17th May 2005 07:02
Bunzl PLC17 May 2005 PART III OF III The following is a more detailed description of the Filtrona business: INFORMATION ON FILTRONA 1. Overview Filtrona is a business area of Bunzl plc, a UK listed, FTSE 100 Support Servicescompany with a market capitalisation of approximately £2.3 billion. It is aninternational, market leading speciality plastic and fibre products supplierwhich is segmented into Plastic Technologies and Fibre Technologies, eachcontributing similar levels of profits to Bunzl. Plastic Technologies produces,sources and distributes protection and finishing products, self-adhesive teartape and certain security products as well as proprietary and customised plasticextrusions and packaging items for consumer products. Fibre Technologies focuseson the production and supply of special filters for cigarettes and bonded fibreproducts such as reservoirs and wicks for writing instruments and printers,household products and medical diagnostic devices. Filtrona believes that manyof the markets and segments within which it operates have the desirablecombination of good growth potential and robust defensive qualities. Across these niche international markets, Filtrona has a number of marketleading blue chip customers including Altria (Philip Morris), Boeing, BritishAmerican Tobacco, Carlsberg, General Electric, General Motors, Hewlett Packard,Nestle, Newell Rubbermaid, Reckitt Benckiser and Unilever. Filtrona's emphasison value addition through innovation, quality and service underpins these longstanding customer relationships. Filtrona is a well invested global business, headquartered in the UK, with 40manufacturing facilities, 32 distribution outlets and sales offices and threeresearch facilities, spread across 22 countries in the Americas, Europe andAsia. Filtrona employs some 5,200 people and its international senior managementteam comprises nine individuals who have an average experience in the businessof nearly 10 years. In 2004 under UK GAAP, Filtrona generated annual sales of £477.5 million (2003:£452.6 million), EBITDA of £74.3 million (2003: £71.3 million) and operatingprofit before goodwill amortisation of £54.2 million (after allocation of Bunzlcorporate costs) (2003: £51.1 million). Plastic Technologies generated sales of£241.5 million (2003: £224.1 million) and operating profit before goodwillamortisation of £33.8 million (2003: £28.6 million) with an EBITA margin of 14%.Fibre Technologies generated sales of £236.0 million (2003: £228.5 million) andoperating profit before goodwill amortisation of £27.8 million (2003: £31.1million) with an EBITA margin of 12%. Of the total sales in 2004, approximately43% originated from Europe, 39% from North America and 18% from the rest of theworld. As at 31 December 2004, Filtrona had net operating assets of £261.2million and net debt of £120.0 million. 2. History Filtrona's strong competitive position has been developed over the last 10 yearsthrough significant investment in new global production and servicecapabilities. Significant new facilities have been established in China (Plasticand Fibre Technologies), India (Plastic Technologies), Mexico (Plastic and FibreTechnologies), the US (Plastic and Fibre Technologies) and Venezuela (FibreTechnologies) ensuring that Filtrona is better able to supply its multi-nationalcustomers and target growth from developing economies. Joint ventures have alsoprovided the filters business with access to the growing markets of the MiddleEast and central Asia and, more recently, joint ventures have been establishedin Plastic Technologies relating to the supply of roll-on deodorant balls inBrazil and patented track and trace technology in coated and security products.A number of complementary niche businesses have also been acquired enhancingFiltrona's product offering and geographical reach, including: (i) the entry in 1996 into the self-adhesive tear tape market through the acquisition of Payne for debt free consideration of £43.2 million; (ii) the addition of significant extra filter and bonded fibre technology and capacity in the US by the acquisition of American Filtrona Corporation in 1997 for £83.1 million (net of cash). This acquisition also added a significant extrusion business in the US to Filtrona's existing Plastic Technologies business and united the Filtrona brand name, which had not previously been available for use by Bunzl in the US; (iii) the acquisition in 1998 of Enitor, a leading Dutch extruder with annual sales prior to acquisition of €16 million; (iv) the purchase in 2000 of Davidson Plastics, a profile extrusion operation located in the US which had annual sales prior to acquisition of US$22 million, and Pexco, a specialist medical tubing extruder, which had annual sales prior to acquisition of US$7 million; (v) the acquisition in 2003 of Baumgartner Fibertec, a Swiss based business engaged in the development, manufacture and supply of cigarette filters and capillary reservoirs which, prior to acquisition, had annual sales of CHF40 million; and (vi) the purchase in 2004 for £19.2 million (debt free) of the Skiffy Group, based in the Netherlands, which provided expertise in the manufacture and supply of small nylon parts for protection and finishing applications and a significant additional number of potential new customers for the existing Plastic Technologies product range. 