Final Results
Elementis PLC
23 February 2006
23 February 2006
ELEMENTIS plc
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005
Highlights
• Group sales 7 per cent ahead of 2004, excluding portfolio changes.
• Operating profit before exceptional items £20.3 million, 77 per cent
up on 2004.
• Earnings per share before exceptional items 2.8p (2004: 1.3p)
• Final distribution to shareholders 1.1p (2004: 1.1p). 2.2p for the
year (2004: 2.2p)
• Operating loss from continuing operations after exceptional items
£25.4 million (2004: profit £5.2 million).
• Loss per share 8.8p (2004: earnings of 0.8p)
Edward Bramson, Executive Chairman of Elementis plc, said:
'We are pleased to report the solid strategic progress that has been made during
2005. Our focus continues to be on improving the group's long term earnings
quality and consistency to generate funds for growth and for distribution to
shareholders.
The first phase of our strategic review, which was announced in October 2005, is
on track. Our second phase, which will be announced near the end of the first
quarter this year, will primarily address our Specialties division.
Turning to the underlying financial performance during 2005, the increase in
operating profits was driven by positive pricing in all of our businesses,
particularly Chromium. Softness in the coatings sector constrained volumes in
Specialties and Pigments but early indications for 2006 suggest that the sector
is improving. The Board recommends a final dividend of 1.1 pence per share,
taking total distributions for the year to 2.2 pence.'
- Ends -
Enquiries
Elementis
Edward Bramson, Executive Chairman 020 7408 9300
Brian Taylorson, Finance Director
Financial Dynamics 020 7831 3113
Andrew Dowler
Greg Quine
Executive Chairman's Statement
Sales in 2005 increased by 7 per cent on previous year to £439.9 million, after
adjustments for acquisitions and disposals. The major contributor to the
increase was improved pricing in each of our business segments, especially
Chromium.
Operating profit before exceptional items increased to £20.3 million in 2005
from £11.5 million in 2004. For the year, the Group reported exceptional items
of £47.7 million (2004: £2.6 million) resulting, principally, from the Board's
strategic review announced in October. As a result the Group reported an
operating loss from continuing operations of £25.4 million compared to a profit
of £5.2 million in 2004.
Market conditions in many of the Group's end markets such as aerospace alloys,
oilfield chemicals and personal care were reasonably good. The coatings markets
which are significant for both Pigments and Specialties were, however, somewhat
soft for most of the year which constrained volumes in both businesses.
Conditions in the coatings market now appear to be improving.
The relocation of Elementis Pigments US manufacturing operations to a new
facility in China progressed, essentially, as planned. As a result our margins
for Pigments are approaching the levels that were anticipated when the project
was initiated. The plant was in a parallel start-up phase during 2005 so little
or no operating margin benefit was reflected in this year's results. Lower
production costs should be reflected in Pigments profits for a significant
portion of 2006 and the benefit of a full year's savings will be seen in 2007.
The transition of customers to material produced in China has proceeded
remarkably smoothly which is a tribute to the professionalism of our Pigments
management team.
In the interests of improved financial transparency, the Board has concluded
that we should henceforth disclose additional detail for the Elementis
Specialties business segment. As a result, we are now providing information in
the operating and financial review (OFR) on our historical Specialties business
(Specialty products), predominantly rheological modifiers, separately from
Surfactants which are a significant part of the Servo business that was acquired
in June 2004. As we implement specific strategies for these differing product
lines we believe it will be helpful to shareholders to have this additional
data. As noted above, Specialty products was adversely affected by soft volumes
in the coatings markets which were offset by price increases. Specialty
products results reflect the disposal of the Hardman adhesives business and the
internal transfer of a product line to the Pigments business. Adjusting for
these two factors Specialty products reported results essentially in line with
those of the previous year. Surfactants' profits increased principally as a
result of fixed cost reductions implemented during the year.
In advance of the results of the Board's strategic review of Specialties that is
currently in progress, we undertook some fixed cost reductions in the second
half of last year that include a contribution of around £4.0 million to the
profits of this segment in 2006, independently of the outcome of the review.
Elementis Chromium reported a significant improvement in operating profit before
exceptional items in 2005 after what was essentially a breakeven year in 2004.
In a further step to increase financial transparency we are now reporting the
results of the UK and US chromium businesses separately in the OFR. As was the
case in the prior year, the UK chromium operation was unprofitable in 2005,
although it moved into profitability in the second half. The first phase of the
Board's strategic review, announced in October, addressed the level of Chromium
profits in the UK and particularly the volatility of these profits which had an
undesirable effect on Group earnings as a whole. As a result of the review we
are cutting production capacity in the UK and reducing fixed costs more than
proportionately. These actions, which are to be completed by the end of the
first quarter, will materially reduce the worldwide breakeven level for the
Chromium segment. They will also have the effect of improving returns as we
will discontinue lower margin products which have also tended to be more
volatile. Lower breakeven levels will reduce our sensitivity to cyclical
fluctuations in demand in the future. Elementis will continue to be the world's
largest supplier of chromium chemicals and with significant unused capacity
available to us we retain the ability to increase production in response to
changes in market conditions. The restructuring of Chromium and the change in
our management strategy are intended to reduce the historical volatility of the
business and to result in a more predictable and therefore valuable earnings
stream to the Group in the medium term.
In October, the Specialty Rubber business was sold for £18.2 million.
Profitability of Specialty Rubber has improved over the last two years, but the
Board concluded that there was insufficient strategic fit with the rest of the
Group to justify further investment, and that a sale represented the best course
of action.
Before exceptional items the Group reported basic earnings per share of 2.8
pence in 2005 (2004: 1.3 pence). After exceptional items, discussed below, we
reported a net loss of 8.8 pence per share (2004: earnings of 0.8 pence). Net
borrowings at the end of 2005 were £99.4 million (2004: £90.2 million). Foreign
currency translation gave rise to £8.8 million of the increase.
