Rolls-Royce Holdings plc (RR) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Net Zero Launch Investors and Analysts Panel. My name is Seth, and I will be your operator. [Operator Instructions] I will now hand the floor over to Isabel Green to begin. Please go ahead, Isabel.

Thank you very much, Seth. And good morning, and good afternoon, everyone. So I'm Isabel Green, Head of Investor Relations, and thank you for joining our net zero pathway roundtable event today. Firstly, apologies for the late change for the conference call format. And for anybody who hasn't already accessed the slides, they are available on our website for you to download. And we will start with a short introduction by our CEO, Warren East, which we'll refer to those slides. We'll follow that with a Q&A session, and we have a panel of our senior managers from across our business with us today. So we very much look forward to receiving your questions at the end. So now I'll hand over to Warren. Thank you very much.

Great. Thanks, Isabel, and thank you, everybody. And I think you can find the slides in the Results and events section on the Investors section of the website. And I am going to start -- I'm going to start on Slide 4 of the presentation there. We're going to set out road map for achieving net zero by 2050. We're going to explain a little bit more about some of the technologies that will enable us to get there. Global commitments to net zero have, we think, reached a tipping point. The chart -- the few pie charts in the middle of the chart there, pointing out that 68% of the global economy, 56% of the world's population are now covered by net zero targets. Achieving net zero is an imperative for our customers. It's imperative for our people and the communities in which we work. As well as being an imperative, for us as a business, it's also a great commercial opportunity, and we're very excited to be playing our part in this big change in society, but also addressing that opportunity. So Slide 5. Demand for power is increasing and the industries that we serve are among the hardest to decarbonize. And because of this, our innovation to help our end markets reach net zero is essential to achieve the global transition. As we pivot away from fossil fuels, we'll be both expanding our business in traditional markets and migrating to net zero through the use of sustainable fuels and new technologies. And that will also mean that we'll be entering new areas, supporting further growth and technological development. The chart on the bottom of the slide looks like just a migration, but actually 100% at 2020 represents 300,000 gigawatt hours. 100% in 2050 represents 1.8 million gigawatt hours. So there's significant business growth in here as well as transition that we're talking about. So moving on to Slide 6. We have, of course, many years experience in pioneering innovations that meet some of the world's really tough engineering challenges. In Civil Aerospace, the Trent XWB, that's top left of the picture there, is the world's most efficient large civil aero engine in service today. And efficient engines are absolutely vital because they will help stimulate and support the take-up of sustainable fuels. Now we've been growing and expanding the reach of our business as we've aligned ourselves towards championing sustainable power for several years. And from testing of hybrid electric systems, like the rail picture in -- at the top of the slide and marine a few years ago, we now actually have real commercial products here. The microgrid that you can see on the top right is at our factory in Friedrichshafen. It's been online since 2019. It's enabled us to go from demonstrating microgrids to actually selling them all around the world. Last year, we acquired Kinolt, energy storage specialists. And that's now in -- left middle of the slide, that's now our Microgrid Competence Center. And the picture there is our battery container unit manufacturing plant in Ruhstorf in Bavaria. In aviation, we took a significant step towards electrifying flight with the acquisition of the aircraft back in 2019, and that's the picture in the middle. And as far as engine testing is concerned, with sustainable aviation fuels, we've tested Trent 1000 engine with 100% sustainable aviation fuels in Darby and also the Pearl 700 business jet engine. And finally, in the bottom right of the chart, our small modular reactor consortium is up and running, and it's aiming to be the first design to be assessed by U.K. regulators starting in the second half of this year. Moving on to Slide 7. The pie chart shows our total emissions footprint. And you can see the emissions from our own manufacturing and production and office facilities, excluding product development and testing, make up a very small, but nevertheless, important proportion. We've actually halved those emissions over the past 5 years. And last year, we declared our target to get them to net zero by 2030. But the chart shows clearly the vast, vast majority of our emissions, the scope 3 emissions associated with both the supply chain, but more importantly, the use of the products that we sell. So the abatement of the product-related emissions during their use is where we can have the most impact, and therefore, that is the primary focus for our