Leadership
To ensure effective delivery of the new strategy, the Executive Team has been strengthened and expanded to 14 members to lead our divisions, the four new performance initiatives and Group-level functions. Most recently, it is a measure of our progress that we have been able to attract people of the calibre of Leo Quinn, Chief Operating Officer of Production Management; Dan Leff, Chief Operating Officer of Energy Management; Shelley Stewart for Lean Supply Chain; Teri Johnson, who leads the Customer Development initiative; and Ed Mulvey, who heads up Service Delivery. Full details of the Executive Team are given on the Executive Team section.

Individual performance contracts will shortly be in place for more than 500 of our senior managers. Our priority now is to strengthen the next levels of leadership and develop our talent throughout the organisation. I am delighted with the number of good people I constantly meet as I travel round our operations. We are committed to providing challenging and rewarding careers for our current and future employees and are putting in place a structured appraisal and development framework to achieve this.

2001/02 performance and strategic progress
Whilst the decline in our sales and operating profits was driven principally by severe market conditions, it was exacerbated by internal issues. The stabilisation of our second half performance similarly reflected both the late recovery in US industrial and consumer demand and our first actions to address problems identified in the strategy review. The performance of each division is reviewed in detail on each divisional section.

With these results, we comfortably met the requirements of our banking covenants with interest cover of 3.2 times for the year and a healthy 4.0 times for the second half. We dramatically improved our cash generation from last year's outflow of £241 million to an inflow of £266 million. We made good progress on our disposal programme, realising approximately £230 million in net cash proceeds between September 2001 and the year end, reducing net debt to £3.0 billion. Since then we have received a further £366 million in respect of the Flow Control disposal and negotiated a new £979 million ($1.39 billion) loan facility to gain the financial headroom to implement our strategy.

Implementation
These are solid achievements; but I do not pretend they have done any more than provide a launchpad for the swift implementation of our new strategy.

This has two phases. The first will deliver a rapid recovery through a large number of localised projects for performance improvement. These will focus on the four areas identified in the strategy review as key to all our businesses — customer development, service delivery, project management and lean supply chain. These will strengthen our capacity for sustained revenue and margin recovery, and help us to replace the profits lost through our disposal programme; a difficult objective this year without some market help, but one that we are squaring up to now.

The second repositioning phase - which to some extent will parallel recovery — involves the radical long-term repositioning of Invensys as a leader in providing customers with greater resource productivity. This will require close collaboration among our businesses on our major accounts, supply chain, future technology and the delivery of sophisticated new performance services.

Performance improvement teams
Delivery of the strategy demands a systematic transformation of the way we do business. To place this change in the hands of all our employees, we have developed a programme called INVEST. This gives their ideas for local or cross-business performance improvements the structure and skills necessary to deliver results to the bottom line.

We launched INVEST at a major internal conference in April 2002. Every business now has a programme manager, with 1,000 project leaders being trained to take on specific projects. Over 650 potential performance improvements are being tracked on our new Intranet, nominated either spontaneously from the businesses or in response to our strategic initiatives.

The programme will run for up to four years, at the end of which we expect a minimum annualised profit benefit of £200 million. Any upturn in the global economy or our particular markets will increase that figure. In 2002/03, the minimum profit enhancement we would consider tolerable is £50 million net, a one-for-one return on the budgeted programme costs this year, and we are aiming for up to double that return. Each of our initiatives will contribute to those targets.

Key metrics for customer development include customer satisfaction and retention and employee satisfaction, which correlates closely with customer satisfaction. Among targeted customers we expect sales growth of 1 to 2 percentage points, 1 to 2 points' margin improvement and 50% reduction in customer attrition.

The prime goals in service delivery are to increase our counter-cyclical service revenues by 5 to 15 percentage points of total sales and to improve service margins by 5 to 10 points, as well as achieving higher rates in contract renewals and problem resolution.

In project management, an early pilot in Production Management is on track to increase margins by 2 to 3 points this year on their existing projects. Over the next three years, we aim to improve gross margins across our entire project portfolio —currently a third of all revenues— by up to 10 points, generate positive cash flow through staged payments and contribute strongly to customer retention.

Our lean supply chain initiative is targeting reductions in cost, inventory and the number of suppliers and the formation of stronger strategic partnerships. Its long-term objective is a 1 to 2 point improvement in Group margin over time.

Details on the activities of the four key initiatives are given on the performance improvement initiatives section.

Invensys today
We are now very much on track. We have stabilised the Group's performance, strengthened its leadership, established a new structure and made a good start on our debt reduction. We have comfortably met our banking covenants and turned round the Group's cash flow performance. We have launched our change programme for short-to mid-term recovery and put in place a performance framework with meaningful, agreed metrics for the long-term. We are working on greater collaboration, common systems and shared technology development. Inevitably, in the first stages of any change process, activity outpaces results; but the results will follow, because we have a strategy endorsed by our customers, rigorous processes to deliver necessary change and people determined to make things happen for our customers and, therefore, for our shareholders.

Invensys 2006
We now have a common goal. We want to become known as the company that transformed itself — sharp, focused and followed by competitors. We want to build tenacious relationships where we become an essential, seamless presence inside our customers' businesses. We want to be known as specialists in key industries, continually leading on applications, service reach and market share. We want to create a talent pool which combines the voice of experience with a constant flow of young, ambitious leaders of the future. We want to become our investors' benchmark for growth, cash generation, profits and returns amongst our peers. Above all, we want to develop a strong reputation in all regions for corporate citizenship and the creation of resource productivity, which enhances our businesses' ability to perform effectively in their markets.

Rick Haythornthwaite, Chief Executive
14 June 2002