The Board
Kevin Matthews and Chris Girling joined the Board in February and April
respectively and Michael Hartnall retired in April 2005. Hanover Investors, with
which I am associated, became a significant shareholder in the Company in the
first half of 2005. Subsequently, further changes were made to the composition
of the Board. Ian Brindle, Ken Minton, Matthew Peacock and I joined the Board
in June. Keith Hopkins and Edward Wilson resigned at the same time. Philip
Brown retired from the Board at the end of June and Geoff Gaywood resigned from
the Board in August. The Board would like to express its appreciation to these
former directors who laid the foundation for many of the positive developments
that we expect to see in 2006.
Strategy
Following its reorganisation in June the Board has been conducting a review of
the Group's strategy. The first phase of the strategic review, announced in
October, set out three main goals. The first is to increase the base level of
the Group's profits significantly in 2006 as a base from which to grow earnings
in subsequent years. We believe that a consistent increase in the level of our
returns is necessary if we are to have the resources to finance growth without
the need for external financing, to increase distributions to shareholders in
the future, and to motivate employees to achieve above average returns.
To this end, during 2005, we took a number of actions to reduce head office
costs and to combine certain overhead functions in Pigments and Specialties,
both of which are based in the USA. As a result, we expect overhead expenses to
be reduced by more than £11.0 million per year in 2006 compared with 2005. This
cost reduction is significant when compared with this year's reported results.
The reduction also reflects a long-term change in the way that Elementis will be
managed. Authority and responsibility in many areas have now been transferred
to the management of the operating businesses with, I believe, resultant
benefits in improved decision making and employee motivation.
The Board's second objective is to refocus resources and attention on the
Specialties business segment. This is our largest and highest profit margin
business and has, we believe, attractive growth opportunities. The next phase
of the strategic review will focus on Specialties and we anticipate that the
Board will make an announcement towards the end of the first quarter.
The third objective that the Board has set is to improve the Group's longer-term
earnings quality and consistency. In order to accomplish this it has been
necessary to change the strategic position of the Chromium business to reduce
volatility in the manner described above. We are planning other steps to
increase the predictability of earnings in 2006 which will form part of the
forthcoming Board review.
Exceptional items
As a result of the implementation of the first part of the Board's strategic
review, the Group has recorded an exceptional charge in 2005 of £32.9 million,
representing £13.4 million of cash costs and £19.5 million of asset write downs
partly offset by pension curtailment gains. The cash costs will be financed
principally from the net proceeds of the Specialty Rubber sale. Total
exceptional items for the year, including management actions announced at the
interim stage, were £47.7 million.
Environmental, health and safety
Performance by the Group continued to be of a high standard in 2005 with
improvements being recorded in most of the key measures. In particular, our
safety performance is now in the top quartile of the industry, and we will
continue to strive for improvements in all areas of this important aspect of our
operations.
Distribution to shareholders
The Board has decided to recommend the resumption of dividend payments. The
Group's tax position makes it no longer necessary to make distributions in the
form of redeemable B shares as we have been doing for some years. Consequently,
the directors recommend a final dividend of 1.1 pence per share taking the total
return to shareholders for the year to 2.2 pence. Subject to approval at the
Annual General Meeting, the dividend will be paid on 5 May 2006 to members on
the register at the close of business on 7 April 2006. The Board intends to
continue to review the dividend policy as earnings performance permits.
People
This is my first year at Elementis and I have been tremendously impressed by the
depth of the talent and experience of the people I have met here. I would like
to express my appreciation and that of the entire Board for the dedication of
our employees during the recent period of restructuring. It is my hope and
belief that improving financial performance will create an environment in which
their efforts can be well rewarded.
Going forward
The actions that have already been taken create the conditions for significant
improvements in the coming year. The Board is, therefore, now able to turn its
attention to the development of strategies that will improve our position in
2007 and beyond.
Edward Bramson
Executive Chairman
23 February 2006
Operating and Financial Review
Revenue Effect of Acquisitions and
Revenue exchange disposals
2004 rates 2005
£million £million £million
Specialties
- Specialty products 140.3 0.1 (5.3)
- Surfactants 19.3 0.2 19.5
______ ______ ______
Specialties total 159.6 0.3 14.2
Pigments 79.1 0.9 13.4
Chromium 110.5 0.3 -
Specialty Rubber 45.9 (0.3) (5.1)
Inter-segment (5.9) - -
______ ______ ______
389.2 1.2 22.5
______ ______ ______
Operating and Financial Review (continued)
Revenue
Inc/(dec) Revenue
2005 2005
£million £million
Specialties
- Specialty products 4.6 139.7
- Surfactants 6.7 45.7
______ ______
Specialties total 11.3 185.4
Pigments (2.7) 90.7
Chromium 18.6 129.4
Specialty Rubber - 40.5
Inter-segment (0.2) (6.1)
______ ______
27.0 439.9
______ ______
International financial reporting standards (IFRS)
The Group has reported on the basis of IFRS as adopted by the European Union
(EU), and comparative data has been restated accordingly. In addition, the Group
has restated its segmental information, in order to provide a clearer view of
the underlying profit performance of the business units. Consequently central
costs, which are not identifiable as costs of particular segments, are reported
as a separate item and consist of those expenditures incurred by the Board of
Directors, Company Secretary, Group finance and internal legal costs.
IFRS requires separate disclosure of items of income and expense which are
material by virtue of their nature or amount. These items are considered to be
most appropriately disclosed as exceptional. Elementis plc management consider
that the information presented in the OFR provides useful financial information
relating to the performance of the Group. This information should not be
considered as an alternative, but as a supplementary to the full IFRS income
statement presented on page 12.
Group results
Group sales were £439.9 million in 2005 compared to £389.2 million for the
previous year. Sales increased by £33.8 million as a result of having a full
year of sales from Sasol Servo BV ('Servo'), which was acquired in June 2004.