3. Products and end markets 3.1 Protection and finishing (a) Products Filtrona's protection and finishing products business is an internationalsourcing and supply group, sourcing a wide range of products and tooling,particularly from Asia, to supplement its own production of injection mouldedand dip moulded vinyl products for general protection, electrical, fastening andfinishing applications. It operates in Europe through its Moss Plastic Parts andSkiffy brand names, and in the US through Alliance Plastics and MouldingSpecialists. These predominantly plastic components are low value but are critical tocustomers delivering their final product. Filtrona's position as a leadingsupplier in this fragmented substantial market is based on excellent service anda broad product offering. Production facilities are located in the UK, the Netherlands, Mexico, the US andBrazil, with some 300 injection moulding machines. Filtrona has a broadindustrial customer base, with over 59,000 customers in Europe and the Americas,including a large number of blue chip customers such as Carlsberg, GeneralMotors and Parker Hannifin. No one customer represents more than 3% of turnover. (b) Markets Protection and finishing products include plugs and caps for holes, threads,corners, pipes and flanges which are used to protect customers' products duringtransit, processing and finishing. The market for such products is fragmented,with end users including the automotive, general engineering, white goods,pneumatics, hydraulics and oil and gas industries. The products within the electrical range protect, space, restrain, insulate andposition wires for a number of end markets, including capital goods, automotive,white goods and lighting. Fasteners include nylon rivets, latches, clips,washers, spacers and bushes and are also used in similar end markets. Finishing components are used for adding functionality and completing tubularand extruded products. Typical applications include office or school furniture,hospital equipment, commercial catering equipment, machinery and cabinets. The market for protection and finishing products is highly fragmented with manysmaller competitors based in North America and Europe. Filtrona believes thatnone of these competitors can offer either the range or international supplycapability of Filtrona. (c) Sources of differentiation The breadth of the customer base is a key strength of the business. Filtronabelieves few competitors have the scale and supply chain competence to serviceeconomically so many customers with such an extensive range and that itsdistribution network, advanced IT systems and logistics capability provide realdifferentiation in the protection and finishing market. Filtrona believes that, given the critical nature of these low cost components,the breadth of product offering and quality of service are also keydifferentiators. Filtrona's wide product range and quality of service aresupported by an extensive library of approximately 20,000 moulds, catalogues innine languages, 35,000 SKUs and a global logistics and manufacturing capability.Filtrona also uses sophisticated business to business marketing techniques todrive high rates of new customer acquisition. (d) Growth drivers Management is pursuing growth through continued investment in supply chainlogistics and IT, as well as extending geographic coverage and the range ofproducts offered. Filtrona's sourcing capability is growing rapidly for bothfinished products and tooling and a new representative office has just beenestablished in China, located at the Filtrona Fibertec Ningbo facility. Furthermore, given the fragmentation of the market, Filtrona believes there isample scope for further selective value enhancing acquisitions. 