Interim Results

Cookson Group PLC 02 August 2006 2 August 2006 COOKSON GROUP PLC - ANNOUNCEMENT OF 2006 INTERIM RESULTS Highlights â€¢ Ongoing implementation of strategic plan producing strong results â€¢ Continuing operations: - Revenue of Â£819 million up 14% - Trading profit of Â£72 million up 27% - Return on sales up 0.9 percentage points to 8.8% â€¢ Headline PBT and EPS up 57% and 56% respectively â€¢ Pension deficit Â£36 million lower than December 2005 â€¢ Net debt Â£114 million lower than June 2005 â€¢ Interim dividend of 3 pence per share Increase/(decrease) vs 2005 Year First Half 2006 2005(3) Reported rates Constant 2005(3) rates Continuing Operations(1) Revenue Â£819m Â£720m +14% +10% Â£1,481m Trading profit(2) Â£72.0m Â£56.6m +27% +21% Â£128.8m Return on sales(2) 8.8% 7.9% +0.9 pts +0.8 pts 8.7% Total Operations Revenue Â£866m Â£795m +9% Â£1,635m Trading profit(2) Â£76.0m Â£56.6m +34% Â£134.7m Return on sales(2) 8.8% 7.1% +1.7 pts 8.2% Profit - headline(2) Â£61.9m Â£39.5m +57% Â£101.1m before tax - basic Â£54.9m Â£32.2m +70% Â£81.4m Earnings per - headline(2) 21.4p 13.7p +56% 36.8p share - basic 12.7p 8.5p +49% (5.8)p Dividend per share 3.0p - 5.0p Free cash flow(2) Â£(13.1)m Â£(17.8)m Â£4.7m Â£48.4m Net debt Â£249m Â£363m Â£(114)m Â£292m (1) Continuing operations exclude the results of the Laminates and SCS businesses (2) Refer to Note 1 of the attached financial statements for definitions (3) The 2006 Interim Results reflect the reclassification of pension interest as described more fully in the Group Financial Review below. Comparatives have been restated for this change and also to include the amortisation of intangibles within trading profit rather than separately as an exceptional item. Commenting on the Group's results and outlook, Nick Salmon, Chief Executive, said: 'The Group has made very encouraging progress so far in 2006, both in terms of improved trading results and in the execution of our strategic plan. 'Revenue from continuing operations for the first six months of 2006 was up 14%, driven by continuing growth in our main end-markets of worldwide steel production and consumer electronics, together with some improvement in the US precious metals market. Trading profit from continuing operations increased 27% over the comparable period last year. This strong improvement reflects the benefits of the restructuring and investment programmes initiated over the past two years. 'In line with our strategic plan and previous guidance, we will be implementing further restructuring and investment projects over the next eighteen months. Today, we are announcing the building of additional Ceramics production capacity in Poland and the proposed restructuring of this division's operations in the UK. 'We expect the positive market trends to continue into the second half of 2006 while noting that the second half of 2005 was markedly stronger than the first half, setting a tougher comparative benchmark for the second half of 2006.' OVERVIEW Strategic Plan In January 2005, we announced a strategic plan with a three year horizon, targeted to improve operational performance, reduce debt and resume a dividend programme. The plan is based on four principles: â€¢ A focus on higher technology products and the exit from commodity activities â€¢ Investment in production capacity in emerging markets and restructuring in maturing markets â€¢ Cost and overhead reduction â€¢ The disposal of non-core activities and assets to reduce debt by over Â£100 million by the end of 2006 Strategic Plan - Progress to date We have made good progress so far in implementing the strategic plan. As previously advised, in recent years the bulk of restructuring has been in the Electronics division, mainly in the now disposed of Laminates sector. The focus has shifted to the Ceramics division, where the new divisional Chief Executive, Francois Wanecq, has identified a number of further opportunities to improve performance. Ceramics Whilst organic revenue growth in the first half of 2006 at 7% was broadly in line with steel production growth, trading profit has grown by 26% and the margin at 11.2% now exceeds the original strategic plan target (as restated for the reclassification of pension interest). A new, more streamlined and responsive organisation has been put in place. Overhead costs have been reduced via the restructuring plan implemented around the end of 2005 which eliminated over 100 positions and this, in particular, has benefited the profitability of our NAFTA operations. In April, we completed the disposal of our Ceramic Fibres business. In May, we announced projects to further increase capacity in China and Mexico as well as the closure of one of our smaller facilities in the US. In China, we are investing Â£10 million in three new, highly efficient facilities to supply the growing foundry, glass and solar cell markets. In June, we sold our carbon blocks business located in Bawtry, UK for Â£7 million. This business had revenue in the full year 2005 of Â£13 million, trading profit of Â£1 million, and employed 90 people who have transferred with the business. This sale involved a substantial (Â£6 million) non-cash loss on disposal but enabled us to exit a non-core commodity activity. Today, we are announcing additional significant investment in Poland and some further proposed restructuring plans in the UK. We are announcing plans to invest over Â£10 million in building two new production lines at our existing large facility in Skawina, Poland. One will serve as our main European centre for slide-gate production based on the newer resin bonded alumina technology and the second as a new solar crucible facility. We propose, subject to employee consultation, to close the existing slide-gate facility in Goole, UK by mid-2007. Goole currently employs 114 people. It is envisaged that the assets associated with this site would therefore be written-down in the second half of 2006 as a non-cash charge. Our magnesia-carbon bricks business in Worksop, UK is suffering from a low level of order intake and poor prospects in the face of strong Asian competition. We propose, subject to employee consultation, to close this operation by the end of 2006. In 2005, Worksop generated revenue of Â£11 million and a small trading loss. It currently employs 73 people. We have written-down the associated net assets as a non-cash charge in these interim results. Lastly, as a result of the above, we propose to further downsize our UK central organisation in Barlborough. Electronics The disposal of the Laminates business was completed in April 2006 and thereby eliminated our exposure to this volatile commodity business. The continuing businesses of Assembly Materials and Chemistry showed combined revenue growth of 20% compared with the first half of 2005 with trading profit up 24%. The main drivers for these improvements were the continuing market transition to higher margin lead-free products and the non-repeat of the copper damascene product de-stocking issue which adversely affected the first quarter of 2005. In June we completed the closure of our commodity industrial metals business activities in Europe (2005 revenue of Â£7 million) with the loss of 65 jobs at our Naarden facility in The Netherlands. We are increasing lead-free solder production capacity, particularly in Asia-Pacific, to keep up with the market transition and further expanding our R&D facility in Bangalore, India. Precious Metals Net sales value increased by 10% and trading profit by 52% compared with the first six months of 2005. The US operations have benefited from improved net sales value in an improving market environment, together with the benefits of the major restructuring implemented in the second quarter of 2005. In Europe, net sales value remained flat in a depressed market. Profitability has improved as we execute our plan to restructure our selling and distribution activities in the UK, which has involved the loss of 42 jobs in 2006 to date. Disposals In addition to the Â£114 million of disposals previously announced with our Preliminary Results in March 2006, we have subsequently completed the sale of the carbon blocks business for Â£7 million, payable in instalments over three years, and further land and property for Â£3 million. We are progressing with some further small business disposals and continuing the rationalisation of our property portfolio. Dividend In June 2006, the Group paid the final dividend of 5 pence per share in respect of 2005, which was the first dividend paid since October 2001. The first half of 2006 has seen strongly improved profitability and a satisfactory trend of free cash flow generation. This, together with the Board's confidence in the future prospects for the Group, has resulted in the Board declaring an interim dividend for 2006 of 3 pence per share. OUTLOOK Market conditions generally remain positive, particularly for Ceramics and Electronics, our two largest divisions. On top of this, we see opportunities in all three divisions to implement further initiatives, consistent with the four strategic principles outlined above, which will underpin our recent strong results progression and further improve our performance and potential. We expect the positive market trends to continue into the second half of 2006 while noting that the second half of 2005 was markedly stronger than the first half, setting a tougher comparative benchmark for the second half of 2006. REVIEW OF OPERATIONS Note: the data provided in the tables below are at reported exchange rates and reflect the reclassification of pension interest as described more fully in the Group Financial Review below. Comparatives have been restated accordingly. Group - continuing operations First Half Year 2006 2005 2005 Revenue (Â£m) 819 720 1,481 Trading profit (Â£m) 72.0 56.6 128.8 Return on sales 8.8% 7.9% 8.7% Group revenue from continuing operations in the first half of 2006 was well ahead of the same period in 2005, being 14% higher at reported exchange rates and up 10% at constant exchange rates. The increase in revenue reflected both strong organic growth plus the impact of higher metal prices being 'passed through' to customers in the Precious Metals