Two businesses were sold during the year, the Hardman adhesives business and
Specialty Rubber, which reduced reported sales by £11.3 million. After adjusting
for these changes, sales increased by 7 per cent over the previous year.
Improved pricing in all businesses, but particularly in Elementis Chromium, was
the main driver of the increase in sales, with average prices improving by 7 per
cent. Sales volumes were 2 per cent lower due to softer demand in the US
Coatings market and the effects of price improvement programs.
Operating profit before exceptional items increased by £8.8 million to £20.3
million (2004: £11.5 million). Improved pricing contributed £31.2 million,
offsetting increases in energy of £6.0 million and raw materials of
approximately £10.3 million, with most of the variances occurring in Elementis
Chromium. Lower volumes reduced operating profit by £5.7 million, while currency
movements had a positive impact of £2.2 million.
Exceptional items before taxation in 2005 were a charge of £47.7 million (2004:
£2.6 million). Consequently the Group is reporting an operating loss for the
year from continuing operations of £25.4 million (2004: profit of £5.2 million).
Elementis Specialties
Phase one of the integration of the Servo business, acquired in June 2004, was
completed during the year, generating £3.5 million of annualised cost savings.
Servo products in the coatings and oilfield sectors complement well the
Elementis products in those same markets, and have been fully integrated into
the Elementis Specialties commercial organisation. Servo also produces a range
of surfactants for industrial applications and the pulp and paper markets, and
these do not directly overlap with existing Elementis products and markets.
In addition, Servo produces a range of driers for the coatings market, which
were reported as part of Elementis Specialties in 2004. These were transferred
to Elementis Pigments in 2005 where there is a similar range of products serving
the same markets.
Operating profit 2005
£million Operating profit Exceptional items* Adjusted operating
profit
Continuing operations
Specialties
- Specialty products 14.6 2.4 17.0
- Surfactants 0.1 0.5 0.6
______ ______ ______
14.7 2.9 17.6
Pigments (5.9) 7.1 1.2
Chromium (21.7) 29.5 7.8
Central costs (12.5) 5.0 (7.5)
______ ______ ______
(25.4) 44.5 19.1
Discontinued operations
Speciality Rubber 1.2 - 1.2
______ ______ ______
(24.2) 44.5 20.3
______ ______ ______
* excluding profit / (loss) on disposal of business
(continued from table above)
Operating profit 2004
£million Operating profit Exceptional items* Adjusted operating
profit
Continuing operations
Specialties
- Specialty products 16.5 2.3 18.8
- Surfactants (2.9) 1.6 (1.3)
______ ______ ______
13.6 3.9 17.5
Pigments 1.8 - 1.8
Chromium (0.9) 1.3 0.4
Central costs (9.3) - (9.3)
______ ______ ______
5.2 5.2 10.4
Discontinued operations
Speciality Rubber 3.7 (2.6) 1.1
______ ______ ______
8.9 2.6 11.5
______ ______ ______
* excluding profit / (loss) on disposal of business
Specialty Products
Global markets for Specialty products grew by around 2-3 per cent in the year,
with China showing above average growth. The market for architectural coatings
benefited from a robust US housing market, while growth in industrial coatings
was strong in Asia, but relatively flat in Europe and the US, due in part to
lower car production rates. The market for oil field products benefited from
strong growth in North America, where there was a record number of drilling
programs in Canada and good growth in the US despite some slowdown in the second
half of the year due to hurricane damage. Growth in this sector is also being
enhanced by the search for new reserves in increasingly remote and extreme
environments, that require greater quantities of performance chemicals such as
those produced by Elementis Specialties.
Product development programs resulted in four new products being introduced in
the year for the growing Chinese market and for the oilfield sector.
Sales of Elementis Specialty products in 2005 were £139.7 million (2004: £140.3
million). Having a full year of sales from the Servo acquisition added £7.6
million to 2005 sales, but the sale of the Hardman adhesives business in June
2005 and the transfer of the Servo driers business to Pigments reduced reported
turnover by £12.9 million. After adjusting for these changes, sales increased
by 3 per cent over the previous year. Improved pricing added 4 per cent while
volumes were down 2 per cent due to the softer US coatings market and the
effects of the price improvement program. Volumes were also impacted by
changes in supply chain processes following the implementation of the ERP
program. Within this overall result, personal care made good progress and oil
field sales enjoyed strong growth due to the market dynamics described above,
and new opportunities from the Servo business. The latter included a one time
opportunity to supply a large customer during a plant expansion, and the opening
of a new pipeline in Azerbaijan.
Operating profit before exceptional items was £17.0 million (2004: £18.8
million) which is £0.4 million lower than the previous year after adjusting for
acquisitions and disposals. Higher pricing was more than offset by lower
volumes and higher energy costs and overheads. In addition, the revaluation of
hectorite ore at its mine in California contributed £0.8 million to its result
in the first half of 2005.
Surfactants
The surfactants business was acquired as part of the Servo acquisition. The
global market for surfactants grew by around 3 per cent in 2005, but margins
remained low due to strong competition and high raw material costs. A
surfactant is a surface active ingredient used primarily in the formulation of
detergents.
Sales of surfactants in 2005 were £45.7 million (2004: £19.3 million). The
effect of owning Servo for a full year in 2005 increased reported sales by £19.5
million. Otherwise sales volumes improved by 18 per cent following the
reorganisation of the commercial group as part of the acquisition integration
process. Overall pricing was flat versus the previous year.
The operating profit before exceptional items in 2005 was £0.6 million (2004:
loss of £1.3 million). If the Group had owned Servo for a full year in 2004,
this would have represented an annualised improvement of £3.2 million and was
the result of higher sales volumes and £1.5 million of cost savings from the
reorganisation announced in July 2005. As part of this reorganisation employee
numbers were reduced and business processes were streamlined to improve
efficiency.
Elementis Chromium
Elementis Chromium for 2005 was characterised by a significant improvement in
selling prices, which more than offset higher raw material and energy costs, and
improved profitability by £7.4 million.