decarbonization plan. Now there is -- I'm flicking on to Slide 8. There's no one single solution to this. It's going to require multiple technology solutions and partnership across policymakers and across industry. Our pathway involves introducing new technologies, ensuring that our products are compatible with sustainable fuels and making our products more efficient to stimulate and assist in the take-up of those fuels. And this way, we believe we can take our emissions, bend that curve down to net zero by 2050. In fact, our business as a whole could be said to be there sooner as we introduce zero carbon technologies like SMRs into new areas that are outside the scope of our current business. To emphasize just how significant we see this opportunity is, we're focusing our R&D investment on the necessary next-generation and lower carbon products. And we expect to spend 75% of our gross R&D in these areas by 2025, compared with approximately 50% in 2020. So Slide 9. Today, we are committing to ensuring that our new products will be compatible with net zero by 2030. And all our in-use products will be compatible therefore with net zero by 2050. And a new engine that can use SAF is only part of the solution. We expect that our current products are going to be used for several decades. So today, we're pledging to have proven all our in production, commercial and business jet aero engines to be compatible with 100% SAFs by 2023. And that will mean that 2/3 of our Trent engine fleet and 3/5 of our business jet fleet currently in service will be SAF ready. We're also exploring the use of SAFs in defense application, including as part of our involvement in the [ Tempus ] program here in the U.K., and we've carried out extensive tests with our U.S. Defense products. In our Power Systems business, we've defined a science-based interim target to reduce the lifetime emissions of new products by 35% by 2030. That's relative to 2019. And that, we believe, is an industry-leading ambition. We're also testing hydrogen fuel cells, in the middle of the slide there on the left. And we're putting 4 of those together into a new demonstrator that we hope to have up and running by this summer. And we are also targeting to have integrated many more modules to create a 2 megawatt solution in an operational microgrid for demonstration by 2030. On the bottom of the slide, we're also planning to have approved the MTU Series 2000 and 4000 class engines that's extensively used in marine and power generation applications for use with sustainable fuels by 2023. These engines together represent the majority of the MTU engines that we make and sell today. Moving to Slide 10. The transition to net zero represents a real opportunity for us. In aviation, we have opportunities for hybrid electric and all-electric applications across a host of completely new markets for us, including urban air mobility, commuter and regional markets. We've learned a lot from our work on the Spirit of Innovation, all-electric plane, that's bottom left on the slide. The characteristics that air taxis require from batteries are very similar to what's being developed here. So we're powering the Vertical Aerospace urban air mobility aircraft, top left, which will be able to undertake zero emissions flights of over 100 miles on a single charge. And Vertical has already secured conditional preorders for 1,000 aircraft, and that's worth $4 billion, with entry into service from as early as 2024. And middle left, we're working with Tecnam and Widerøe to deliver an all-electric passenger commuter aircraft, which will be ready for service in Norway in 2026. Further up the power scale, we recently started testing the first elements of a powerful hybrid electric power propulsion unit at a specially designed test bed in Bristol. And back on the ground, we've developed a solution called [ grid up ] in Power Systems, which brings together renewables, grid power, hydrogen production, fuel cells and backup power into an uninterruptible CO2-neutral power supply system that can be used to provide power for data centers. On the bottom right of the slide, our SMR technology. Our SMR technology will be able to create competitive zero carbon power for communities and for industrial processes. And it opens up a really significant export market opportunity for us. Another potential area for SMRs is to provide zero carbon power for things like direct air capture and sustainable fuels production. So let me summarize what we're doing. We've pledged to achieve net zero carbon in our own operations by 2030, to be a net zero carbon business as a whole by 2050, and to take a crucial role in stimulating and enabling the sectors in which we operate to reach net zero by 2050. To help us achieve this, we've set a series of short-term targets. And yes, they're all connected to executive remuneration, to make many of our current products compatible with sustainable fuels. Now at its heart, Rolls-Royce is really all about taking stored energy and turning it into useful power. We believe that, that must and it can be made compatible with net zero carbon emissions through the development of the technologies with which we operate. In summary, we can see a clear pathway to net zero by 2050. With that, I'll hand back to Isabel to chair the Q&A.