division and the Assembly Materials and Chemistry sectors of the Electronics division. Revenue for the Group's operations in the Asia-Pacific region continued to grow strongly now representing 21% of Group revenue (2005: 18%), with NAFTA and Europe each representing 37%. Trading profit from continuing operations in the first half of 2006 increased significantly to Â£72.0 million (2005: Â£56.6 million), being 27% higher at reported exchange rates and up 21% at constant exchange rates. All divisions and sectors reported an increase in their trading profit. These increases reflected both the strong organic revenue growth and the benefit of the cost reduction initiatives enacted over the last eighteen months. The strong growth in trading profit resulted in a significant increase in the Group's return on sales from continuing operations with an increase to 8.8% from 7.9%. The impact of higher metal prices increasing reported revenue depressed the return on sales in the first half of 2006 by around 0.4 percentage points compared to the same period last year. Ceramics division First Half Year 2006 2005 2005 Revenue (Â£m) 399 368 746 Trading profit (Â£m) 44.9 35.6 77.0 Return on sales 11.2% 9.7% 10.3% The division performed strongly in the first half of 2006 with revenue at reported exchange rates higher by 9% compared to the same period last year (5% at constant exchange rates). Organic growth, adjusted to take account of the disposals of Technical Ceramics (McDanel) in 2005 and the Ceramic Fibres and UK carbon block businesses in 2006, was 7%. Trading profit at Â£44.9 million was 26% higher at reported exchange rates (20% at constant exchange rates) resulting in the return on sales increasing from 9.7% to 11.2%. The strong trading performance was driven by good growth in the division's key end-markets, in particular the steel, glass and construction industries, plus the beneficial impact of the restructuring and investment measures implemented in 2005 and the first half of 2006. At the end of 2005, a new more streamlined and responsive organisational model was introduced which focuses operational responsibilities on a regional basis. We are amending our external reporting to reflect this structure. In each region, the key end market is global steel production, which accounts for around 65% of the division's revenue. Global steel production grew 8% in the first half of 2006. This growth compares to the 6% growth seen in the full year 2005. Growth was recorded in all major regions with particularly strong growth in steel production in China (18%) and India (17%). Whilst the division is well positioned in these two fast-growing markets, over 76% of the division's revenue still comes from NAFTA and Europe, in which steel production growth was 5% and 4% respectively. NAFTA (comprising the US, Canada and Mexico) Revenue in NAFTA grew by 5% to Â£151 million at constant exchange rates with growth in all principal product lines - flow control, linings and foundry. Steel production in NAFTA grew by 5% in the first half of 2006 compared to the same period last year and other industrial markets also showed modest growth. A decline in revenue for the construction & installation business, which supplies and installs monolithic refractory linings into a variety of industries, reflected the strategy to only focus resources on higher margin, more valued-added projects. Trading profit in the first half of 2006 increased markedly by around one-third on the same period last year reflecting the underlying volume growth, the impact of the elimination of around 60 non-production personnel at the end of 2005, the benefit to costs of the ongoing relocation of production capacity from the US to Mexico and improved profitability in the linings and construction & installation product lines. During the first half of 2006, the division continued its restructuring programme with the announcement of the closure of the Beaver Falls facility. Slide-gate production capacity is in the process of being expanded at the Monterrey facility in Mexico. Europe Improved market conditions resulted in a 2% growth in revenue at constant exchange rates to Â£152 million compared to the first half of 2005. Strong revenue for flow control products reflected a growth in steel production of 4% for the region in the first half of 2006, with growth in Eastern Europe, Italy, Germany, France and the UK, more than offsetting a reduction in Spain. The linings and foundry product lines also demonstrated growth. Trading profit grew by nearly one-fifth compared with the first half of 2005 as a result of the underlying volume growth despite weaker profitability in the UK. Following a strategic review of the UK operations, the carbon block business, located in Bawtry (South Yorkshire) was sold in June 2006. The magnesia carbon brick business, located in Worksop (Nottinghamshire), is currently experiencing very weak trading conditions. Subject to employee consultation, we plan to close this facility by the end of 2006. We also plan, subject to employee consultation, to close our slide-gate operation in Goole (East Yorkshire) by mid-2007, in light of the planned expansion of our slide-gate capacity at our facility in Skawina, Poland based on the newer resin bonded alumina technology. As a result of these initiatives, it is also intended to downsize the Ceramics division's UK headquarters based in Barlborough (Derbyshire). Asia-Pacific and ROW Revenue in these regions grew in total by 15% to Â£75 million at constant exchange rates reflecting both strong steel production growth in the two key markets of China and India, plus broadly unchanged revenue in the construction & installation business, which primarily operates in Australia. China continues to experience consolidation in the steel industry and the government is encouraging the industry to shift to more modern, energy and pollution efficient methods of steel production which should expand the market for the Ceramics division's leading flow control products. This trend should enable the division to continue its strong progress in China even if the rate of growth of total steel production starts to slow. The strong revenue growth has resulted in trading profit being 22% ahead of the first half of last year with increased volumes more than offsetting a more competitive market environment. In May we announced the construction of a new Â£5 million foundry crucibles facility in Suzhou, Jiangsu Province, near two of the division's existing Chinese facilities. The new facility, which should be operational by mid-2007, will produce long-life, high performance alumina graphite crucibles for the fast-growing non-ferrous foundry market. The Chinese foundry industry is the largest in the world and has experienced annual growth of around 10% over the last few years. Fused Silica The one product line we manage on a global rather than a regional basis is fused silica. The principal products in the global fused silica product line are tempering rollers used in the glass industry and solar crucibles used in the manufacture of photovoltaic ('solar') cells. Revenue has grown by 17% to Â£21 million compared with the first half of 2005 at constant exchange rates, driven by good market conditions for the glass industry - both strong growth in the construction industry in China and increasing demand for flat screen television panels - combined with the growth of the solar energy industry. As anticipated, limited supplies of the polysilicon material used in the majority of solar panels is restricting growth in the short-term, but additional capacity is now coming on stream such that growth should increase to double-digit in the next couple of years. Profitability remains strong for this product line with trading profit up by just over a quarter on the first half of 2005. To meet the increasing demand for fused silica products, in May a Â£5 million additional investment was announced in Kua Tang, the site of the division's existing glass roller business in China. This investment, which should be completed by the end of 2006, will significantly expand capacity for producing the rollers used in the glass industry and transform this facility into the Ceramics division's leading centre worldwide for glass roller production. Alongside this facility, the division is also constructing a new facility to manufacture solar crucibles for the fast-growing photovoltaic market in Asia-Pacific. Following this additional investment in China, a Â£7 million investment to build a solar crucible facility in Skawina, Poland to supply European customers has just been launched. This facility should be operational by mid-2007. Electronics division First Half Year 2006 2005 2005 Revenue (Â£m) 281 234 489 Trading profit (Â£m) 27.0 21.7 52.5 Return on sales 9.6% 9.3% 10.7% Following the completion of the Laminates disposal in April 2006, the Electronics division now comprises two sectors, Assembly Materials and Chemistry, the results of which are reviewed below. Assembly Materials First Half Year 2006 2005 2005 Revenue (Â£m) 162 129 273 Trading profit (Â£m) 12.7 9.6 25.6 Return on sales 7.9% 7.4% 9.4% Revenue for the sector of Â£162 million grew very strongly by 25% at reported exchange rates compared to the first half of 2005 (20% at constant exchange rates). This increase reflected both strong organic revenue growth of around 14% (at constant exchange rates) but also the 'pass through' to customers of higher metal prices, in particular for silver. Whilst the average price of tin - the sector's major raw material - in the first half of 2006 was only marginally higher than the same period last year, the price of silver was on average 57% higher between the two periods. Silver is becoming a more significant raw material given the increased penetration of lead-free solder, which typically comprises 3% silver by weight. The organic revenue growth was driven by continued strong growth in demand for consumer electronics, notably mobile phones, MP3 players, digital televisions and personal computers, only partially offset by more difficult markets for solder products used in industrial applications. Trading profit of Â£12.7 million was 32% higher than the same