidal power turbine, anchored on the sea bed off the coast of Scotland. This has generated 500kW at full power and has been successfully linked into the national grid.

We continue to expand our activities in civil nuclear power generation. During 2010, we secured contracts to provide nuclear safety systems in France and in China and have developed supply relationships with reactor vendors and utilities both in the UK and globally. These areas of investment enable us to address the particular requirements of low or zero carbon power generation with solutions that build on our core capabilities.

The successful development of our portfolio depends critically on world-class people and teamwork. The global nature of our business means that our people must work effectively across time zones, geographies and cultures. Of the 38,900 men and women we employ, 45 per cent are now based outside the UK. This makes communications and shared values critical.

This year we built on the success of our annual strategy storyboard with a televised presentation to most of the senior managers in the Company. The managers who attended this event have been responsible for presenting the storyboard to every employee of the Company. This has enabled people at all levels and in every location in the organisation to understand our objectives and to feed back their own thoughts.

We believe that effective recruitment and continuous training are critical to our success. This year, we recruited 220 apprentices and over 300 graduates from 25 countries. We devote significant resource to the continuous development and training of our people.

Over the past five years the Company has committed £150 million to this area alone. Our UK Apprenticeship scheme has been awarded Beacon Status by the Office for Standards in Education (Ofsted) and we have schemes of similar quality globally.

We benefit from the diversity that our global presence brings, recognising that a clear understanding of developing customer requirements, world-class technology and exceptional teamwork are the keys to our future success.

The long-term disciplined application of our strategy has created a broad portfolio of products, services and capabilities that ensures a wide range of options for future growth. The expected doubling of revenue over the next decade is underpinned by a record order book, which gives good visibility of the future, and a strong balance sheet which enables us to invest in the people, technology and capability that will enhance competitiveness.

In the short term we expect demand in some markets to remain subdued. However, we have access to the faster growing global markets and our large installed base allows us to benefit from an increasing emphasis on the services we can provide to our customers.

Last September, when I announced my intention to retire, I said there were three considerations that made me comfortable with my decision: I know Rolls-Royce is in a strong position with more choices than we have had in the past; we have a world-class team; and I am confident in the Board’s appointment of John Rishton as my successor. He will be an outstanding Chief Executive.

Rolls-Royce has been my working life for 27 years. Wherever I have gone in the world, I have always been proud to be Chief Executive of this Company. It has been an extraordinary privilege to work with so many outstanding people and to contribute to the development of a business that has been at the forefront of engineering and technology for over 100 years. I wish Rolls-Royce, its employees and its shareholders continued success.