Thank you, Warren. So I can start now by introducing the rest of our panel, and really keen to get questions for all of those who are volunteered their time today to help answer your questions. So with me today, we have Tom Bell, he is the President of Defence; Rachael Everard, Head of Sustainability; Andreas Schell is President of Power Systems; Paul Stein, our Chief Technology Officer; and Rob Watson, Director of Rolls-Royce Electrical. So operator, can you please remind people how to register a question and then perhaps come back to me for the first question to give people a chance to put their hand up? Thank you.

[Operator Instructions]

Thank you. I just wanted to wait for people to register their questions. Rachael, if we could start with a question for you, please? How does the pathway we published today align with the other public and industry frameworks? And particularly, I'm thinking about things like sustainable aviation U.K. road map and ATAG Waypoint 2050.

Great. Thanks for the question, Isabel. So, broadly the pathways are aligned. The ultimate goal is to reach net zero carbon by 2050, as time tells us we must. There are some differentiating factors. Rolls-Royce is a technology-led company, has a technology-driven transition to net zero, and that's what we are setting out today. So many of the levers are the same: more efficient engines; increased use of sustainable fuels; and exciting new breakthrough technologies. Of course, our pathway reflects the breadth of the group. And the diagram that Warren talked about showed the potential role of SMRs as an example to further bending the curve as well as negative emissions technologies like BECCS in accelerating our transition.

Thank you, Rachael. We have got some questions online now. Operator, can I hand back to you to introduce and bring them on the call?

Of course. So the first question comes from the line of Robert Stallard of Vertical Research.

I have a couple of questions. First of all, a lot of what you're talking about relies on SAF, sustainable aviation fuel, which at the moment is very, very expensive compared to kerosene. What can Rolls-Royce do to get the cost of SAF down and also expand its availability to your customers around the world? And then secondly, realistically, at what point in the future do you think we'll be in a situation to replace a large civil aircraft engine with an alternative power source like all-electric or hydrogen?

Thanks, Rob. Warren, can I ask you to have a few words on that and perhaps also we'll ask Paul Stein to add some comments there?

Yes. Well, let me just chip in to begin with then on SAFs and what we can do with the cost. First of all, one of the reasons for the costs being so high at the moment is that we're at very early stages in terms of proportion of SAF that is used. So around about 0.1% of the aviation fuel used in the world today is SAF. So scale is a key factor. Another key factor is the cost of electricity that is used in the production process. And we do believe that there's a lot of SAF that's going to be required. That means a huge amount of energy is going to be required. And that's where off-grid zero carbon energy from things like our small modular reactors is going to come into play. And then at the other -- on the other side of it, of course, we perhaps recognize that SAF for a long time are going to be somewhat more expensive than fossil fuels. And so we believe we have a part to play in stimulating the take-up of those by making it more economically possible by making progress in improving the efficiency of our engines. Paul, you might want to answer the next bit, hopefully?

Yes. I might also suggest that, Tom, when I finish the next bit, you might want to say something about what's happening in the States to help stimulate the growth of SAFs under the States' net zero path. On the question about powering large aircraft, before 2050, we firmly believed that large aircraft flying medium to long distances will continue to be powered by ever more efficient gas turbines fueled by sustainable aviation fuels. And that's because none of the technologies that we're exploring -- and as Warren had indicated earlier, we're exploring a number of very exciting technologies, electrification and hybrid electric and even hydrogen power. But none of them really are suitable for those very long-range flights or carrying large numbers of people. So we see the future of aviation really being ever more efficient engines, which is one of the reasons why we're investing in UltraFan, a rapid ramp-up of SAFs in the way that Warren just described, and then the investment in those novel technologies to really transform aviation, not just to achieve net zero, but to really redefine the way communities are connected. But Tom, are you happy just to take up the question about some of the activities going on in the States to stimulate SAF?