period last year at reported exchange rates (25% at constant exchange rates) reflecting the growth in underlying volumes, the higher profitability of lead-free products and the impact of cost-saving initiatives. Return on sales increased from 7.4% to 7.9%. This improvement was achieved notwithstanding the negative impact on the return on sales percentage from the higher metal prices being 'passed through' to customers. Asia-Pacific, the sector's largest region, accounted for just over half of revenue in the first half of 2006, an increase of 6 percentage points over the same period last year. This reflected the continued migration of consumer electronics production to this region. The transition to lead-free solder, driven by European Union legislation which became effective on 1 July 2006, continues to enhance both revenue and profits. In the second quarter of 2006, 47% of solder revenue was derived from lead-free products, up from 37% in the first quarter of 2006 and 32% in the fourth quarter of 2005. This trend is expected to continue in the second half of 2006 and capacity for the production of lead-free solder has been increased, notably in Asia-Pacific. Sales of the sector's proprietary lower cost, lead-free solder with a low silver content (Alpha SACXTM) have been encouraging and it constituted 13% of lead-free solder revenue in the second quarter of 2006. In June 2006, the closure of our commodity industrial metals business in Naarden, Netherlands was completed with a reduction in headcount of 65. R&D and new product development remain a key focus, reflected by a further expansion of R&D capabilities in Bangalore, India. Chemistry First Half Year 2006 2005 2005 Revenue (Â£m) 119 105 216 Trading profit (Â£m) 14.3 12.1 26.9 Return on sales 12.0% 11.5% 12.5% Revenue for the first half of 2006 of Â£119 million grew by 13% at reported exchange rates (10% at constant exchange rates). This growth was largely driven by the 'pass through' of higher metal prices (notably for gold and palladium) to customers. Prior to this impact, the organic growth in revenue of 1% (at constant exchange rates) reflected good growth for the sector's higher margin products serving the electronics markets (and, in particular, the non-repeat of the significant copper damascene de-stocking issue which negatively impacted the first quarter of 2005), being offset by weaker sales of lower margin products for industrial and automotive markets. Trading profit for the first half of 2006 at Â£14.3 million was 18% higher than the same period last year at reported exchange rates (14% at constant exchange rates). This reflected the better mix of higher margin products serving the electronics markets, including copper damascene and lead-free immersion silver products (AlphaSTARTM). Return on sales increased strongly from 11.5% to 12.0%, notwithstanding the negative impact of higher reported revenue due to higher precious metal prices. Europe and NAFTA remain the sector's largest regions with 41% and 35% of total sector revenue, respectively. Asia-Pacific represents 23% of total sector revenue. The first half of 2006 saw further progress being made in the rationalisation of the sector's European sales and distribution network, a cost-reduction initiative commenced in 2005. Precious Metals First Half Year 2006 2005 2005 Revenue (Â£m) 139 118 246 Net sales value (Â£m) 57 52 108 Trading profit (Â£m) 4.4 2.9 7.8 Return on net sales value 7.7% 5.6% 7.2% The Precious Metals division operates in two distinct geographic regions; the US, which constitutes 58% of the total net sales value for the division, and Europe (which includes the UK, France and Spain). The calculation of net sales value has been revised in the period to better reflect the exclusion of the precious metals content in revenue. Prior period comparatives have been restated accordingly. Precious metal prices (notably for gold, silver and platinum) have been very volatile in the first half of 2006 with gold reaching a 26 year high of US$730/ounce in early May. Whilst prices have reduced since this time, the volatility in prices since the beginning of the year and its potential impact on retail demand continues to create uncertainty for the division's trading prospects. Precious Metals - US First Half Year 2006 2005 2005 Revenue (Â£m) 77 62 133 Net sales value (Â£m) 33 29 61 Trading profit (Â£m) 4.1 3.0 7.3 Return on net sales value 12.2% 10.3% 11.9% Net sales value of Â£33 million grew by 16% at reported exchange rates (10% at constant rates) compared to the same period last year. This increase reflected some firming of retail markets and increased business from Tiffany and the US Mint (in particular, the supply of 24 carat gold blanks for the production of the new 'Buffalo' coin for investors and collectors). Whilst order intake was negatively impacted in late May/early June due to high and volatile precious metal prices, the position had stabilised by the end of the first half. Trading profit for the first half of 2006 at Â£4.1 million was 37% ahead of the same period last year reflecting the strong organic net sales value growth and the full-period impact of the headcount reductions enacted in the second quarter of 2005. Return on net sales value was 12.2% (2005: 10.3%). At the beginning of August, we announced the consolidation of the operations of Inverness, our US ear-stud business currently located in New Jersey, into our principal US facility in Attleboro, Massachusetts with the transfer of 120 jobs. Precious Metals - Europe First Half Year 2006 2005 2005 Revenue (Â£m) 62 56 13 Net Sales Value (Â£m) 24 23 47 Trading profit/(loss) (Â£m) 0.3 (0.1) 0.5 Return on net sales value 1.3% (0.4%) 1.1% Net sales value of Â£24 million was broadly unchanged compared to the same period last year both at reported and constant exchange rates. This reflected continuing weak retail demand (particularly in the UK) being offset by stronger scrap refining business, stimulated by the high precious metal prices. Trading profit for the first half of 2006 at Â£0.3 million, whilst ahead of the corresponding period last year, remains unsatisfactory with breakeven profitability in the UK (2005: loss of Â£0.3 million) and a small trading profit in each of France and Spain. Return on net sales value was 1.3% (2005: 0.4% loss). The restructuring of the UK operations, to increase the emphasis on selling via the internet and the existing call-centre, is continuing in line with the plan announced at the beginning of 2006 and should benefit results going forward. Group corporate The Group's corporate costs, being the costs directly related to managing the Group holding company, were Â£4.3 million (2005: Â£3.6 million). The majority of the increase relates to non-recurring charges, in particular costs relating to the successful SEC deregistration. Discontinued operations Discontinued operations include the results of the Laminates business, which was sold in April 2006 and, in 2005, the Specialty Coating Systems business, which was sold at the end of December 2005. The Laminates business traded profitably in the period up to its disposal, reflecting both the restructuring of this business in 2005 and the discontinuance of any depreciation charge as required by its accounting treatment as a business 'held for sale'. GROUP FINANCIAL REVIEW First Half Year 2006 2005 2005 Profit before tax (Â£m) - headline 61.9 39.5 101.1 - basic 54.9 32.2 81.4 Earnings per share (pence) - headline 21.4 13.7 36.8 - basic 12.7 8.5 (5.8) Dividend per share (pence) 3.0 - 5.0 Free cash flow (Â£m) (13.1) (17.8) 48.4 Net debt (Â£m) 249 363 292 Reclassification of pension interest The results for first half of 2006 reflect an amendment to the accounting treatment for the 'interest' element (in effect, the non-current service cost) of the total expense relating to the Group's defined benefit pension and other post-retirement benefit plans. This element of post-retirement expense (which constitutes the net of the interest on the total plan liabilities and the expected return on the plan assets), which was previously deducted in arriving at trading profit, will henceforward be included within finance costs. The post-retirement expense relating to service cost remains within trading profit. This reclassification between trading profit and finance costs will have no impact on profit before tax or earnings per share and complies with International Accounting Standard 19 'Accounting for Retirement Benefits in Financial Statements of Employers', as indeed did the previous treatment. The amended treatment will reduce the volatility within trading profit from changes relating to the post-retirement deficit in respect to past service and also ensures better comparability of the Group's results with those of its peer group. Comparatives for the first half of 2005 and full year 2005 have been restated accordingly. For the first half of 2006, the pension interest now included within finance costs was Â£2.3 million (first half 2005: Â£2.6 million; full year 2005: Â£5.3 million). Group Income Statement Headline profit before tax Headline profit before tax for total operations was Â£61.9 million for the first half of 2006, which was Â£22.4 million higher than for the same period in 2005. The increase in headline profit before tax arose as follows: - Â£12.5 million increase in trading profit from continuing operations at constant exchange rates as discussed in the Operating Review above; - Â£3.8 million increase in trading profit from discontinued operations at constant exchange rates as discussed in the Operating Review above; - Â£3.1 million positive trading profit exchange rate translation variance; - Â£2.6 million lower charge for net interest payable principally due to a decrease of some Â£61 million in the average level of borrowings; - Â£0.3 million lower pension interest charge; and - Â£0.1 million increase in income from joint ventures (net of tax) from Â£0.4 million to Â£0.5 million. Items excluded from headline profit before tax A net charge of Â£7.0 million was incurred in the first half of 2006 (2005: Â£7.3 million) for the following items excluded from headline profit before tax. Of the total charge in the first half of 