Rapid growth in manufacturing load continued in 2006, closing the year 12 per cent above 2005 even after the effect of temporarily ceasing manufacture of the Trent 900 in September. All sectors and regions contributed to this growth.

Operationally, raw material supply constraints continued to have a disruptive effect but this improved steadily throughout the year, driving a general improvement in delivery performance by our external supply chain. The delay to the Airbus A380 programme resulted in the Trent 900 manufacturing being suspended for one year with effect from September 2006. In spite of these issues, we were able to support our portfolio of manufacturing programmes and as usual I take this opportunity to thank all of our employees and suppliers for their efforts in 2006 in this regard.

We continued our programme of Supply Chain Restructuring in 2006. Our supplier base reduced by 32 to 666 although we added 103 new suppliers. Our sourcing in emerging low-cost markets increased from nine per cent to 11 per cent of purchases.

Commodity prices continued to rise throughout the year, although by the year-end the peak appeared to have passed in the case of fuels and perhaps some metals. During the year we successfully concluded new long-term agreements for the major primary metals we require giving us security of supply and cost stability.

We continued to drive for lower operating costs focusing on overheads and added-value activities within our control. We increased our employee population by 4.8 per cent and delivered an improvement from £186,000 to £192,000 in sales per employee via productivity improvements. We were not able to fully offset the effects of commodity price inflation in 2006 and, as a result, product unit costs rose slightly in the year.

We commenced operations in our new UK facilities at Derby, Hucknall, Barnoldswick and Bristol during 2006 and we will cease operations in all the old factories during 2007. We reached agreement on modern working practices with all the remaining UK component manufacturing workforces as well as our repair and overhaul workforce in Montreal, Canada. Our Global Council covering all employees met successfully twice during the year.

We used our Process Excellence programme to continue the drive for better quality and continuous improvement. In 2006 we saw a positive step change in the quality performance of our external supply chain. This was the main driver of an improvement in overall supply chain quality of approximately 20 per cent.

We further reduced the operating cost of our IT estate allowing our new investment proportion of total IT cost to rise to its highest level to date. Our total IT spend remained constant year-on-year resulting in a reduction as a percentage of turnover to 2.4 per cent.

In 2006, we completed the standardisation of our Enterprise Resource Planning (ERP) systems for the energy business, the aero repair and overhaul business and the aero gas turbine units in Europe. In 2007 the remaining units in the US and Canada will be standardised to give us a single and truly global supply chain management system.

Implementation of Product Lifecycle Management Systems coupled with a thorough revision to the business process has driven considerable productivity improvement in engineering.

As forecast, our inventories increased in 2006 to respond to the growth in output, to build aftermarket support stocks and to increase strategic stocks of rare metals. We continued to offset these increases by improvements in the management of financial working capital to effect a further improvement in working capital utilisation.

In 2007 our priorities will be to complete all our ERP IT projects and implement a Global Supply Chain management structure which will allow us to consolidate commodity management and increase the dollar based proportion of our purchase bill. We will also complete all of our UK factory moves which have been protracted due to stronger market growth and disruption caused by shortages of raw materials. Our drive for operating and unit cost reduction will continue as will our Process Excellence initiative whilst we prepare for the load increase in 2008 when Airbus A380 production will recommence and Boeing 787 production begins.