Absolutely, Paul. Thank you. Tom Bell here again. Yes. Here in the United States, in -- we know that the Biden administration has made climate change a focus of the new administration. And the Biden administration has committed over $2 trillion to this problem in the next budgeting cycle. So it's a significant issue that is gaining a lot of momentum. And as a result of that, we see many legislatures in our House and in the Senate that are advancing bills to help the industry create SAF fuels to meet the emerging demand. As Warren spoke to very clearly, our job is to facilitate that emerging demand and make sure the engines are compatible with SAFs. We're partnered with companies to create the SAF. And our legislatures around the world are looking at ways that they can help lower the barrier to entry to make SAFs more economically viable for the producers, and therefore, put it at all the points where it will be required to make it a significant part of the Civil Aerospace market. So very exciting times that we're witnessing emerging all around us.

The next question comes from [ Andy Jones ] at [indiscernible].

Firstly, congratulations on the new strategy, in particular, the science-based target for Power Systems. I'd imagine those are both a large amount of work, so well done. I just had 3 quick questions, if that's okay. The first one is just a clarification between net zero carbon and net zero, if you could explain that differentiation? And whether that's a question of data or materiality or something else? Second question, just, again, interested in the feasibility of science-based targets in civil aviation business before 2050. And how much that would depend on the changing goals at the value chain level to be able to do that? And thirdly, just interested in, I guess, how the company's reporting will evolve in regard to the alignment of capital allocation with the net zero goals?

Thanks, [ Andy ]. And perhaps I'll ask Rachael to start it off with some answers on those?

Yes, [ Andy ], thanks for the question. So first up, on the net zero versus zero carbon. So the primary focus of the report is on carbon emissions, but we are kind of talking at a broader level around Rolls-Royce's impact on the climate and greenhouse gases more collectively. So we've been quite clear where we're talking specifically carbon or we're talking CO2 equivalent hopefully, if I'm not clear, throughout the report. But broadly, we are talking about our position of getting to net zero carbon by 2050. And on your second question on Science Based Targets initiative. At the moment, I think it's fair to say we don't yet have clarity on the convergence of the breakthrough goals that we require to have -- get the whole of Rolls-Royce Group to be able to set a science-based target, particularly some of the more complex sectors that we're part of in terms of aviation and as well as the articulation of the role that new technologies that we are pursuing like SMRs, like electrification and also the negative technologies like BECCS won't be abating current Rolls-Royce scope 3 emissions, but can play a really important role in accelerating the global energy transition. So we are working in partnership with the Science Based Targets initiative at the moment to understand how we can make sure we can set a verified group target through the net zero global standard consultation over the coming months. I'm really excited about that continued engagement with them. And we are continuing to talk to the Race to Zero coalition that we are really proud that Rolls-Royce is one of the founding members with them. Actually, Warren participated in a launch event about a year ago today to work with them on the sector breakthrough goals that they've identified as being the significant tipping points we need to reach by 2030 in order to reach net zero by 2050, such as the 10% SAF uptake goal for aviation. And the third question?

His question was about reporting and changing to reporting. So look, obviously, will be reflecting some of this in our external reporting in due course as and when it becomes appropriate. But FYI, internally, we are for the first time now adopting ambitious objectives for the medium term in terms of the proportions of our revenue that we expect to be at zero carbon by intermediate date. So we're not just planting a flag in 2050 and saying, we're going to go from here to there. We have a sort of a pathway with interim milestones. But we're not here today to discuss those interim milestones, but we will be prepared as and when it's appropriate to report externally.