2006, Â£2.3 million was non-cash related. This charge consisted of the following items: Rationalisation costs: rationalisation costs of Â£8.8 million (2005: Â£7.7 million) were incurred in the first half, all relating to continuing operations. Of the total charge, Â£2.3 million related to the non-cash write down of assets and Â£6.5 million to cash-related costs. Of the total charge for the first half of 2006: - Â£5.1 million arose in the Ceramics division for the rationalisation of facilities in the UK and the US. Of the total charge, Â£1.7 million related to the non-cash write down of assets; - Â£1.9 million arose in the Assembly Materials sector primarily relating to the rationalisation of the facility in Naarden, Netherlands; - Â£1.1 million arose in the Chemistry sector for the rationalisation of the selling and distribution network in Europe; and - Â£0.7 million arose in respect of redundancy initiatives in the Precious Metals division and Group central operations. Profit relating to fixed assets: a net credit of Â£1.8 million (2005: Â£1.6 million) was realised in the first half of 2006, principally relating to the disposal of surplus properties. Write-off prepaid debt raising fees: in the first half of 2005 a non-cash charge of Â£1.2 million was incurred at the time the existing bank facility was put in place related to the write-off of the un-amortised portion of the fees incurred in respect of the previous facility. Group profit before tax and after the items noted above was Â£54.9 million for the first half of 2006 compared to Â£32.2 million in the first half of 2005. Taxation The tax charge on ongoing activities was Â£18.7 million. The effective tax rate on headline profit before tax from continuing operations was 31.5% (2005: 28.9%). The increase in the effective tax rate compared to the first half of last year has arisen as more of the Group's taxable profits are earned in relatively higher tax rate paying countries, notably in Asia-Pacific. This trend is expected to continue, albeit less materially, going forward. A tax charge of Â£1.6 million (2005: Â£1.9 million) arose in relation to all the items excluded from headline profit before tax noted above. Net post-tax loss on disposal of operations A net post-tax loss on disposals of Â£8.1 million (2005: Â£0.5 million) was reported in the period, consisting of a net post-tax loss before goodwill of Â£4.2 million and a write-off of goodwill of Â£3.9 million. Of the total net loss in the current period, Â£6.4 million arose from discontinued operations which relates to the completion on 20 April 2006 of the disposal of the Group's Laminates business to Isola Group S.A.R.L. The loss on disposal after tax comprises adjustments to the 31 December 2005 estimated fair value less costs to sell, including movements in working capital. The assets and liabilities of the Laminates business, formerly part of the Electronics division, were classified as 'held for sale' in the Group balance sheet as at 31 December 2005, with the consequential recording of a loss at that date of Â£52.5 million in the full year 2005 results. The final consideration for the Laminates disposal is subject to completion balance sheet adjustments in respect of working capital and capital expenditure, both of which are expected to be finalised in the second half of 2006, but which are not expected to result in further significant adjustments. In the Ceramics division, the disposal of the Ceramic Fibres business was completed in April and resulted in a profit of Â£4.7 million, after a write-off of goodwill of Â£2.6 million and a tax charge of Â£0.2 million; and in June the division's UK carbon blocks business was sold, resulting in a loss of Â£6.4 million, after a write-off of goodwill of Â£1.3 million. The net post-tax loss on disposal of operations of Â£0.5 million in the first half of 2005 related mainly to the disposal of the Group's Technical Ceramics business (McDanel), formerly part of the Ceramics division. Headline profit attributable to equity holders Headline profit attributable to equity holders for the first half of 2006 was Â£40.9 million (2005: Â£25.8 million), with the Â£15.1 million increase over 2005 arising from the significant increase in headline profit before tax more than offsetting both the increase in the effective tax rate and an increase of Â£0.5 million in profit attributable to minority interests. After taking account of all items excluded from headline profit before tax noted above (net of the related tax impact) and the net post-tax loss on disposal of operations, the Group recorded a profit of Â£26.5 million for the first half of 2006, Â£8.6 million higher than the Â£17.9 million profit recorded in the first half of 2005. Earnings per share (EPS) Headline EPS, based on the headline profit attributable to equity holders, amounted to 21.4 pence per share in the first half of 2006, an increase of 56% on the 13.7 pence recorded in the first half of 2005. The Directors believe this basis of calculating EPS is an important measure of the underlying earnings per share of the Group. Basic EPS, based on the net profit attributable to parent company equity holders, was 12.7 pence (2005: 8.5 pence). The average number of shares in issue during the first half of 2006 was 191 million (2005: 189 million). Dividend In June 2006, the Group paid the final dividend of 5 pence per share in respect of 2005, which was the first dividend paid since October 2001. The first half of 2006 has seen strongly improved profitability and a satisfactory trend of free cash flow generation. This, together with the Board's confidence in the future prospects for the Group, has resulted in the Board declaring an interim dividend for 2006 of 3 pence per share. This will be paid on 16 October 2006 to all shareholders on the register at the close of business on 29 September 2006. Group cash flow Cash generated from operations In the first half of 2006, the Group generated Â£9.5 million of net cash inflow from operations, Â£2.5 million higher than the first half of 2005. This net improvement principally arose from: - a Â£14.7 million increase in EBITDA (being earnings before interest, tax, depreciation and amortisation) to Â£95.6 million; - a cash outflow of Â£55.9 million for trade working capital, Â£13.1 million higher than 2005, of which Â£8.8 million related to a cash outflow for trade working capital for the Laminates business prior to its disposal; - a Â£1.1 million increase in the cash spend for rationalisation costs to Â£9.2 million; - a Â£7.8 million increase in pension 'top-up' payments to Â£12.8 million; and - a net decrease in cash outflow for operating provisions and other items of Â£9.8 million. The cash outflow in respect of trade working capital, prior to the impact of discontinued operations, results from both the increase in underlying revenue but also the negative impact on the levels of inventories and trade receivables at 30 June 2006 of higher metal prices (notably gold, silver and tin) in the Precious Metals division and the Assembly Materials and Chemistry sectors. However, there continues to be a strong focus on working capital management, evidenced by the ratio of average trade working capital to revenue from continuing operations reducing from 22.4% for the full year 2005 to 22.0% for the first half of 2005. Cash outflow for rationalisation was Â£9.2 million, of which Â£3.4 million related to programmes that were initiated in the first half of 2006 in respect of continuing businesses and the balance from prior period initiatives. As previously indicated, a cash outflow of around Â£20 million for rationalisation is expected in each of the full years, 2006 and 2007. Cash generated from operations in the first half of 2006 was negatively impacted by the cash outflow from the discontinued Laminates business in the period prior to its disposal. Cash generated from continuing operations in the first half of 2006, prior to the impact of discontinued operations, was Â£16.4 million, an improvement of Â£9.6 million on the Â£6.8 million for the comparable period last year. Net cash from operating activities In the first half of 2006, the Group generated Â£12.6 million of net cash outflow from operating activities, Â£4.2 million lower than the first half of 2005. This net improvement principally arose from a Â£3.7 million lower outflow for net interest paid. Net cash from investing activities Capital expenditure: Payments to acquire property, plant and equipment in the first half of 2006 were Â£14.6 million, marginally ahead of the first half of 2005 and representing 74% of depreciation (2005: 57%). Proceeds from the sale of surplus properties, primarily in the US and India, were Â£2.8 million (2005: Â£5.7 million). Dividends from joint ventures: Dividends of Â£0.9 million were received in the period (2005: Â£4.7 million) from the Chemistry division's Japanese joint venture. Acquisitions and disposals: Net cash inflow for acquisitions and disposals in the period was Â£53.2 million which included the following: - proceeds from the disposal of businesses, net of disposal costs, of Â£56.9 million, primarily comprising Â£11.9 million for the disposal in March 2006 of the Ceramic Fibres business, Â£43.6 million for the disposal in April 2006 of the Laminates business, and Â£1.4 million for the disposal in June 2006 of the Ceramics division's operations in Bawtry, UK; - trailing costs and purchase price adjustments paid for prior year disposals of Â£2.8 million; and - Â£0.9 million payments in respect of deferred consideration. Free cash flow Free cash flow is defined as net cash flow from operating activities and after net outlays for the acquisition and disposal of fixed assets, dividends from joint ventures and dividends paid to minority shareholders, but before additional funding contributions to Group pension plans. Free cash outflow for the first half of 2006 was Â£13.1 million; Â£4.7 million lower than the Â£17.8 million outflow in the first half of 2005 due to the increase in cash flow from operating activities for the reasons described above. The Group traditionally experiences free cash outflows in the first half of the year. This is then followed by inflows