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CNBC Transcript: Ian Davis, Chairman, Rolls-Royce

Following is the full transcript of CNBC's interview with Ian Davis, Chairman of Rolls-Royce at the 2017 Singapore Summit. This interview broadcasted in Asia on Tuesday, 19 September.

All references must be sourced to a "CNBC Interview".

Interviewed by Nancy Hungerford, Anchor/Correspondent, CNBC.

Nancy Hungerford (NH): As we're sat here in Singapore can you talk to us a bit more about the Asia growth opportunity for your business?

Ian Davis (ID): Asia is a really important market for us, over half our forward book is in Asia and China in particular is very very important to us. And the reason I'm in Singapore is that Singapore is increasingly a hub for Rolls-Royce, we are employing nearly 3000 people here and we're a pretty important part of the Singapore aerospace story.

NH: And is this across divisions within the company or is there one area in particular?

Ian Davis: It's across divisions. I mean if you talk about Rolls-Royce to people they think they didn't think of the cars, because they think about aerospace but we have a marine business that supplies engines propulsion systems for marine, and then we have a big services operation as well which we do in conjunction with Singapore Airlines.

NH: When you talk about your marine business, it's one area that shows a little bit of a dip in revenue in recent results, because of course it is exposed to the offshore markets. And when you look at the oil price environment, is the strategy more about maneuvering around the new normal for oil prices, or is there still a hope we'll see a balancing here?

Ian Davis: Well I don't think we're betting on a rebound in oil prices. I think you look at most industry forecasts it suggests that oil will stay in that 50 to 60 dollar oil range and that's certainly what we're assuming so we're not to see a big rebound in the oil price and anyway that's a lot of excess capacity in the offshore. So what we're increasingly doing on the Marine side is looking at other forms of Marine, you were nice enough to say a small dip, there but it's been a really really tough market in the last two or three years for Marine but there are areas of growth, for example in tugs and short haul which we're increasingly looking to focus on.

NH: And I suppose you say that relatively speaking because overall the half year results did show quite a big improvement coming after a year in 2016 that you probably would like to forget talking about that loss that occurred there. Overall do you think the company has turned the corner.

Ian Davis: Well I think we're certainly recovering we had a couple of tough years financially in large part driven by where we were in the aero engine product cycle. But then of course see you know a very steep decline in the marine industry really didn't help. So yeah we had a couple of very tough years. I would say we're recovering. We still got an awful lot to do. But equally we've got a very very strong order book and there's tremendous opportunities for us to improve our financial performance.

NH: I mean you look at the share price it did give up some of those post earnings gains. Of course investors are somewhat worried about the work that is left to be done. Are you suggesting there is reason to be cautious here?

Ian Davis: Well there's always reason to be cautious but there's huge opportunities as well. I think you know normally when you surprise on results in this case positively it went upward and then it comes back. So I think the market is generally moving positively and I think the market is increasingly seeing the growth story which I absolutely believe is there. When being straightforward never is in this sort of industry. But there's actually no doubt that there's huge potential opportunity for us.

NH: The results of the reputational issue of the big bribery scandal. Once again as we're sitting in Asia I've got to ask you because some of the companies that were central to the issue were in Asia -- Indonesia, China, Thailand. Do you think the culture of corruption has changed significantly in the world or is it still difficult to be competitive while playing by the rules?

Ian Davis: Well now you can absolutely be competitive we've made very very clear that we will not tolerate bad behavior and I hope that our actions demonstrated that obviously very very embarrassing for Rolls-Royce. But we're absolutely committed to following all moral and regulations. And I'm absolutely certain it's possible to do business well and that's what we will do and we strive to do.

NH: And you just touched on some regional growth opportunities. There have been some reports in Chinese newspapers that actually, that the Chinese are looking to do domestic manufacturing for some engines in there jumbo jets going forward. Is that going to present a real competitive challenge going forward?

Ian Davis: Well I think in the long run I think it's very very possible and plausible that the Chinese and possibly other countries will be looking to develop a wide body engines. China is already developing its narrow body engine and it makes sense to me that the Chinese and other advanced manufacturing engineering countries will be looking to develop engines. So we assume at some stage in the future that they will come in. But it's a big growth market. I think the key as always is to make sure you've got competitive products and you can really really offer something to customers.

NH: What about the Middle Eastern carriers because the gulf carriers in particular seem to be in no shortage of problems here. We've already talked about the low oil prices, this was a huge growth area when it came to demand for jets. Of course that trickles down to your business. Is this ultimately a negative headwind?

Ian Davis: Not necessarily for the Middle East carriers I mean our growth is not being driven by the price per se is that a very aggressive strategy to attract traffic through that's not changing. Traffic is increasing the market's been growing by 7 per cent this year, grew last year, and all expectations are absent some external disaster the growth will continue. So I think you know the growth of Middle East carriers is driven by the ambitions and strategies of building a real hub in the Middle East area. And that's linked to a bit the oil price but fundamentally it's a separate issue I think.

NH: And the rift in Qatar does this worsen the situation there?