The global market for Chrome chemicals grew by 1-2 per cent in 2005, driven by
strong growth in the US industrial CCA (Chromated copper arsenate) market and
strong aerospace demand. The US CCA market for timber treatment benefited from
exceptionally high demand for treated timber, especially utility poles, to
repair hurricane damage in the second half of the year. The chromium oxide
market for aerospace alloys grew by around 10 per cent driven by good recovery
in aircraft production. Other market segments showed more modest growth while
chromium oxide demand for pigments was depressed by a weaker US coatings market.
Global supply-demand balances during the year were favourable, leading to
higher sales prices, and were supported by plant closures in the Far East.
2005 2004
£million £million
______ ______
Sales
- UK 56.4 51.7
- US 73.0 58.8
______ ______
129.4 110.5
______ ______
Adjusted operating profit/(loss)*
- UK (0.3) (6.3)
- US 8.1 6.7
______ ______
7.8 0.4
______ ______
* before exceptional items
Elementis Chromium sales in 2005 were £129.4 million, an improvement of 17 per
cent over the previous year. This was largely driven by a program of quarterly
price increases, led by Elementis to restore profit margins, and resulted in a
21 per cent improvement in average prices versus the previous year. Prices
improved in all major product sectors, but there were some related volume losses
which resulted in an overall volume reduction of 4 per cent compared to 2004.
Volumes were higher in North America, due to strong CCA demand, but lower in all
other major geographic sectors. In Asia Pacific, there was a reduction in
China, where pricing was less robust, but an increase in Japan where plant
closures led to additional supply opportunities.
Operating profit before exceptional items in 2005 was £7.8 million compared to
£0.4 million in 2004. Higher selling prices were the main driver of the overall
improvement, and more than offset increases of £5.6 million in energy costs and
£6.8 million in raw material costs.
The US business reported a profit of £8.1 million for the year (2004: £6.7
million) while the UK business, which is being restructured, reported a loss of
£0.3 million (2004: £6.3 million). The UK business made a loss in the first
half of the year but was profitable in the second half due to higher selling
prices.
Operating profit before exceptional items
Acquisitions
Operating Effect of and
profit * exchange disposals
2004 rates 2005
£million £million £million
Specialties
- Specialty products 18.8 1.2 (1.3)
- Surfactants (1.3) - (1.3)
______ ______ ______
Specialties total 17.5 1.2 (2.6)
Pigments 1.8 0.5 3.0
Chromium 0.4 0.9 -
Specialty Rubber 1.1 (0.1) -
Central costs (9.3) (0.3) -
______ ______ ______
11.5 2.2 0.4
______ ______ ______
* before exceptional items
Operating profit before exceptional items (continued)
Operating
Inc/(dec) profit *
2005 2005
£million £million
Specialties
- Specialty products (1.7) 17.0
- Surfactants 3.2 0.6
______ ______
Specialties total 1.5 17.6
Pigments (4.1) 1.2
Chromium 6.5 7.8
Specialty Rubber 0.2 1.2
Central costs 2.1 (7.5)
______ ______
6.2 20.3
______ ______
* before exceptional items
Elementis Pigments
In 2005 Elementis Pigments successfully completed the transitioning of its North
American manufacturing base to a new plant in China. The majority of operations
at the East St Louis plant closed on 30 June 2005 and most major customers have
approved the new Chinese material.
Coatings markets served by Elementis Pigments showed the same overall trends as
described under Elementis Specialty products. Good growth was seen in Asia but
demand was relatively flat in the US and Europe. The US represents Elementis
Pigments largest market and while there was reasonable growth in the
architectural sector, demand for industrial applications was lower than the
previous year leading to an overall softer coatings market for the year. In the
construction market demand was also lower, albeit from record levels in the
previous year.
Sales in Elementis Pigments were £90.7 million (2004: £79.1 million). The
transfer of the driers business from Elementis Specialties in early 2005
contributed £13.4 million of the increase in sales. Otherwise prices improved
by approximately 3 per cent due to increases being applied in all key market
sectors to offset rising raw material and energy costs. Volumes were 6 per cent
lower than 2004 due to the effects of the price increases as well as softer
market demand.
Operating profit before exceptional items for the year was £1.2 million (2004:
£1.8 million). Benefits from higher pricing and the inclusion of the Servo
driers business were offset by lower sales volumes and second half
inefficiencies from the transfer of production to the China plant. Additional
inventory was produced at the higher cost East St Louis plant to support key
customers during the transition, and this effectively delayed the benefits of
selling the lower cost Chinese product until 2006. In addition the US plant
continued to run during July and August as part of the shut down process and
this led to some duplication of manufacturing costs with the Chinese plant,
which started up at the same time. Going forward, the transfer of production to
the new plant is expected to reduce annualised manufacturing costs by around
£3.0 million, once the East St Louis inventory is fully depleted. Consequently
2006 is expected to benefit from around 70 per cent of this saving.
Central costs
Central costs in 2005 were reduced by £1.8 million to £7.5 million (2004: £9.3
million). The reduction was the result of a reorganisation of head office in
which functions were downsized or absorbed by business units. Annual employee
related costs were reduced by around 80 per cent, by the end of 2005 and the
full effect of the reductions will be reflected in 2006.
Exceptional items
In the first half, exceptional charges of £6.3 million were announced. These
comprised the closure of the majority of operations at the Pigments' East St
Louis plant, the first phase of the Servo integration, a head office restructure
and the disposal of the Hardman adhesives business. The first phase of a
strategic review was announced on 31 October 2005, which resulted in exceptional
charges of £38.4 million. These related to the closure of a kiln at Chromium,
together with severance and other restructuring costs. Further exceptional
items of £3.0 million have been incurred in the second half from the sale of
Specialty Rubber, curtailment gains on pension schemes related to the
restructuring and the settlement of legal and insurance claims.