3.2 Coated and security (a) Products Filtrona, under the brands Payne, Morane and Laminex, provides self-adhesivetear tape, coated film products and identity systems, cards and accessories. Ithas locations in the UK, US, Brazil, Germany, France, Spain, India, Indonesiaand Singapore. Filtrona is in the process of consolidating the brands under thename of Payne. Filtrona also has a joint venture which owns patented technologyfor individual item level track and trace, otherwise known as ''pack DNA''. Filtrona has pioneered the tear tape industry move away from wax tear tape toself-adhesive tape, which offers more efficient processing to its customers.Filtrona is now the global market leader in self-adhesive tear tape for easyopening, brand communication and security applications. Filtrona supplied over29 million kilometres of tear tape in 2004 and has strong relationships withblue chip customers including Altria (Philip Morris), British American Tobacco,Kraft, Nestle and United Biscuits. Through its brand Morane (to be rebranded as Payne Coated Film Products),Filtrona supplies coated film products for encapsulation, lamination, industrialand document security applications. Over the last 30 years, Filtrona has beensupplying the film to create unique national identity cards, national votingcards and printed security passports for governments and agencies worldwide. Under the Laminex brand (to be rebranded Payne Security), Filtrona suppliesidentity systems, cards and accessories for security, health and safety andpromotional use. Filtrona believes that FractureCode (its joint venture based in Denmark), whichis currently undergoing a major trial with a leading blue chip consumer productscompany, is expected to become a high growth business. FractureCode has thepotential to add value where customers require identification of items to anindividual item level for track and trace and security applications. (b) Markets Tear tape is a product which allows consumers to open product packaging easily.It also provides a promotional medium for marketing to consumers and can carryvarious anti-counterfeit features. The tear tape market is split between wax tear tape and self-adhesive tear tape.Wax tear tape requires the tape to be passed through a molten wax bath beforebeing applied to the packaging medium. Self-adhesive tear tape requires no waxto adhere to the packaging, is faster to apply and results in lower machinedowntime compared with the wax alternative. The higher volume tear tape customers are to be found in the tobacco industry,which has recognised the easy opening ability of tear tape. Certain customershave taken advantage of the use of tear tape as a brand promotion tool and as amedium to carry anti-counterfeit security measures effectively. Further market growth is dependent upon Filtrona persuading fast moving consumergoods customers (who specify the type of packaging for their product) of thebenefits that tear tape can bring to their products. A variety of other products form the balance of the coated and security productportfolio. Items range from plastic sheet for laminating documents and simplePVC cards to higher value-added security documents and card identificationsystems. Filtrona expects the market for individual item identification to grow rapidly,as is evidenced by the growth in RFID (radio frequency identification) chipapplications. FractureCode is an individual item system which does not involvethe high cost of an electronic chip and can be printed onto standard productpackaging, including tear tape, labels and cartons. In the tear tape market Filtrona's competitors are principally suppliers to thetobacco industry. Competition in coated film products comes from a variety of European and USbased manufacturers, with low priced competition from Korea and China. (c) Sources of differentiation Within the tear tape market, Filtrona seeks to differentiate itself from thecompetition through technology, innovation and its global supply infrastructure.Since pioneering self-adhesive tear tape, Filtrona has sought to maintain itstechnological advantage over the competition, both in terms of materials andprocesses. Recent innovations include the development of printing technologythat significantly improves brand security and customer communication. Filtronabelieves that the FractureCode track and trace technology is unique and can alsobe integrated into tear tape and other packaging media to provide further addedvalue to customers. Filtrona's global infrastructure provides a low cost, flexible source of supplyas well as penetration into higher growth emerging markets. As a leading UK supplier of coated films for document encapsulation, the Moranebusiness is highly regarded for its high quality, comprehensive range andexcellent service level. Laminex is well regarded for its robust software andits highly efficient identity card bureau service. (d) Growth drivers Filtrona expects the self-adhesive tear tape market to grow over the next fewyears, driven by enhanced usage for easy opening in consumer goods applicationsoutside the tobacco industry, particularly in the US, and for enhanced brandprotection and security within the tobacco industry. Filtrona is well positionedto benefit from this trend, not only as the market leader with an internationalpresence, but also through its combination of proprietary materials and printingtechnology. Developments in digital print technology will also open upopportunities for the printing of unique sequential numbers or codes onto teartape which can be used for consumer promotions. The increasing focus on document security (e.g. drivers' licences, visas andpassports) will enable the coated film products business to continue to developvalue-added applications and Filtrona expects the identity card market tocontinue its growth path. Filtrona believes that FractureCode is a new product and that the market haspotential for strong growth. 