Ian Davis: Well it's very difficult to say. I mean what's difficult that's more in the geopolitics level but if you look at the actual market and demand it's not having too much impact that we can see at least.

NH: And what is your view on demand coming from the U.S.? Because when U.S. president Donald Trump came into office there was a big 'Made in America' push. Of course some of your big rivals being General Electric. Have you felt any pressure when it comes putting America first, means buying made in America?

Ian Davis: It is difficult to unravel the reality from the rhetoric. I should just say that Rolls-Royce has a very large operation in the U.S. in Indianapolis for example we have a very large manufacturing So when do you say 'Made in America' around some of our engines have more made in America content than some of the American manufacturers. So quite what made in America means is open to question, but Rolls-Royce really does like think of itself a global company. You know in America, we have very big operations in Germany, we have big operations in Singapore. So we'll have to wait and see. You know what the words actually mean. But I do want to stress that we have a big American presence.

NH: In trying to figure out what these words actually mean there was a lot of concern even just from a year ago at the Singapore Summit, about protectionism, and whether or not it was gaining a lot of traction. Let's talk a bit more about Brexit, because that of course has a big influence on Rolls-Royce. Just a couple days ago there was a report that 10 Downing Street had sent a letter around to FTSE 100 companies trying really to solicit support for their Brexit position. Did Rolls-Royce receive one of these letters?

Ian Davis: No, we didn't get involved in that, no letter appeared. There's a lot of noise about it, and there is often a lot of dialogue between government and companies so that was not an issue that we got involved in. But just coming back to Brexit, Rolls-Royce made it clear before Brexit that we favored staying inside Europe for a business point of view. We felt that our interests that time were best served staying and our position is still that we just, you know, we recognize that the democratic decision that's being made absolutely we'll deal with it. But our position is that we would like the outcome to be as close as possible to the current status quo. We have very big orders in continental Europe. We have a big supply chain in continental Europe and it's absolutely crucial that we keep those things.

NH: How would you rate the government's response on this so far?

Ian Davis: Well I think they're learning their way, you read the papers you know and frankly you know you read the papers and everybody's got their views. I think it's a very difficult situation politically you can sense that. But I do think that there is increasing understanding of realism about the practical aspects at industry level. You could can talk about Brexit an ideological sense or remain an ideological sense. But the really hard work you know is when you get down to specific sectors, specific issues, specific regulations, I think there's an increasing realization of what's involved.

NH: And Theresa May is getting ready for reset of her Brexit stance, getting ready for her big speech in just a few days. If you had a meeting with her one-on-one, what would your advice be? What is the single most important thing for your company when it comes to sort of negotiation?

Ian Davis: Well I think the single most important thing from us, which is what I think government is doing, just to listen to our point of view and just to understand what it is like for us and whether you're 'Brexiteer' or a 'remainer', just to listen to the perspective of the business I think is very important and we feel that we are getting better heard.

NH: And if you talk about the kind of trade that Rolls-Royce does, sending engines to airbus let's say in France, is there any other way than having some sort of customs union as you see it that would protect against tariffs?

Ian Davis: Well I mean there are ways you can figure it out but as I said the status quo is something that we've all tried and tested that would be very helpful to us and our suppliers, a lot of our supply chain is continental Europe. Airbus is our biggest customer. So keeping the status quo, I think from a narrow point of view at least our point of view would be by far the best outcome.

NH: And just going back to what you were saying about the overall look at Rolls-Royce where you are today, there is still work to be done you said, what do you think is the biggest objective?

Ian Davis: I think you know we've got internally, we've got two or three main objectives. We've had a massive program of new product introductions. It's one of the reasons that you know we had to deal with some quite difficult issues. So delivering those, dealing with the teething problems and making sure our customers are getting what they want is number one. The second I think is more on operational issues, getting cost efficient as the new engines materialize. So I would say our biggest priority at the moment is internal, really really delivering on the fantastic growth we've had in orders and in sales. The order book is really strong, the market's very strong. Our challenges now are to really focus on the consequences of that.

NH: And looking back, do you it was a wise decision awarding the pay package that was given to Warren East because there was some criticism around that. Given where you are in the restructuring, the objectives that have been hit, what do you think?

Ian Davis: Well I think the pay package Warren East was very well received. There was some publicity there always about it and I would say it was one of the more modestly paid CEOs in the company. He's doing a fantastic job in my and the board's point of view. He's very very popular with the employees and I actually think his pay was very very reasonable in light of the results. You got to pay CEOs on what they do and what they're meant to be doing and the objectives. You can't just reward them short term for the wavers of a particular market. So I think he's being very very fairly and appropriately paid and he's doing an absolutely fantastic job I can tell you that.

NH: And as we are getting ready for the big F1 race, do you have anyone that you are supporting?

Ian Davis: I do not, I have to say. Well, Lewis Hamilton is a Brit, so I would have to say Lewis Hamilton. I'm not a particular motor race fan but I'm really looking forward to this evening so I'll be rooting for Lewis Hamilton but really I won't lie awake at night worrying about whoever wins.

NH: Alright thank you very much for your time.

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