Total exceptional items before taxation in the year were £47.7 million (2004:
£2.4 million) and are set out in note 5.
Interest
Net interest payable increased by £2.0 million to £7.6 million in 2005 (2004:
£5.6 million). This includes £0.1 million (2004: £0.2 million) in respect of
discontinued operations. Interest payable on net borrowings increased by £2.6
million to £6.4 million (2004: £3.8 million) due to higher average borrowings
and higher interest rates. The finance charge in respect of pension and
post-retirement benefits decreased by £0.7 million in the year, to £0.4 million
(2004: £1.1 million) due to a higher expected return on UK pension scheme assets
and contributions paid into the UK scheme.
Interest cover - the ratio of operating profit before exceptional items to
interest on net borrowings - was 3.3 times (2004: 3.3 times).
Taxation
Tax charge £million Effective rate per cent
Before exceptional items 0.3 2.6
Exceptional items 3.1 (7.8)
______ ______
Total 3.4 (12.0)
______ ______
The low rate of taxation on profit before exceptional items is due to the
amortisation of goodwill in the US for tax purposes. Taxation on exceptional
items of £3.1 million arose on pension scheme curtailment gains and due to the
write off of £2.3 million in relation to deferred tax previously provided on UK
pension schemes. Potential deferred tax assets of £31.6 million (2004: £28.8
million) in respect of carried forward losses have not yet been recognised.
The effective tax rate on profit before exceptional items in 2006 will continue
to be dependent on the mix of profits primarily between the UK and overseas, and
the utilisation of tax losses in the UK and the US.
Earnings per share
Earnings per share for the year was a loss of 8.8 pence per share (2004:
earnings of 0.8 pence), due to the exceptional charges in the year. Basic
earnings per share before exceptional items increased to 2.8 pence (2004: 1.3
pence) due to the increased operating profit partly offset by increased net
interest costs.
Dividends and issue of redeemable B shares
The Board has decided not to continue with the programme of issuing and
redeeming redeemable B shares, and is proposing a final dividend of 1.1 pence
per share. The total nominal value of redeemable B shares that were issued to
shareholders during 2005 was 2.2 pence per ordinary share. A final offer will
be made to existing holders of redeemable B shares to redeem any remaining B
shares in issue for cash at their nominal value in November 2006.
Cash flow
The cash flow is summarised below:
2005 2004
£million £million
Ebitda(1) 38.5 27.0
Change in working capital 1.9 (5.1)
Capital expenditure (16.8) (22.0)
Pension (14.1) (4.6)
Interest and tax (9.4) 1.8
Other (1.8) (2.2)
______ ______
(1.7) (5.1)
Redemption of B shares (9.7) (9.2)
Acquisitions and disposals 23.7 (36.3)
Exceptional items (12.7) 3.8
Currency fluctuations (8.8) 3.5
______ ______
Increase in net borrowings (9.2) (43.3)
Net borrowings at start of year (90.2) (46.9)
______ ______
Net borrowings at end of year (99.4) (90.2)
______ ______
(1)Ebitda - earnings before interest, tax, exceptional items, depreciation and
amortisation
Net borrowings increased by £9.2 million in the year to £99.4 million. The
strengthening of the US dollar against sterling increased reported borrowings by
£8.8 million. Ebitda(1) increased by £11.5 million to £38.5 million (2004:
£27.0 million) due to the improved operating performance. Cash flow from working
capital was an inflow of £1.9 million. Inventory and debtors for continuing
businesses both improved compared to the previous year end. Debtor days were 4
days lower at 57 days and inventory was 12 days lower at 77 days. Year end
creditors were down 6 days to 66 days.
Capital expenditure in the year was £5.2 million lower than previous year at
£16.8 million due to the completion of the ERP project in 2004 and the Tai Cang
Pigments plant in June 2005. Total spend in 2005 represented 93 per cent of
depreciation (2004: 143 per cent).
Payments to pension schemes net of service cost were £9.5 million higher than
2004 at £14.1 million as the Group made an additional contribution of £7.0
million into the UK scheme following the disposal of Specialty Rubber.
Balance sheet
2005 2004
£million £million
Intangible fixed assets 170.6 155.7
Other net assets 118.6 155.8
289.2 311.5
______ ______
Equity 189.8 221.3
Net borrowings 99.4 90.2
______ ______
289.2 311.5
______ ______
Gearing (2) 34% 29%
(2)the ratio of net borrowings to equity plus net borrowings
Currency fluctuations had a material impact on equity. The main currency
exchange rates relevant to Elementis are set out below:
2005 2004
Year end Average Year end Average
US dollar 1.72 1.82 1.92 1.83
Euro 1.46 1.46 1.41 1.47
______ ______ ______ ______
The majority of the Group's assets are stated in US dollars and the
strengthening of the US dollar in 2005 increased equity by £18.3 million. This
partly offset the loss after exceptional items in equity of £38.1 million.
Pensions and other post retirement benefits
The Group provides retirement benefits for the majority of its employees mainly
through defined benefit schemes. A small number of defined contribution schemes
are also provided and an unfunded post-retirement medical benefit scheme is
provided in the US.
The net pension liability, which is calculated by the Group's actuaries and
based upon fair value of the schemes' assets and present value of schemes'
liabilities, decreased by £19.4 million to £62.0 million. This was due to a 16
per cent return from the assets of the UK pension plan plus employer
contributions of £19.1 million and curtailment gains of £9.0 million associated
with restructuring program. This more than offset liability increases of £33.3
million due to changes in mortality estimates and other assumptions.
In 2005, due to the curtailment gains there was a net credit to the income
statement of £3.0 million (2004: charge of £7.2 million). Excluding these gains
the total cost of pensions and post-retirement health care in the year was
similar to 2004. Total contributions to pension and post retirement schemes in
the year amounted to £19.1 million (2004: £10.7 million). Estimated
contributions in 2006 are approximately £12.0 million.