3.3 Plastic profile and sheet (a) Products Filtrona is a leading supplier in the US and the Netherlands of extrudedthermoplastic profiles, sheet and speciality tubes in its chosen productcategories. The products are proprietary and custom made to exacting customerstandards and are used for a wide range of applications such as lighting,fencing, transportation, point of sale displays, refrigeration, medicalsupplies, aerospace, and traffic control. (b) Markets Lighting products include thermoplastic lens wraps and sheet for fluorescenttube lighting for commercial, industrial and public sector applications.Filtrona is a leading supplier of these items in the US and Mexico. Transportation products are made for aerospace and automotive customers. Forexample Filtrona's extruded profiles can be found inside the passenger cabins onmany of Boeing's commercial aeroplanes. Filtrona also supplies extrusions whichhelp in the positioning of passenger safety restraint systems. This market isgrowing as car manufacturers are increasingly offering multiple airbags asstandard on their vehicles. Filtrona is the leading US supplier of inserts for chain link fencing. Thismarket has displayed growth assisted by the added emphasis on securing premisesunder the homeland security programme. Filtrona's national supply capability iscritical to success in this market. In the medical sector, Filtrona is an extruder of high quality medical tubesused in surgical procedures. Filtrona's customers are increasingly requiringextra value-added features to be supplied along with the standard extrudedmedical tubing. This includes secondary coiling, banding, solvent bonding andpackaging, which Filtrona is well placed to supply, both technically andgeographically. Filtrona supplies the point of sale products that are used in store to hold thepricing information in place on the shelf and also delivers the high responselevels expected by retailers to support their promotional campaigns. In thepoint of sale sector, major retailers are re-branding and updating their imagesand stores with the trend moving towards the opening of more ''super-centre''type locations. Filtrona conducted a survey in September 2003 which estimatedthe size of this market for all plastic purchases at US$5.0 billion in the US.In both the US and the Netherlands, Filtrona has a particularly strong positionin the scanning profile market where the expertise in multiple polymer extrusionis critical to success. Filtrona's chosen markets are fragmented. The profile market, which representsover 90% of sales, is highly fragmented and is made up of much smaller localsuppliers. (c) Sources of differentiation Filtrona benefits from economies of scale compared with its smaller, more localcompetitors, both in terms of its cost base and in terms of service, exemplifiedby its multi-point supply. In addition, investment in sophisticated IT systemsenables it to manage its business and its customer relationships efficiently. Filtrona has built up relationships with key blue chip customers in this market,including Boeing, General Electric, Hussman and Wal-Mart. (d) Growth drivers Management are driving growth through focusing on development of proprietaryniche products and technologies in growing segments such as transportation,medical supplies and point of sale displays. 3.4 Consumer packaging (a) Products In its consumer packaging business, Globalpack, Filtrona has a market leadingposition in the Brazilian market as a producer of packaging for toiletries andcosmetic items. Based in Sao Paulo, Globalpack supplies containers, tubes,closures and, through its joint venture Euro-Matic Filtrona, roll-on balls tothe market leading producers of deodorant and cosmetic products. (b) Markets Globalpack serves blue chip customers such as Avon, Johnson & Johnson, Naturaand Unilever and has a unique position derived from the high level of innovativesolutions provided to its customers. Globalpack supplies packaging using a rangeof processes including injection moulding, blow moulding, extrusion and printingand, as such, offers a full service range to its principal customers. Globalpack, through Euro-Matic Filtrona, is the market leading supplier ofroll-on deodorant balls in Brazil. This joint venture, combined withGlobalpack's capability in producing bottles, housings and caps, has positionedit as the leading supplier of roll-on deodorant packaging in the Brazilianmarket. The principal competitors to Globalpack are privately owned Brazilian companiesand divisions of larger packaging groups. (c) Sources of differentiation Globalpack is the only Brazilian supplier with the capability to produce a fullroll-on deodorant packaging set (i.e. container, ball, housing and cap). It hasa full print capability for the decoration of tubes and containers and is knownfor innovation and quality. (d) Growth drivers The Brazilian cosmetics and toiletries market continues to expand withconsumers' disposable incomes. Globalpack will continue to drive growth throughthe innovative new packaging formats it is able to offer the blue chip cosmeticsand toiletries suppliers, both in Brazil and in the surrounding region. 