in the second half, mainly due to the seasonality of trade working capital cash flows. The annualised free cash inflow for the year ended June 2006 was Â£53.1 million. This compares with the Â£48.4 million cash inflow in the year ended December 2005. Net cash flow before financing Net cash inflow before financing for the first half of 2006 was Â£29.7 million, Â£54.4 million higher than for the first half of 2005. This improvement primarily reflects proceeds from the disposal of businesses of Â£56.9 million (2005: Â£2.4 million) more than offsetting additional funding contributions to Group pension plans of Â£12.8 million (2005: Â£5.0 million). After an outflow for financing activities (before repayment of borrowings) of Â£6.1 million (2005: Â£3.1 million), arising primarily from the payment of Â£9.6 million relating to the 2005 final dividend of 5 pence per share in June 2006, the net cash inflow for the first half of 2006 (before repayment of borrowings) was Â£23.6 million, Â£51.4 million higher than the first half of 2005. The cash inflow was further improved by a positive translation effect of Â£18.3 million, mainly due to the increase in the value of sterling from US$1.72 to US$1.85 during the first half of 2006, resulting in a decrease in net debt of Â£43.6 million to Â£248.7 million. Group borrowings As at 30 June 2006, the Group had gross borrowings of Â£304 million which were drawn on available medium to long-term committed facilities of around Â£495 million. The Group's net debt comprised the following: 30 June 31 December 30 June 2006 2005 2005 Â£m Â£m Â£m US Private Placement loan notes 295 318 298 Committed bank facilities - 23 68 Lease financing and asset securitisation 3 5 15 Other loans, overdrafts, other 6 10 14 Gross borrowings 304 356 395 Cash and short-term deposits (55) (64) (32) Net Debt 249 292 363 The US Private Placement loan notes, currently US$545 million, are repayable at various dates between 2007 and 2012, with US$180 million being due for repayment in 2007. The committed bank facility of Â£200 million has a current maturity date of March 2009. The facility, which includes an option to extend its maturity by a further twelve months beyond March 2009, is unsecured. There were no drawings on this facility at 30 June 2006. Currency The US dollar weakened against sterling during the course of the period such that the exchange rate at 30 June 2006 was some 8% higher than at 31 December 2005. The average US dollar exchange rate for the first half of 2006 was 4% lower than the average exchange rate for the first half of 2005. Other US dollar 'tracking' currencies, such as the Singapore and Hong Kong dollar and the Chinese renminbi, also showed a similar trend. The value of the euro was relatively stable against sterling, both in respect of the period-end rates and the average for the half year compared to last half year. In the first half of 2006, the net translation impact of currency changes was to improve headline profit before tax by Â£3 million and to reduce net debt by Â£18 million. Pension fund and other post-retirement obligations The Group operates defined contribution and defined benefit pension plans, principally in the UK and US. In addition, the Group has various other defined benefit post-retirement arrangements, being principally healthcare plans in the US. As at 30 June 2006, a liability of Â£188.8 million is recognised in respect of employee benefits, a decrease of Â£36.0 million compared with the Â£224.8 million as at 31 December 2005. This decrease results primarily in respect of the UK and US plans from increases in the prescribed discount rates used to present value future plan liabilities together with the 'top-up' cash payments referred to below. Of the total liability, Â£96.2 million relates to the deficit on the Group's defined benefit pension plan in the UK, Â£48.7 million to the Group's defined benefit pension plan in the US, Â£15.0 million to pension arrangements in the Rest of the World, and Â£28.9 million to unfunded post-retirement defined benefit arrangements, being mainly healthcare benefit arrangements in the US. In February 2006, following the successful implementation of the Group's recent disposal programme and the increase in the net pension deficit for the UK plan during 2005, it was agreed with the Trustee of the Group's UK plan, to make ' top-up' payments (in addition to the normal cash contributions) of Â£25.5 million in 2006 and Â£26.5 million in 2007. The level of these additional 'top-up' payments will be reviewed in consultation with the Trustee when the next triennial valuation is available in the first half of 2007. In the first half of 2006, additional 'top-up' payments of Â£12.8 million have been made (2005: Â£5.0 million). The Group's UK defined benefit pension plan was closed to new entrants in 2004 and the equivalent US plans were closed to new entrants in January 2006. Plans are currently being finalised to freeze the accruals for existing members of the US plans with effect from 1 January 2007. Future pension benefit will be provided through a defined contribution arrangement. The reduction in the future defined benefit liability expected to arise as a consequence of this change to the US arrangements will result in a curtailment credit to the income statement in the second half of 2006, which is expected to be reported as an exceptional item. The total charge to the income statement in the first half of 2006 for all pension plans (including defined contribution plans) was Â£11.4 million, a reduction of Â£1.2 million over the first half of 2005. Of this charge, Â£9.1 million has been deducted in arriving at trading profit and Â£2.3 million has been included within finance charges. Total pension cash contributions into defined benefit pension plans amounted to Â£17.7 million in the first half of 2006 (2005: Â£9.0 million). Shareholder/analyst enquiries: Nick Salmon, Chief Executive Cookson Group plc Mike Butterworth, Group Finance Director Tel: + 44 (0)20 7822 0000 Isabel Vilela, Investor Relations Manager Press enquiries: John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Cookson management will make a presentation to analysts on 2 August 2006 at 10: 30am (UK time). This will be broadcast live on Cookson's website. An archive version of the presentation will be available on the website from late afternoon on 2 August. Forward Looking Statements This announcement contains certain forward looking statements regarding the Group's financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, plans and objectives of management and other matters. Statements in this document that are not historical facts are hereby identified as 'forward looking statements'. Such forward looking statements, including, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, in each case relating to Cookson, wherever they occur in this document, are necessarily based on assumptions reflecting the views of Cookson and involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by the forward looking statements. Such forward looking statements should, therefore, be considered in light of various important factors. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward looking statements include without limitation: economic and business cycles; the terms and conditions of Cookson's financing arrangements; foreign currency rate fluctuations; competition in Cookson's principal markets; acquisitions or disposals of businesses or assets; and trends in Cookson's principal industries. The foregoing list of important factors is not exhaustive. When relying on forward looking statements, careful consideration should be given to the foregoing factors and other uncertainties and events, as well as factors described in documents the Company files with the UK regulator from time to time including its annual reports and accounts. Such forward looking statements speak only as of the date on which they are made. Except as required by the Rules of the UK Listing Authority and the London Stock Exchange and applicable law, Cookson undertakes no obligation to update publicly or revise any forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward looking events discussed in this announcement might not occur. Cookson Group plc, 165 Fleet Street, London EC4A 2AE Registered in England and Wales No. 251977 www.cooksongroup.co.uk Independent review report on the condensed consolidated interim financial information to the members of Cookson Group plc Introduction We have been instructed by the Company to review the financial information for the six months ended 30 June 2006 which comprises the Condensed Group Income Statement, the Condensed Group Balance Sheet, the Condensed Group Cash Flow Statement, the Condensed Group Statement of Recognised Income and Expense and the related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Listing Rules of the Financial Services Authority. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the UK. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Statements on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2006. KPMG Audit Plc Chartered Accountants Registered Auditor London 2 August 2006 Condensed Group Income Statement For the six months ended 30 June 2006 Dis- Half Dis- Half Full Continuing continued year Continuing continued year year operations operations 2006 operations operations 2005 2005 as as as restated restated restated Notes Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revenue 3 819.0 46.5 865.5 719.7 75.0 794.7 1,634.6 Manufacturing costs - raw materials (386.5) (23.9) (410.4) (321.5) (38.1) (359.6) (743.2) - other (201.5) (11.6) (213.1) (193.1) (24.4) (217.5) (437.0) Administration, selling and distribution costs (159.0) (7.0) (166.0) (148.5) (12.5) (161.0) (319.7) Trading profit 3 72.0 4.0 76.0 56.6 - 56.6 134.7 Rationalisation of operating activities 4 (8.8) - (8.8) (7.5) (0.2) (7.7) (18.5) Profit relating to fixed assets 5 1.8 - 1.8 1.6 - 1.6 - Profit from operations 3 65.0 4.0 69.0 50.7 (0.2) 50.5 116.2 Net finance costs - borrowings related 6 (12.3) - (12.3) (14.9) - (14.9) (29.7) - employee benefits 6 (2.3) - (2.3) (2.6) - (2.6) (5.3) - other activities 6 - - - (1.2) - (1.2) (1.2) Share of post-tax profit of joint ventures 0.5 - 0.5 0.4 - 0.4 1.4 Profit before tax 50.9 4.0 54.9 32.4 (0.2) 32.2 81.4 Income tax costs - ongoing activities 7 (18.1) (0.6) (18.7) (11.3) (0.6) (11.9) (28.4) - other activities 7 (1.6) - (1.6) (1.8) (0.1) (1.9) (14.4) Net post-tax loss on disposal of operations 8 (1.7) (6.4) (8.1) (0.5) - (0.5) (46.2) Profit/(loss) for the period 29.5 (3.0) 26.5 18.8 (0.9) 17.9 (7.6) Profit/(loss) for the period attributable to: Equity holders of the parent company 27.2 (3.0) 24.2 17.0 (0.9) 16.1 (11.0) Minority interests 2.3 - 2.3 1.8 - 1.8 3.4 Profit/(loss) for the period 29.5 (3.0) 26.5 18.8 (0.9) 17.9 (7.6) Earnings per share (pence): Basic 9 14.3 (1.6) 12.7 9.0 (0.5) 8.5 (5.8) Diluted 9 14.2 (1.6) 12.6 9.0 (0.5) 8.5 (5.8) Dividends per share (pence): Paid 10 5.0 - - Declared 10 3.0 - - Headline profit before tax and earnings per share: Trading profit 76.0 56.6 134.7 Share of post-tax profit of 0.5 0.4 1.4 joint ventures Net finance costs - borrowings related (12.3) (14.9) (29.7) - employee benefits (2.3) (2.6) (5.3) Headline profit before tax 1 61.9 39.5 101.1 Income tax costs on ongoing activities (18.7) (11.9) (28.4) Profit attributable to minority interests (2.3) (1.8) (3.4) Headline profit attributable to parent company equity holders 1 40.9 25.8 69.3 Headline earnings per share (pence) 1, 9 21.4 13.7 36.8 Condensed Group Statement of Cash Flows For the six months ended 30 June 2006 Half year Half year Full year 2006 2005 2005 as as restated restated Notes Â£m Â£m Â£m Cash flows from operating activities Profit from operations 69.0 50.5 116.2 Add back: Rationalisation of operating activities 8.8 7.7 18.5 Profit relating to fixed assets (1.8) (1.6) - Depreciation and amortisation 19.6 24.3 47.9 EBITDA 1 95.6 80.9 182.6 Net increase in trade working capital (47.1) (42.8) (23.7) Net outflows related to assets and liabilities classified as held for sale (8.8) - - Outflows related to rationalisation of operating activities 4 (9.2) (8.1) (17.0) Additional funding contributions to Group pension plans 12 (12.8) (5.0) (10.0) Other items (8.2) (18.0) (14.1) Cash generated from operations 9.5 7.0 117.8 Cash generated from operations - from continuing operations 16.4 6.8 110.3 - from discontinued operations (6.9) 0.2 7.5 Interest paid (14.4) (16.6) (31.3) Interest received 3.3 1.8 1.8 Income taxes paid (11.0) (9.0) (20.2) Net cash (outflow)/inflow from operating activities (12.6) (16.8) 68.1 Cash flows from investing activities Purchase of property, plant and equipment (14.6) (13.8) (42.5) Proceeds from sale of property, plant and equipment 5 2.8 5.7 10.3 Acquisition of subsidiaries, net of cash acquired (0.9) (3.9) (10.6) Disposal of subsidiaries, net of cash disposed of 8 56.9 2.4 30.4 Dividends received from joint ventures 0.9 4.7 4.7 Other, including additional costs for prior periods' disposals (2.8) (3.0) (6.0) Net cash inflow/(outflow) from investing activities 42.3 (7.9) (13.7) Net cash inflow/(outflow) before financing activities 29.7 (24.7) 54.4 Cash flows from financing activities (Repayment of)/increase in borrowings 11 (28.4) 15.1 (45.2) Proceeds from the issue of share capital 5.9 0.1 2.1 Payment of transaction costs - (0.6) (0.6) Dividends paid to equity shareholders 10 (9.6) - - Dividends paid to minority shareholders (2.4) (2.6) (2.2) Net cash (outflow)/inflow from financing activities (34.5) 12.0 (45.9) Net (decrease)/increase in cash and cash equivalents 11 (4.8) (12.7) 8.5 Cash and cash equivalents at beginning of period 63.5 44.0 44.0 Effect of exchange rate fluctuations on cash and cash equivalents (3.3) 0.2 11.0 Net (decrease)/increase in cash and cash equivalents (4.8) (12.7) 8.5 Cash and cash equivalents at end of period 55.4 31.5 63.5 Free cash flow: Net cash (outflow)/inflow from operating activities (12.6) (16.8) 68.1 Additional funding contributions to Group pension plans 12.8 5.0 10.0 Purchase of property, plant and equipment (14.6) (13.8) (42.5) Proceeds from sale of property, plant and equipment 2.8 5.7 10.3 Dividends received from joint ventures 0.9 4.7 4.7 Dividends paid to minority shareholders (2.4) (2.6) (2.2) Free cash flow 1 (13.1) (17.8) 48.4 Condensed Group Balance Sheet As at 30 June 2006 30 June 31 Dec 30 June 2006 2005 2005 Notes Â£m Â£m Â£m Assets Property, plant and equipment 230.9 264.9 312.8 Intangible assets 448.3 481.6 497.0 Investments in joint ventures 11.5 13.1 12.9 Other investments 9.6 11.2 13.8 Income tax recoverable 2.3 2.3 2.2 Deferred tax assets 12.3 15.0 27.3 Other receivables 12.2 8.7 7.4 Total non-current assets 727.1 796.8 873.4 Cash and cash equivalents 11 55.4 63.5 31.5 Inventories 177.2 179.6 186.1 Trade and other receivables 315.5 294.0 330.0 Income tax recoverable 1.6 - 0.7 Other financial assets 7.7 12.2 13.4 557.4 549.3 561.7 Assets classified as held for sale 21.1 87.2 - Total current assets 578.5 636.5 561.7 Total assets 1,305.6 1,433.3 1,435.1 Equity Issued share capital 13 19.3 375.5 375.5 Share premium account 14 4.2 645.5 643.8 Other reserves 1,003.3 37.8 1.3 Retained earnings (575.2) (609.8) (564.4) Total parent company shareholders' equity 451.6 449.0 456.2 Minority interests 11.2 12.7 11.3 Total equity 462.8 461.7 467.5 Liabilities Interest-bearing loans and borrowings 11 268.4 341.9 370.3 Employee benefits 12 188.8 224.8 213.6 Other payables 27.1 35.5 24.4 Provisions 8.1 11.1 9.4 Deferred tax liabilities 21.6 21.6 15.3 Total non-current liabilities 514.0 634.9 633.0 Interest-bearing loans and borrowings 11 35.7 13.9 24.0 Trade and other payables 249.7 249.2 283.8 Income tax payable 23.3 16.4 13.4 Provisions 17.1 20.6 13.2 Other financial liabilities 0.4 - 0.2 326.2 300.1 334.6 Liabilities directly associated with assets classified as held for sale 2.6 36.6 - Total current liabilities 328.8 336.7 334.6 Total liabilities 842.8 971.6 967.6 Total equity and liabilities 1,305.6 1,433.3 1,435.1 Net debt Interest-bearing loans and - non-current 268.4 341.9 370.3 - current 35.7 13.9 24.0 Cash and cash equivalents (55.4) (63.5) (31.5) Net debt 1 248.7 292.3 362.8 Condensed Group Statement of Recognised Income and Expense For the six months ended 30 June 2006 Half year Half year Full year 2006 2005 2005 Notes Â£m Â£m Â£m Exchange differences on translation of the net assets of foreign operations (51.5) 18.6 73.7 Net investment hedges 13.7 (10.5) (29.9) Actuarial gains/(losses) on employee defined benefit schemes 12 19.1 (21.8) (41.1) Changes in fair value of equity securities available-for-sale (0.7) 1.9 2.2 Net income and expense recognised directly in equity (19.4) (11.8) 4.9 Profit/(loss) for the period 26.5 17.9 (7.6) Total recognised income and expense for the period 7.1 6.1 (2.7) Total recognised income and expense for the period attributable to: Equity holders of the parent company 5.4 3.9 (6.0) Minority interests in - profit for the period 2.3 1.8 3.4 - foreign exchange translation differences (0.6) 0.4 (0.1) 7.1 6.1 (2.7) Notes to the financial statements 1 Basis of preparation These condensed interim financial statements have been prepared in accordance with the accounting policies detailed in note 2 below. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2005. The financial information presented in this document is unaudited, but has been reviewed by the Company's auditor and its report appears on page 20. The comparative figures for the financial year ended 31 December 2005 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. These sections address whether proper accounting records have been kept, whether the Company's accounts are in agreement with those records and whether the auditor has obtained all the information and explanations necessary for the purposes of its audit. Disclosure of significant items International Accounting Standard (IAS) 1, Presentation of Financial Statements, provides no definitive guidance as to the format of the income statement, but states key lines which should be disclosed. It also encourages additional line items and the re-ordering of items presented on the face of the income statement when appropriate for a proper understanding of the entity's financial performance. In keeping with the spirit of this aspect of IAS 1, the Company has adopted a policy of disclosing separately on the face of its income statement the effect of any components of financial performance considered by the Directors to be significant and/or for which separate disclosure would assist both in a better understanding of the financial performance achieved and in making projections of future results. Materiality and/or the nature and function of the components of income and expense are considered in deciding upon such presentation. Such items may include, inter alia, the financial effect of any profit or loss arising on business disposals, major rationalisation and/or restructuring activity, profits and losses on sale or impairment of fixed assets, and impairment of intangible and other non-current assets and other items, including the taxation impact of the aforementioned items, which have a significant impact on the Group's results of operations either due to their size or nature. Non-GAAP financial measures The Company uses a number of non-Generally Accepted Accounting Practice (' non-GAAP') financial measures in addition to those presented in accordance with IAS 1. Because GAAP measures reflect all items which affect reported performance, the Directors believe that certain non-GAAP measures, which reflect what they view as the underlying performance of the Group, are important and should be considered alongside the GAAP measures. The following non-GAAP measures are referred to in this document. On the face of the condensed Group income statement, 'trading profit' is separately disclosed, being defined as profit from operations before the costs of rationalisation of operating activities and the profit or loss relating to fixed assets. The Directors believe that trading profit is an important measure of the underlying trading performance of the Group. The 'return on sales' margins of Group businesses are calculated by dividing their trading profit by their revenue. On the face of the condensed Group income statement, 'headline profit before tax ', 'headline profit attributable to parent company equity holders' and 'headline earnings per share' are reported, together with their calculation. The Directors believe that these are important measures of the underlying earning capacity of the Group. On the face of the condensed Group statement of cash flows, 'EBITDA' is reported as a sub-total, representing Group earnings before interest, tax, depreciation and amortisation charges. EBITDA is a financial measure that is commonly used and the Directors believe it to be an important measure of the underlying trading performance of the Group. On the face of the condensed Group statement of cash flows, 'free cash flow' is reported, together with its calculation. The Directors believe that free cash flow, which reflects the Group's operational cash flow before repayment of borrowings and defined benefit post-retirement deficits or expenditure on business acquisitions or disposals, gives an important measure of the underlying cash-generation capacity of the Group. On the face of the Group balance sheet, 'net debt' is reported, together with its calculation. The Directors believe that this is an important measure as it shows the Group's aggregate net indebtedness to banks and other external financial institutions. 