Sorry. Andy, did you have any follow-up on that or if not, we'll pass to the next question?

Our next question comes from Celine Fornaro at UBS.

I would have one which I would hope is more like food for thought. But I was wondering how should we think about evaluating management teams. And this comes to probably topics of variable remuneration or incentive plans to make sure that the decision that they take today are compelling and relevant for things that are actually going to influence 2035. And maybe the next management team is not going to turn back and say, actually, got that one wrong, we need to reinvest again. How are you thinking about that? You answered on the previous question about the reporting on the revenues. But also in terms of your own performance assessment, how do you think about that?

Thanks, Celine. I think it's -- yes, that's a question that's going to be answered probably slightly differently by some of the executives of the business units because it does -- the actions and the targets. Whilst we have group level targets, there obviously individual achievements are being set at those levels as well. So again, sorry, Warren, would you like to kick off? But perhaps we could also ask to hear from Power Systems and Defence on things that have impacted them specifically.

Yes. So while I'm talking, Andreas and Tom, please contemplate how you're going to add to this. Actually, Celine, I think it's just a build on what I said in terms of -- we have some internal targets. We're not making many of those internal targets public today, but remuneration is connected. Some of the things we have said today, remuneration targets and the testing of our existing engine products by 2023. For instance, there's a very, very tight link there. And come March 2021, you'll probably be able to read about that in the remuneration report -- 2022, I mean, you'll be able to read that in the remuneration report. Today, we talked about the proportion of our R&D expenditure that we are targeting at net zero products and activity, moving up from 50% in 2020 to 75% in 2025. Clearly, in order to achieve that, we'll reflect an objective like that in the internal objectives and that are tied to remuneration. So I don't think there's -- we're not going to be doing anything special with remuneration just because it's a different type of objective. It will be the same sorts of linkages that we apply to normal financial measures. But Tom, Andreas, anything specific from Defence or Power Systems?

Yes, Warren. If you want me to -- Tom, you go first.

I'm sorry. Okay. Yes, for us in Defence, obviously, we're going to be doing everything with our customers to help the existing suite of products run on synthetic fuels. And we are also in discussion with Warren and the Remuneration Committee about measuring that. But the more exciting opportunity for Defence is actually helping our Defence customers become net carbon-neutral themselves. And so we're looking at it more as a growth opportunity for Defence, because what happens is, as governments turn their attention to net zero economies, and they want to lead the way in showing that it's possible, they quickly realize, to the degree they haven't figured it out already, that their militaries represent the lion's share of their carbon footprint. Militaries around the world are always one of the dominant carbon emitters of any government. And so the opportunity is there for us, uniquely positioned as Rolls-Royce is not only a gas turbine manufacturer, but also a power systems company and a company that has unique capabilities globally in the nuclear world to bring that together to go to militaries, to go to ministries of defense, to go to departments of defense and talk about our partnership with them to help them become net zero across the whole estate. And so for us, yes, remuneration is the net zero target of our business and our products, but it's also a growth opportunity for us in Defence. Andreas, over to you.

Thank you, Tom. Well, for Power Systems, you noticed in the announcement, there is a clear science-based target out there, which is for new products sold really to reduce carbon dioxide emissions by minus 35% on the basis of 2019 by 2030. So there is no mistake in the organization, it's very clear what needs to get done and those get flowed down. Why is there a heightened sense of urgency in the Power Systems business? Because we are, in comparison to Civil Aerospace and Defence, in a much shorter business cycle. And actually, the demand on behalf of the customers is arriving a lot sooner there. And for that reason, we really kind of have that science-based target now to reduce. And in order to really kind of accelerate that, we did change our organization earlier in the year, and we created a business unit structure. And one of the 4 business units is totally dedicated to develop sustainable power solutions. So there is a team that comes to work where the 100% objective is to create the sustainable solutions in order to get to the carbon dioxide reduction.