Consolidated income statement
for the year ended 31 December 2005
2005
Before Exceptional After
exceptional items exceptional
items (note 5) items
Note £million £million £million
Continuing operations
Revenue 399.4 - 399.4
Cost of sales (280.8) (41.0) (321.8)
______ ______ ______
Gross profit 118.6 (41.0) 77.6
Distribution costs (58.5) (2.6) (61.1)
Administrative expenses (41.0) (0.9) (41.9)
______ ______ ______
Operating profit/(loss) 19.1 (44.5) (25.4)
Profit on disposal of business - 4.6 4.6
Investment income 3 0.3 - 0.3
Finance costs 4 (7.8) - (7.8)
______ ______ ______
Profit/(loss) before income tax 11.6 (39.9) (28.3)
Tax 6 (0.3) (3.1) (3.4)
______ ______ ______
Profit/(loss) for the year from continuing
operations 11.3 (43.0) (31.7)
Discontinued operations
Profit/(loss) from discontinued operation 1.1 (7.8) (6.7)
Profit/(loss) for the year 12.4 (50.8) (38.4)
______ ______ ______
Attributable to:
Equity holders of the parent 12.2 (50.3) (38.1)
Minority interests 0.2 (0.5) (0.3)
______ ______ ______
12.4 (50.8) (38.4)
______ ______ ______
Earnings per share 7 2.8 (11.6) (8.8)
From continuing and discontinued
operations:
Basic (pence)
From continuing operations: 7 2.6 (9.8) (7.2)
Basic (pence) ______ ______ ______
Consolidated income statement
for the year ended 31 December 2005 (continued)
2004
Before Exceptional After
exceptional items exceptional
items (note 5) items
Note £million £million £million
Continuing operations
Revenue 343.3 - 343.3
Cost of sales (236.6) - (236.6)
______ ______ ______
Gross profit 106.7 - 106.7
Distribution costs (56.4) - (56.4)
Administrative expenses (39.9) (5.2) (45.1)
______ ______ ______
Operating profit/(loss) 10.4 (5.2) 5.2
Profit on disposal of business - - -
Investment income 3 0.8 - 0.8
Finance costs 4 (6.2) - (6.2)
______ ______ ______
Profit/(loss) before income tax 5.0 (5.2) (0.2)
Tax 6 1.0 0.2 1.2
______ ______ ______
Profit/(loss) for the year from continuing
operations 6.0 (5.0) 1.0
Discontinued operations
Profit/(loss) from discontinued operation (0.2) 2.6 2.4
Profit/(loss) for the year 5.8 (2.4) 3.4
______ ______ ______
Attributable to:
Equity holders of the parent 5.8 (2.4) 3.4
Minority interests - - -
______ ______ ______
5.8 (2.4) 3.4
______ ______ ______
Earnings per share 7 1.3
From continuing and discontinued
operations:
(0.5) 0.8
Basic (pence)
From continuing operations: 7 1.4 (1.2) 0.2
Basic (pence) ______ ______ ______
Consolidated balance sheet
at 31 December 2005
2005 2004
31 December 31 December
£million £million
Non-current assets
Goodwill and other intangible assets 170.6 155.7
Property, plant and equipment 141.1 173.0
Interests in associates 0.7 0.6
Other investments 2.6 1.3
Deferred tax assets 11.1 16.9
______ ______
Total non-current assets 326.1 347.5
______ ______
Current assets
Inventories 63.5 68.3
Trade and other receivables 75.6 84.0
Cash and cash equivalents 13.0 11.5
Assets classified as held for sale - 3.7
______ ______
Total current assets 152.1 167.5
______ ______
Total assets 478.2 515.0
______ ______
Current liabilities
Bank overdrafts and loans (4.6) (4.4)
Trade and other payables (69.5) (71.6)
Current tax liabilities (5.6) (8.2)
Provisions (11.8) (0.8)
Liabilities classified as held for sale - (1.3)
______ ______
Total current liabilities (91.5) (86.3)
Non-current liabilities
Loans and borrowings (107.8) (97.3)
Retirement benefit obligations (62.0) (81.4)
Deferred tax liabilities (0.3) (2.9)
Provisions (22.4) (21.6)
Government grants (2.3) (2.4)
______ ______
Total non-current liabilities (194.8) (205.6)
______ ______
Total liabilities (286.3) (291.9)
______ ______
Net assets 191.9 223.1
______ ______
Equity
Share capital 21.8 23.8
Share premium 1.9 1.2
Other reserves 89.5 59.9
Retained earnings 76.6 136.4
______ ______
Total equity attributable to equity holders of the parent 189.8 221.3
Minority equity interests 2.1 1.8
______ ______
Total equity 191.9 223.1
______ ______
Consolidated cash flow statement
for the year ended 31 December 2005
2005 2004
£million £million
Operating activities:
(Loss)/profit for the year (38.4) 3.4
Adjustments for:
Investment income (0.3) (0.9)
Finance costs 7.9 6.5
Tax 3.4 (0.1)
Depreciation and amortisation 18.2 15.5
Decrease in provisions (1.3) (2.4)
Pension contributions net of current service cost (14.1) (4.6)
Share based payments 0.8 0.2
Exceptional items charged less cash flow 35.0 0.6
______ ______
Operating cash flow before movement in working capital 11.2 18.2
Increase in inventories (1.0) (7.2)
Decrease/(increase) in trade and other receivables 0.3 (3.4)
______ ______
Increase in trade and other payables 2.6 5.5
______ ______
Cash generated by operations 13.1 13.1
Income taxes (paid)/received (2.6) 4.5
Interest paid (7.2) (4.1)
______ ______
Net cash flow from operating activities 3.3 13.5
Investing activities:
Interest received 0.4 1.4
Disposal of property, plant and equipment - 5.8
Purchase of property, plant and equipment (16.8) (22.0)
Acquisition of businesses - (36.3)
Disposal of businesses 23.7 -
______ ______
Net cash flow from investing activities 7.3 (51.1)
______ ______
Financing activities:
Issue of shares 0.9 -
Redemption of B shares (9.7) (9.2)
Decrease in borrowings repayable within one year (3.0) (0.8)
Increase/(decrease) in borrowings repayable after one year (0.9) 35.8
Repayment of obligations under finance lease (0.2) (0.2)
______ ______
Net cash (used in)/from financing activities (12.9) 25.6
______ ______
Net decrease in cash and cash equivalents (2.3) (12.0)
Cash and cash equivalents at 1 January 10.3 22.6
Foreign exchange on cash and cash equivalents 0.4 (0.3)
______ ______
Cash and cash equivalents at 31 December 8.4 10.3
______ ______
Consolidated statement of recognised income and expense
for the year ended 31 December 2005
2005 2004
£million £million
Exchange differences on translation of foreign operations 18.3 (11.8)
Actuarial loss on pension and other post-retirement schemes (1.5) (4.7)