2 Significant accounting policies Except as disclosed below, the condensed financial statements have been prepared using the same accounting policies as used in the preparation of the Group's annual financial statements for the year ended 31 December 2005. In the Group's annual financial statements for the year ended 31 December 2005, the interest cost and expected return on assets associated with the Group's defined benefit pension and other post-retirement benefit plans was recognised in the income statement within trading profit. As permitted under IFRS, these components of the Group's total pension and other post-retirement benefits charge are now recognised as a component of net finance costs, which the Directors believe is a more appropriate accounting treatment. Prior period comparatives have been restated, such that net pension expense of Â£2.6m for the six months ended 30 June 2005 and Â£5.3m for the year ended 31 December 2005 has been reclassified in the income statement from administration, selling and distribution costs to net finance costs. This has had the effect of increasing both trading profit and net finance costs by Â£2.6m and Â£5.3m for the respective periods, while leaving the rest of the income statement unchanged. This reclassification has no impact upon the Group's previously reported cash flows, financial position or recognised income and expense. In the Group's annual financial statements for the year ended 31 December 2005, charges in respect of the amortisation and impairment of intangibles were separately disclosed in the Group income statement as a component of profit from operations, outside of trading profit. No such costs were incurred in the six months to 30 June 2006 and the Directors are of the opinion that these charges do not currently warrant separate disclosure. Accordingly, they are now classified as a component of trading profit within administration, selling and distribution costs. Prior period comparatives have been restated reducing trading profit by Â£0.4m and Â£0.8m respectively in the six months to 30 June 2005 and the year ended 31 December 2005. 3 Segment information For management reporting purposes the Group is organised into three main business segments, Ceramics, Electronics and Precious Metals, which form the basis of the primary reporting format disclosures below. Segment revenue represents revenue to external customers; inter-segment revenue is immaterial. Segment results include items directly attributable to a segment as well as items that can be allocated on a reasonable basis. Half year 2006 Half year 2005 Full year 2005 as restated as restated Revenue Profit Revenue Profit Revenue Profit Â£m Â£m Â£m Â£m Â£m Â£m Ceramics 399.4 44.9 367.6 35.6 746.1 77.0 Electronics 280.8 27.0 234.3 21.7 488.9 52.5 - Assembly Materials 161.7 12.7 129.2 9.6 273.4 25.6 - Chemistry 119.1 14.3 105.1 12.1 215.5 26.9 Precious Metals 138.8 4.4 117.8 2.9 245.8 7.8 Corporate costs (4.3) (3.6) (8.5) Continuing operations 819.0 72.0 719.7 56.6 1,480.8 128.8 Discontinued operations 46.5 4.0 75.0 - 153.8 5.9 Group trading profit 76.0 56.6 134.7 Rationalisation of operating (8.8) (7.7) (18.5) activities Profit relating to fixed assets 1.8 1.6 - Total Group 865.5 69.0 794.7 50.5 1,634.6 116.2 Of the total cost of rationalisation of operating activities of Â£8.8m (2005: half year Â£7.7m; full year Â£18.5m), Â£5.1m related to Ceramics (2005: half year Â£1.1m; full year Â£8.1m), Â£3.0m to Electronics (2005: half year Â£2.1m; full year Â£3.0m) and Â£0.4m to Precious Metals (2005: half year Â£0.6m; full year Â£1.4m) and Â£0.3m to corporate activities (2005: half year nil; full year nil). A further Â£3.9m in the half year 2005 related to discontinued operations (2005: full year Â£5.1m) and Â£0.9m in the full year 2005 to corporate activities. Of the Electronics costs of Â£3.0m, Â£1.9m related to Assembly Materials (2005: half year Â£0.6m; full year Â£0.8m) and Â£1.1m to Chemistry (2005: half year Â£1.5m; full year Â£2.2m). Of the total profit relating to fixed assets of Â£1.8m (2005: half year Â£1.6m; full year nil), Â£1.4m related to Electronics (2005: half year Â£0.3m; full year Â£1.2m loss) and Â£0.4m to corporate activities (2005: half year Â£0.6m loss; full year Â£0.6m loss). All of the Electronics profit related to Assembly Materials (2005: half year Â£0.3m Assembly Materials; full year Â£0.3m Assembly Materials and Â£1.5m loss Chemistry). In 2005, losses on disposal of Â£0.1m arose in the full year in Ceramics and profits on disposal of Â£1.9m arose in discontinued operations in the half and full year. 4 Rationalisation of operating activities The rationalisation of operating activities charge of Â£8.8m (2005: half year Â£7.7m; full year Â£18.5m) represents the cost of a number of initiatives throughout the Group aimed at reducing the Group's cost base and re-aligning its manufacturing capacity. Cash costs of Â£9.2m were incurred in the first half of 2006 (2005: half year Â£8.1m; full year Â£17.0m) in respect of the rationalisation and redundancy initiatives commenced both this period and in prior periods. 5 Profit relating to fixed assets The disposal of surplus Group properties and other fixed assets during the first six months of 2006 generated cash proceeds of Â£2.8m (2005: half year Â£5.7m; full year Â£10.3m) and resulted in a profit of Â£1.8m (2005: half year Â£1.6m; full year Â£nil). 6 Net finance costs Total net finance costs are analysed on the face of the condensed Group income statement between those relating to borrowing activities, those relating to the net finance cost associated with the Group's defined benefit pension and other post-retirement benefit plans and those relating to other activities. In 2005, costs relating to other activities comprised the write-off of Â£1.2m of unamortised fees associated with the Company's Â£148m committed syndicated bank facility, which was replaced by a new Â£200m facility in March of that year. 7 Income tax costs The total charge for income tax of Â£20.3m (2005: half year Â£13.8m; full year: Â£42.8m) comprises a tax charge on ongoing activities of Â£18.7m (2005: half year Â£11.9m; full year Â£28.4m), together with a Â£1.6m (2005: half year Â£1.9m; full year: Â£14.4m) charge from other activities. The effective tax rate for the period of 31.5% (2005: half year: 28.9%; full year: 30.3%) relates to continuing operations and is calculated by reference to the income tax cost on ongoing activities of Â£18.1m (2005: half year Â£11.3m; full year Â£28.4m) and headline profit before tax and excluding the Group's share of post-tax joint venture income of Â£57.4m (2005: half year Â£39.1m; full year Â£93.8m). The total charge from other activities includes a charge of Â£1.7m (2005: half year: Â£1.9m; full year: Â£3.5m) relating to deferred tax on goodwill, a credit of Â£0.4m (2005: half year: Â£nil; full year: Â£5.7m) in relation to rationalisation costs and a charge of Â£0.3m on profits on disposal of fixed assets (2005: half year: Â£nil; full year: Â£nil). Additionally in 2005, other activities included a charge of Â£16.6m for the write-down of deferred tax assets. 8 Net post-tax loss on disposal of operations The net post-tax loss of Â£8.1m (2005: half year Â£0.5m; full year Â£46.2m) on disposal of operations consists of a net post-tax loss before goodwill of Â£4.2m and a write-off of goodwill of Â£3.9m. Of the total net loss in the current period, Â£6.4m arose from discontinued operations which relates to the completion on 20 April 2006 of the disposal of the Group's Laminates business to Isola Group S.A.R.L. The loss on disposal after tax comprises adjustments to the estimated fair value less costs to sell at 31 December 2005, including movements in working capital. The assets and liabilities of the Laminates business, formerly part of the Electronics division, were classified as 'held for sale' in the Group balance sheet as at 31 December 2005, with the consequential recording of a loss at that date of Â£52.5m in the full year 2005 results. The final consideration for the Laminates disposal is subject to completion balance sheet adjustments in respect of working capital and capital expenditure, both of which are expected to be finalised in the second half of 2006, but which are not expected to result in further significant adjustments. In the Ceramics division, the disposal of the Ceramic Fibres business was completed in April and resulted in a profit of Â£4.7m, after a write-off of goodwill of Â£2.6m and a tax charge of Â£0.2m. In June the division's UK carbon blocks business was sold, resulting in a loss of Â£6.4m, after a write-off of goodwill of Â£1.3m. The net loss of Â£1.7m arising from these transactions is reported as part of the Group's continuing operations. The net post-tax loss on disposal of operations of Â£0.5m in the first half of 2005 related mainly to the disposal of the Group's Technical Ceramics business, formerly part of the Ceramics division. Of the net post-tax loss on disposal of operations of Â£46.2m in the full year 2005 results, Â£41.7m related to discontinued operations, comprising a loss of Â£52.5m related to the sale of the Group's Laminates businesses and a profit of Â£10.8m related to the sale of Specialty Coating Systems, Inc., both formerly part of the Electronics division. The Â£4.5m net loss from continuing operations, after a tax cost of Â£1.6m, included the disposal of the Group's Technical Ceramics business (McDanel), formerly part of the Ceramics division, plus a number of additional trailing costs related to previous years' disposals. In accordance with IFRS 5, the assets and liabilities of the Laminates business were disclosed in the Group balance sheet as at 31 December 2005 as held for sale and carried at fair value less costs to sell. Cash generated from the disposal of operations, after disposal costs and net of cash disposed of, amounted to Â£56.9m (2005: half year Â£2.4m; full year: Â£30.4m). 