Our next question comes from Chloe Lemarie from Exane BNP Paribas.

I had a couple. The first one would be on making your existing portfolio compatible with 100% sustainable aviation fuel. What would it look like from your customers' perspective? Would it be offered as a retrofit option or simply a matter of certifying the existing hardware? And the second question, I noted the link you made while in between your small modular reactor solution, which could help make sustainable aviation fuel scalable and affordable. Are you currently seeking partnership that could make you involved in that part of the supply chain?

Thanks, Chloe. I think give Warren rest at this point, maybe ask our Chief Technology Officer to address your questions, if that's okay. Paul, can you please speak to both of those for Chloe?

Absolutely. And thanks for the question, Chloe. So sustainable aviation fuels, you're probably aware, we can blend them up to 50% right now within the certification that is open to us. To move to 100%, we have to do a little bit of recalibration of the engines because sustainable aviation fuels have actually got a lot more energy density than fossil fuels. And secondly, we have to deal with a technical issue to do with the material we use in the seals of the engines. So once we've taken our engines through certification, we've not actually come up with a specific formula, but I can imagine, we're simply -- at engine rotation time, when the engines come in for overhaul, we would simply upgrade the seals and recalibrate the control systems. We don't really see that as a major issue for us in making our engines compatible with 100% sustainable aviation fuels. The second question was about can SMRs -- I think you're saying, can we use it as a pathway to hydrogen and sustainable aviation fuels? And the answer is a clear yes. And we've been working with some major oil and gas companies in looking to see how we can use the energy and residual heat of the small modular reactor in order to drive down the cost of what's called e-fuels. These are purely synthetic sustainable aviation fuels. And so far, the results look quite good, but these won't be available in quantity probably until the middle of the next decade. So we'd certainly see initially a ramp-up of waste to fuel and biofuel processes and then moving to e-fuels with time. E-fuel is also being used in our Power Systems division. And perhaps I could just ask Andreas to come in on the non-aviation side. Andreas, do you want to add something?

Yes, absolutely. Thank you, Paul. So in Power Systems, we really pursue a strategy that on -- in applications where today, we don't really see the physical capabilities of new technologies to be applicable, let's say, for instance, in high sea marine applications, that's the place where we then need to go for e-fuels. And of course, we need to kind of deliver complete solutions to our customers, and that in cases will evolve or will include also that we supply them with the equipment to generate synthetic fuels, of course, in smaller quantities. Wherever we can shift technologies where that's physically possible, we are going to kind of pursue technological changes. And we are present in 13 different industries, and some of these industries are already in the process of converting right now. Examples are rail propulsion, where instead of a pure diesel propulsion system, we are offering a hybrid propulsion system with significant fuel reductions of up to -- fuel consumption reduction of up to 25%. Or another example is data centers, where the owners of data centers have declared that by the year 2025, they do not accept basically diesel-powered backup generators as a backup. So some of these industries, we really need to kind of convert sooner, but there, we will pursue technological changes. Last, we are converting our major product lines, the Series 2000 and the Series 4000, to be 100% compatible by the year 2023 with e-fuels. And I think that's a very important milestone. And to be clear, I think that also kind of applies a bit pressure then to come up with the fuel in itself for usage.

Our next question comes from George Zhao at Bernstein.

My first question is, what is the pivot from 50% to 75% R&D expenditure on lower carbon means for aggregate spending? I mean is this -- does this represent incremental spending? Or is spending simply being redirected from legacy systems that naturally would have faded anyways? And secondly, could you just talk about the technology overlap between what you're doing in the Civil Aerospace and the Power Systems side to help accelerate the development?