Deferred tax associated with pension and other post-retirement schemes (0.9) (8.9)
Gains on cash flow hedges taken to equity 0.7 -
______ ______
Net income/(expense) recognised in equity 16.6 (25.4)
(Loss)/profit for the year (38.4) 3.4
______ ______
Total recognised income and expense (21.8) (22.0)
Effect of change in accounting policy
Effect of adoption of IAS 32 and 39 on 1 January 2005 (with 2004 not restated)
on:
Share capital (2.2) -
______ ______
(24.0) (22.0)
______ ______
Total recognised income and expense is attributable to:
Equity holders of the parent (23.7) (22.0)
Minority interests (0.3) -
______ ______
(24.0) (22.0)
______ ______
Notes to the financial statements
1 Preparation of the preliminary announcement
The financial information in this statement is unaudited and does not constitute
statutory accounts within the meaning of section 240 of the Companies Act 1985.
The comparative figures for the year ended 31 December 2004 are not the Group's
financial statements for that year. Those financial statements, which were
prepared under UK Generally Accepted Accounting Principles, have been reported
on by the Group's auditor and delivered to the Registrar of Companies. The
report of the auditor was unqualified and did not contain statements under
section 237(2) or (3) of the Companies Act 1985. The preliminary announcement
was approved by the Board of Directors on 20 February 2005.
2 Basis of preparation
Elementis plc is a company incorporated in the UK. The information within this
document has been prepared and approved by the directors in accordance with
International Financial Reporting Standards as adopted by the EU (adopted IFRS).
The Group financial statements have been prepared on the historical cost basis
except that derivative financial instruments and financial instruments held for
trading or available for sale are stated at their fair value. Non-current
assets held for sale are stated at the lower of carrying amount and fair value
less costs to sell. The accounting policies have been consistently applied
across group companies to all periods presented and in preparing an opening IFRS
balance sheet at 1 January 2004 for the purposes of the transition to adopted
IFRS, other than in respect of IAS 32 and IAS 39 which, as allowed by IFRS 1,
have been implemented from 1 January 2005. The principal exception is that
financial instruments accounting is determined on a different basis in 2005 and
2004 due to the transitional provisions of IAS 32 and IAS 39.
3 Investment income
Continuing operations Discontinued operations
2005 2004 2005 2004
£million £million £million £million
Interest on bank deposits 0.3 0.2 - 0.1
Interest on other loans - 0.4 - -
Interest on corporation tax refunds - 0.2 - -
______ ______ ______ ______
0.3 0.8 - 0.1
______ ______ ______ ______
Investment income (continued)
Total
2005 2004
£million £million
Interest on bank deposits 0.3 0.3
Interest on other loans - 0.4
Interest on corporation tax refunds - 0.2
______ ______
0.3 0.9
______ ______
4 Finance costs
Continuing operations Discontinued operations
2005 2004 2005 2004
£million £million £million £million
Interest on bank loans 6.5 4.1 0.1 0.3
Interest on other loans 0.1 0.1 - -
______ ______ ______ ______
Total borrowing costs 6.6 4.2 0.1 0.3
Interest on corporation tax payments 0.1 - - -
Unwind of discount on provisions 0.7 0.9 - -
Expected return on pension scheme assets (24.8) (23.4) - -
Interest on pension scheme liabilities 25.2 24.5 - -
______ ______ ______ ______
Pension and other post retirement liabilities 0.4 1.1 - -
______ ______ ______ ______
7.8 6.2 0.1 0.3
______ ______ ______ ______
Finance costs (continued)
Total
2005 2004
£million £million
Interest on bank loans 6.6 4.4
Interest on other loans 0.1 0.1
______ ______
Total borrowing costs 6.7 4.5
Interest on corporation tax payments 0.1 -
Unwind of discount on provisions 0.7 0.9
Expected return on pension scheme assets (24.8) (23.4)
Interest on pension scheme liabilities 25.2 24.5
______ ______
Pension and other post retirement liabilities 0.4 1.1
______ ______
7.9 6.5
______ ______
5 Exceptional items
Cost of sales Distribution costs Administrative
expenses
£million £million £million
Continuing operations:
Pigments East St Louis rationalisation (6.2) (0.5) (0.4)
Chromium restructure (29.7) - (1.7)
Integration of Specialties and Pigments (2.0) (0.6) (0.7)
Integration of Servo business (3.1) (1.5) (1.9)
Disposal of business - - -
Insurance recovery - 1.1
Settlement of legal claims - - (2.4)
Head office restructure - - (3.4)
Curtailment gains on pension schemes - - 8.5
Impairment of joint venture - - -
______ ______ ______
(41.0) (2.6) (0.9)
Discontinued operations:
Disposal of business - - -
Profit on disposal of property - - -
______ ______ ______
(41.0) (2.6) (0.9)
Tax (charge)/ credit on exceptional items - - -
______ ______ ______
Exceptional items (continued)
Profit /(loss) on 2005 2004
disposal of business
£million £million £million
Continuing operations:
Pigments East St Louis rationalisation - (7.1) -
Chromium restructure - (31.4) (1.3)
Integration of Specialties and Pigments - (3.3) -
Integration of Servo business - (6.5) (1.6)
Disposal of business 4.6 4.6 -
Insurance recovery - 1.1 -
Settlement of legal claims - (2.4) -
Head office restructure - (3.4) -
Curtailment gains on pension schemes - 8.5 -
Impairment of joint venture - - (2.3)
______ ______ ______
4.6 (39.9) (5.2)
Discontinued operations:
Disposal of business (7.8) (7.8) -
Profit on disposal of property - - 2.6
______ ______ ______
(3.2) (47.7) (2.6)
Tax (charge)/ credit on exceptional items - (3.1) 0.2
______ ______ ______
(50.8) (2.4)
______ ______
Following the implementation of adopted IFRS, the Group has decided to continue
its separate presentation of certain items as exceptional. These are items
which, in management's judgement, need to be disclosed separately by virtue of
their size or incidence in order for the reader to obtain a proper understanding
of the financial information.
