Highlights of the year

Production load increased significantly

Product cost improved slightly despite considerable commodity inflation

Product quality continued to improve

UK factory infrastructure construction advanced significantly

IT operating costs reduced further: new IT investment increased

Working capital utilisation improved again

2005 was a year of considerable change. Our loading increased by 17 per cent over 2004. Within this total, UK load increased whilst US load fell as the mix shifted away from regional jet engines towards smaller helicopter engines.

Operationally the year was significantly affected by raw material supply issues. The speciality metals industry struggled to meet our increased demand, which gave rise to some delivery disruption during the year. Notwithstanding this, we delivered a creditable result. As usual, I take this opportunity to thank all our employees and suppliers for their efforts in 2005 in this regard.

We made good progress in 2005 on our programme to restructure our supply chain. Our supplier base was reduced by 13 to 698 even though we added 38 new suppliers. Our sourcing in emerging low-cost markets increased from six per cent to nine per cent of purchases. Our newest civil aerospace product, the Trent 1000, was launched with an external supply chain of only 71 suppliers.

The prices of metals and of fuel rose throughout the year and closed at, or close to, new highs. We are accustomed to managing this through long-term supplier relationships that reduce volatility, together with long-term positions in the metals market for those that are traded.

We continued to drive for lower operating costs against a background of steeply rising volume. We increased our employee population by two per cent and delivered an improvement from £169,000 to £186,000 in sales per employee. In 2005 we were able to deliver a small reduction in product unit cost, effectively neutralising the effects of commodity-price inflation.

We completed construction of new factories at Derby and Hucknall and commenced commissioning. We completed all the remaining moves into our new factory at Inchinnan from Hillington. The latter site was closed and sold in its entirety in December. Construction of new factories at Barnoldswick and Bristol is proceeding satisfactorily towards completion in 2006 and full operation in 2007. We constructed a new factory for our commercial marine business in Shanghai and commenced operations in November.

More efficient working practices, which are a precondition for new factory investment, are now implemented in most UK locations and are under discussion elsewhere. Our new Global Council covering all our employees met successfully twice in 2005.

Our Process Excellence culture-change programme continued through 2005, delivering training to 27,000 employees and putting in place fully accredited six-sigma 'Black Belts' and 'Green Belts' at 0.6 per cent and 2.0 per cent of total employee population respectively.

In conjunction with our IT supply chain and our principal IT partner, EDS, further reductions in the operating cost of our IT estate provided the opportunity to increase our new investment in this area whilst maintaining total IT expenditure within 2.6 per cent of turnover. In 2005 we connected 70 per cent of our worldwide operations to a single wide-area-network, took important steps towards full global standardisation of our ERP systems and commenced the roll-out of the latest generation of Product Lifecycle Management software.

As forecast, our inventories increased in 2005 to respond to higher output volume and to buffer the moves associated with new factories. We offset this increase by tighter management of financial working capital to effect a further improvement of working capital utilisation.

In 2006 our priorities will be to complete our infrastructure-renewal projects in the UK and to advance our move into the new factories. We shall persist with operating and product unit-cost reduction, turning our focus towards overhead costs in particular, and we will continue our drive with Process Excellence to eliminate waste and achieve continuous improvement.