Yes. I'll kick off on the R&D one. And I think then point towards Andreas and Robin between them possibly to talk about migration of Power Systems technology into the aerospace world. On -- we're talking proportions of our R&D rather than absolute terms because we don't want to talk about absolute levels of R&D in 2025 today and effectively be issuing guidance for that sort of thing. You're right. Some of the expenditure that we have been applying to our large gas turbines in Civil Aerospace, for instance, over recent years would have probably had a tendency to come off a bit, as a large number of new engine programs reach maturity, there's less work to do and so on. But it is more than that. If I step back and think about the last -- the whole sort of COVID pandemic. And yes, I can observe there that the world of commercial aerospace is definitely contemplating a period where commercial aerospace is going to be a smaller proportion of the global economy than we would otherwise have expected it to be. And that's well known from other discussions that we're having with you guys and I'm sure we're having with everybody else in the sector. And at the same time, probably a reflection of the last 18 months is that the general push around society for migration to a net zero world has gathered huge momentum. And I indicated that in probably the first or second slide that we presented this afternoon. And so if you take those 2 things together, it makes a lot of sense for a business like Rolls-Royce to tilt the balance a little bit of that R&D expenditure a little bit more than would naturally have occurred just because of engine programs reaching levels of maturity. And that's what's behind the, let's call it, a migration perhaps rather than a pivot from 50% in 2020 to 75% in 2025. Andreas or Rob -- Andreas, why don't you go first?

Yes. Thank you, Warren. Well, I -- when it comes to R&D, what I think, first, when I kind of think about us as a group is Rolls-Royce being a technology company. And within that company, Rolls-Royce Power Systems, really due to its shorter business cycle, is exposed sooner on to some of the required transformation due to customer requirements or legislative changes. And hence, we kind of really feel the need to also change over our product portfolio much sooner than, for instance, in some of the longer-cycle businesses. And in that regard, we benefit really from the central R&D capabilities that exist within the group, for instance, in Rob Watson's area when it comes to electrical. And in exchange, I think the group then gets the benefit from Power Systems really being first in experiencing what that means to deploy the technologies into applications and hand it over into the customer hands. And I think this is some of the benefit that we can deliver at Rolls-Royce because we're integrated as one group.

I'd add from an electrical point of view. As Andreas said, we've been able to leverage some of the Power Systems capability certainly on batteries and microgrids. And the electrical systems architecture, the Power Systems are out in front developing. But at the same time, we have some great examples. For example, us in Singapore with our [ electronics ] team, where we're taking megawatt scale converts as we developed for the E-Fan X program for aerospace and using a lot of the topology software as the algorithms to then help develop megawatt scale converters for the Kinolt's battery solutions. So there's a really good 2-way flow of technology, both in hardware, software and in engineering skills.

Our next question comes from Liren Li at MFS. [Operator Instructions]

Okay. Great. And I just have 3 questions, please. The first one is just quickly, I wonder in the scope 3 emission disclosed today, could you just give some color on how that breaks down into your different segments of Power Systems and Civil and Defence? And then I guess my second question comes back to Paul's comments on the long-term outlook for medium and long-range fuel aerospace aircraft still being gas turbine powered. So -- and I guess most estimates says SAF adoption will only be maybe 10% by 2030. So just curious, longer term beyond that and by 2050, sort of your thinking around what level of SAF is required to actually help the longer-range aviation segment to reach net zero. Are you expecting that to be 100% SAF? Or is it -- does it have to be offset by some kind of carbon capture or offset schemes? And then my final question is just around -- your thinking around how your, I guess, R&D and CapEx is aligned with the rest of the supply chain, so Airbus and Boeing. Just sort of any color on whether you're kind of thinking along the same line. And so how you plan to kind of work with them and the entire sector?

Thanks, Liren. I think it would require answers from a few different members of the panel there. And perhaps, Rachael, for the first question, would you mind talking about our scope 3?

Yes. Thanks for the question, Liren. I guess, a reminder that the nature of scope 3 emissions reporting means that the figure is always an estimation, of course, always someone else's scope 1 and 2. And actually, for that reason, we're not providing any further detail on the breakdown across the different businesses, particularly, we do consider that to be commercially sensitive and restricted, particularly in relation to our Defence business. But it wouldn't be inappropriate to assume that the breakdown of revenues across the group is broadly proportional.