Subsequent to its reorganisation in June, the Board has been conducting a review
of the Group's strategy. The first phase of the strategic review set out three
main goals: to increase the base level of future earnings, to refocus resources
on Specialties and to improve the quality and consistency of future earnings.
As a result of strategic action taken in the first half of 2005 and, following
the implementation of the first part of the Board's strategic review, a number
of exceptional charges and credits have arisen.
In Chromium, in order to reduce the volatility of its UK business, one of its
kilns at Eaglescliffe was closed resulting in an asset impairment of £25.2
million and redundancy costs of £6.2 million. The business also received £1.1
million of insurance recoveries in relation to claims from several years ago.
In Specialties, the integration of Sasol Servo BV, which was acquired in June
2004, was implemented resulting in redundancy charges of £6.5 million. In
addition, the US based administration functions of the Specialties and Pigments
businesses, were combined resulting in a charge of £3.3 million. Specialties
also disposed of its Hardman adhesives business in June 2005 resulting in a
profit of £4.6 million.
On 30 June 2005, the majority of operations at Pigments' East St Louis plant
were closed resulting in an asset impairment of £4.8 million and redundancy and
decommissioning costs of £2.3 million.
The Elementis head office was also restructured during 2005 for a charge of £3.4
million, which comprised £0.7 million in respect of an onerous lease and £2.7
million in respect of redundancies. In addition, the Group settled a legal
claim, previously disclosed as a contingent liability, for £4.8 million. This
related to a contract for the sale of Pauls Malt Limited and the repayment of
refunds to the Department for Environment, Food and Rural Affairs. This was
partly offset by the receipt of £2.4 million in respect of an environmental
claim. Curtailment gains on pension schemes following the restructuring during
2005 amounted to £8.5 million.
Exceptional charges and income have been classified in the profit and loss
account in accordance with their nature. Exceptional items in 2004 comprised
£5.2 million which was charged to administrative expenses, less a gain on
disposal of property of £2.6 million which was included in other operating
income.
6 Income tax expense
Continuing operations Discontinued operations
2005 2004 2005 2004
£million £million £million £million
Current tax:
UK corporation tax at 30% (0.3) (0.1) - 0.3
Overseas corporation tax 0.5 0.5 0.1 (0.2)
Adjustments in respect of prior years - 0.3 (2.2) (0.3) -
overseas
______ ______ ______ ______
Total current tax 0.5 (1.8) (0.2) 0.1
Deferred tax:
United Kingdom (4.0) (3.6) - 1.0
Overseas 2.4 0.1 - -
Adjustments in respect of prior periods 2.1 1.3 0.2 -
ACT written off 2.4 2.8 - -
______ ______ ______ ______
Total deferred tax 2.9 0.6 0.2 1.0
______ ______ ______ ______
Income tax expense for the year 3.4 (1.2) - 1.1
______ ______ ______ ______
Income tax expense (continued)
Total
2005 2004
£million £million
Current tax:
UK corporation tax at 30% (0.3) 0.2
Overseas corporation tax 0.6 0.3
Adjustments in respect of prior years - overseas - (2.2)
______ ______
Total current tax 0.3 (1.7)
Deferred tax:
United Kingdom (4.0) (2.6)
Overseas 2.4 0.1
Adjustments in respect of prior periods 2.3 1.3
ACT written off 2.4 2.8
______ ______
Total deferred tax 3.1 1.6
______ ______
Income tax expense for the year 3.4 (0.1)
______ ______
The tax charge on profit before exceptional items of £0.3 million (2004: £0.1
million) results in an effective tax rate on profit before exceptional items for
the year to 31 December 2005 of 2.6 per cent (2004: 2.0 per cent). The rate is
lower than the standard UK corporation tax due to the utilisation of losses.
Tax on exceptional items was a charge of £3.1 million (2004: credit of £0.2
million).
7 Earnings per share
The calculation of the basic earnings per share attributable to the ordinary
equity holders of the parent is based on the following:
2005 2004
£million £million
Earnings:
Earnings for the purpose of basic earnings per share (38.1) 3.4
Exceptional items net of tax 50.3 2.4
______ ______
Adjusted earnings 12.2 5.8
______ ______
2005 2004
Number of shares:
Weighted average number of shares for the purposes of basic earnings per share 434.2 431.9
______ ______
The calculation of the basic earnings per share from continuing operations
attributable to the ordinary equity holders of the parent is based on the
following:
2005 2004
£million £million
(Loss)/profit for the year attributable to equity holders of the parent (38.1) 3.4
(Loss)/profit for the year from discontinued operations 6.7 (2.4)
______ ______
Loss from continuing operations (31.4) 1.0
Exceptional items from continuing operations after minority interest 42.5 5.0
______ ______
Adjusted earnings from continuing operations 11.1 6.0
______ ______
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