9 Earnings per share Earnings per share are calculated using a weighted average of 190.8m ordinary shares in issue during the period (2005: half year 188.5m; full year 188.5m). The ordinary shares held by the Group's Employee Share Ownership Plan ('ESOP') are excluded from the weighted average number of shares as they are held within retained earnings. As at 30 June 2006 the ESOP held 0.8m ordinary shares (2005: half year 1.2m; full year 1.2m). Diluted earnings per share are calculated assuming conversion of all outstanding dilutive share options. Outstanding share options are treated as dilutive when their conversion to ordinary shares would decrease earnings per share or increase loss per share. The fully diluted weighted average number of ordinary shares in issue during the period was 192.1m (2005: half year 189.8m; full year 189.6m). 10 Dividends On 12 June 2006, a final dividend of 5.0p per ordinary share (2005: half year nil; full year nil) was paid in respect of the year ended 31 December 2005. The total cost of the dividend was Â£9.6m (2005: half year nil; full year nil). The Directors have declared an interim dividend of 3.0p per ordinary share (2005: nil) in respect of the year ending 31 December 2006. The dividend will be paid on 16 October 2006 to ordinary shareholders on the register at 29 September 2006. Based upon the number of ordinary shares in issue at 30 June 2006, the total cost of the dividend would be Â£5.8m. 11 Borrowings Balance at Foreign Refinancing Balance 1 January exchange Non-cash and issue 30 June 2006 adjustment Disposals movements costs Cash flow 2006 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Cash at bank and in hand 65.9 (3.3) - - - (2.0) 60.6 Bank overdrafts (2.4) - - - - (2.8) (5.2) Cash and cash equivalents 63.5 (3.3) - - - (4.8) 55.4 Other loans and finance leases: - Current (13.9) 0.1 1.9 (27.0) - 3.2 (35.7) - Non-current (341.9) 21.5 - 27.0 (0.2) 25.2 (268.4) Other loans and finance leases (355.8) 21.6 1.9 - (0.2) 28.4 (304.1) Net debt (292.3) 18.3 1.9 - (0.2) 23.6 (248.7) 12 Employee benefits The balance of Â£188.8m in respect of 'Employee benefits' as at 30 June 2006 results from an interim actuarial valuation of the Group's defined benefit pension and other post-retirement obligations as at that date (31 December 2005: Â£224.8m; 30 June 2005: Â£213.6m). Of the total balance, Â£144.9m relates to the combined deficits of the Group's principal defined benefit pension schemes in the UK and the US (31 December 2005: Â£178.5m; 30 June 2005: Â£166.8m). Of the remainder of the total, Â£15.0m (31 December 2005: Â£14.3m; 30 June 2005: Â£12.7m) relates to defined benefit pension arrangements in the rest of the world and Â£28.9m (31 December 2005: Â£32.0m; 30 June 2005: Â£34.1m) relates to unfunded post-retirement benefit arrangements, being mainly healthcare benefit arrangements in the US. The valuation of the Group's pension arrangements at 30 June 2006 represents a ' roll-forward' from the date of the last full individual scheme valuations, which was 31 December 2003 in the case of the UK pension scheme and 31 December 2005 for the US pension schemes. For the UK and US pension schemes, changes in actuarial assumptions, mainly an increase in discount rates, resulted in a Â£17.8m reduction in the combined scheme liabilities, which is reflected in the Â£19.1m actuarial gain in the condensed Group statement of recognised income and expense. Together with additional cash funding into the UK plan of Â£12.8m, these movements represent the main components of the Â£36.0m decrease in the combined valuation deficit from 31 December 2005. For valuation purposes, the discount rates used were 5.22% for the UK (31 December 2005: 4.75%; 30 June 2005: 5.00%) and 6.32% for the USA (31 December 2005: 5.50%; 30 June 2005: 5.25%). The mortality assumptions used in the Group's actuarial valuations at 30 June 2006 were consistent with those used as at 31 December 2005 as detailed in the Group's 2005 Annual Report. The total charge against trading profit in the income statement for the six months to 30 June 2006 in respect of the Group's defined benefit pension and other post-retirement obligations was Â£5.1m (2005: Â£6.0m). Note 2 provides information on the change in reporting treatment within the income statement for the interest element of the pension charge. In addition to the regular funding contributions into the Group's UK defined benefit pension plan, in agreement with the plan Trustee, the Company has made additional funding contributions aimed at accelerating the reduction in the plan deficit. Additional contributions of Â£12.8m were made in the six months to 30 June 2006 (2005: half year Â£5.0m; full year Â£10.0m). 13 Issued capital At an Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved special resolutions to reduce the issued share capital of the Company by cancelling and extinguishing the Company's deferred shares of 49p each. On 15 February 2006, the High Court of Justice confirmed the reduction of capital of the Company from Â£550.0m (divided into 1,934,963,124 ordinary shares of 10 pence each and 727,558,546 deferred shares of 49 pence each) to Â£193.5m (divided into 1,934,963,124 ordinary shares of 10 pence each). The Order of the Court was registered on 15 February 2006 and the reduction of capital, including the cancellation of the deferred shares, was effective on that date. Upon their cancellation, the balance of Â£356.5m in respect of the deferred shares became a non-distributable reserve of the Company. This reserve becomes distributable only at such time when all external creditors of the Company as at 15 February 2006 have either been fully settled, or have agreed that this reserve may be deemed distributable. Also at the Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved a special resolution to amend the Company's Articles of Association to facilitate termination of the Company's registration with the Securities Exchange Commission ('SEC') of the US. The amendment included a provision conferring upon the Board the power to require ordinary shares which are held directly or indirectly by US resident shareholders to be sold in order to reduce the number of such shareholders below 300, as presently required by the SEC for termination of registration. In order to avoid the costs of complying with SEC registration requirements in respect of the financial year ended 31 December 2005, the Board commenced exercising these compulsory transfer provisions soon after the amendment was approved by shareholders and, having reduced the number of US resident shareholders below 300, the Company announced on 21 February 2006 that it had filed a Form 15 with the SEC to terminate the SEC registration of its ordinary shares. SEC de-registration duly occurred on 22 May 2006. On filing of the form, the Company's obligations to file certain forms and reports with the SEC, including Forms 20-F and 6-K, were suspended. Under currently applicable SEC regulations, the number of the Company's US resident shareholders must remain below 300 at each financial year-end to avoid re-commencement of SEC reporting and other applicable US obligations. The Company's Articles of Association give the Company's Directors the ability to limit the number of the Company's US resident shareholders for this purpose. 14 Share premium account At an Extraordinary General Meeting of the Company held on 12 January 2006, shareholders approved a special resolution to cancel the share premium account of the Company. The cancellation became effective on 15 February 2006 upon registration of the order of the High Court of Justice with the Registrar of Companies, at which date the balance of Â£646.9m on the account became a non-distributable reserve of the Company. This reserve becomes distributable only at such time when all external creditors of the Company as at 15 February 2006 have either been fully settled, or have agreed that this reserve may be deemed distributable. 15 Exchange rates The Group reports its results in pounds sterling. A substantial portion of the Group's revenue and profits are denominated in US dollars and in currencies other than pounds sterling. It is the Group's policy to translate the income statements and cash flow statements of its overseas operations into pounds sterling using average exchange rates for the period reported (except when the use of average rates does not approximate the exchange rate at the date of the transaction, in which case the transaction rate is used) and to translate balance sheets using period end rates. The principal exchange rates used were as follows: Period end rates of exchange Average rates of exchange for the period Half year Half year Full year Half year Half year Full year 2006 2005 2005 2006 2005 2005 US dollar ($ per Â£) 1.85 1.83 1.72 1.79 1.87 1.82 Euro (â‚¬ per Â£) 1.45 1.50 1.46 1.46 1.46 1.46 Singapore dollar (S$ per Â£) 2.92 3.06 2.85 2.88 3.09 3.03 Chinese Renminbi (RMB per Â£) 14.8 15.1 13.9 14.4 15.5 14.8 South African rand (ZAR per Â£) 13.2 12.1 10.9 11.3 11.6 11.6 Japanese yen (Y per Â£) 211 200 203 207 199 200 This information is provided by RNS The company news service from the London Stock Exchange

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