Thanks, Rachael. And then perhaps, Paul, over to you for the next question about the longer-term outlook for gas turbines and the -- looking at the SAF.

Yes. And thanks, Liren. I think one thing that we all have to bear in mind is that we're at the start of the growth of a massive industry in SAF, Liren. And right now, we're only powering 0.1% in fleet [indiscernible] SAFs. And the world's energy companies, including our own pathway through SMR for SAF, are now gearing up for a huge global industrial scaling. IAG has already predicted that they'll have enough SAF to commit to 10% by 2030, and they made a statement of that recently. The EU is going through the refuel initiative, which is likely to commit to a much higher figure by 2035. And we believe there is a pathway to get to 500 million tonnes of SAF per year by 2050, which is what we need to completely decarbonize aviation.

Thank you. And then finally, Warren, would you mind picking up the question about the R&D and the alignment with the supply chain?

Yes. Supply chain and -- and with customers. And I think there's 2 parts to this answer. The first is that there is a natural alignment. Whatever the topic, whether we're talking about journey to net zero or whatever, we as a business have to be aligned with our customers. If our customers are applying a lot of R&D on net zero technologies, whether that be ships or airplanes, it doesn't matter. We have to be aligned with them. Otherwise, we're not going to sell any products to them. So I think from that point of view, from our existing customer base, we're pretty aligned. And the same is true with our supply chain, because if our suppliers didn't align their businesses with ours, as you sort of move along the value chain, then it just wouldn't work. But just one thing I should bring out here is -- one of the things we've been talking about today is the opportunity that's in the net zero report and then the energy transition, and that is to -- for us as a business to be working in other areas. And we've highlighted a couple of examples today. We've talked about electric aviation, and how electric aviation brings us to urban air mobility, brings us to small commuter aircraft, smaller regional aircraft and so on, where we're just not present today. And so yes, we do have to spend some R&D there, and we're aligning there with future customers. What we're doing with Rolls-Royce Electrical is taking new technology, but we're applying it very much into a field that we understand, in a market that we understand. But surely, there are going to be different customers in that market. And then with SMRs, we're taking some technology that we're quite familiar with, the underlying nuclear technology there, and we're applying it to a completely new market. And so in those 2 areas, where we're really creating completely pure growth opportunities, obviously, we have to get our R&D out a bit ahead of our customers.

Thank you. I think we have run over time slightly, but perhaps you could just squeeze in one last question, please, operator. If you've got one more that we could add?

Of course. So we'll take the last question from Mouchumi Bhuyan from Spinecap.

And congratulations on setting up science-based target. I just have one question. So are these targets only internally verified, or these are also verified and certified by SBTi already?

Great question. So as I said earlier, we are engaging with the Science Based Targets initiative. The target itself that we're setting for Power Systems that Andreas has described is not yet verified. As you might be aware, it's quite a lengthy process to go through, but it is fully aligned with their methodology for new products lifetime -- life cycle emissions reduction, and does align with an emission trajectory to maintain global warming well below a 2-degree emissions trajectory. So we are just in the process of having that target verified.

Maybe If I could add. We're working with SBTi to kind of get this set up, and we will communicate about the specifics behind the 35% reduction for Power Systems later in the year.

Thank you. Thank you. And I'm very sorry for everyone that had a question that didn't get answer today. It has been a popular call. Unfortunately, [indiscernible] we have time for. So if you do have more questions that you want to come back to me or my team with, obviously, there's a lot of information also available on the website. So please do continue to engage with us as we proceed along this journey. But thank you for joining the call, and thank you to our panel for providing all the answers.

Yes. Okay. Thank you for joining us. Thank you for your support.

Bye-bye.

Bye.

This concludes today's conference call. Thank you all for dialing in. You may now disconnect your lines.