3.5 Cigarette filters (a) Products Filtrona produces a wide range of filters from monoacetate to multi-segmentspecial filters with novel mouthpieces and sophisticated adsorbent materials.Filtrona's special filters provide its customers with an opportunity todifferentiate their products in the market relative to its competitors. Fibre Technologies, with over 50 years of experience in the industry, is thelargest independent producer of special filters for the cigarette market. Itsupplies cigarette filters to, among others, the top four global cigarettemanufacturers, Altria (Philip Morris), British American Tobacco, ImperialTobacco and Japan Tobacco International, which together represent some 44% ofthe cigarette market. Filtrona has a relatively low share of the monoacetate market, as the largertobacco companies tend to self-manufacture. Filtrona supplies cigarette filtersinto this market where multi-national customers require additional capacity orflexible production runs and to smaller independent cigarette manufacturers whodo not wish to add complexity to their business. However, Filtrona believes thekey area of differential advantage in its business is the supply of specialfilters. Cigarette filter specifications are individual to brands, blends andmanufacturers and are created to fulfil identified market niches. Filtrona'sstrategically positioned, well invested manufacturing facilities in 14 locationsaround the world ensure that filters are delivered in a timely and costeffective way to fulfil customer needs. (b) Markets The market for cigarette filters includes monoacetate filters and specialfilters. Monoacetate filters are manufactured from paper wrapped cellulose acetate tow.Cellulose acetate tow is a white, virtually tasteless filling material which isbonded with a plasticiser. In special filters, additives like carbon or menthol are combined with amonoacetate filter to change the taste of the cigarette smoke and theperformance of the filters. Multiple filter sections can be combined together,with additives, to form a multi-segment filter, or the monoacetate filter canitself be modified to alter performance of the filter. Filtrona estimates that standard monoacetate filters account for approximately88% of the cigarette filters market, with special filters accounting for theremaining 12%. The special filters share has grown from 11.7% of filteredcigarettes in 2003 to 12.2% in 2004. The principal competition for Filtrona is from cigarette companies choosing tomanufacture their filters in-house. Filtrona believes that its expertise,technology, innovation, low cost production footprint and high quality customerservice offers an advantage over self-manufacture of special filters and thishas been recognised by the major tobacco manufacturers who source from it. Whileoccasionally some volume is taken back in-house by its customers, historicallyFiltrona has been able to offset these movements through new outsourced businessfrom within its current customer base. (c) Sources of differentiation A global footprint is an important source of differentiation within the specialfilters market. Filtrona has operations in 14 locations spread across the world,with two in the US, one in Mexico, three in South America, four in Europe andfour in the Middle East and Asia. This provides a low cost, flexible source ofsupply as well as important penetration into the higher growth emerging markets. Technology, innovation and manufacturing flexibility are also importantdifferentiators in the cigarette filters market. Filtrona's commitment toresearch and innovation is underlined by the operation of the Technology Centrein the UK. The Technology Centre was designed to bring together laboratoryservices, product development, materials testing and process engineering in onefacility. Together these disciplines help Filtrona to research and source thebest available materials and develop filter production techniques for use in itsplants throughout the world. (d) Growth drivers Filtrona's multi-national tobacco customers require Filtrona to supply specialfilters to support their brands in their chosen end use markets, butparticularly in Russia, Japan, South Korea and Venezuela, where special filtershave either a leading or rapidly growing market share. Filtrona provides aflexible service that can support the strong growth profile that a successfulbrand requires. Filtrona customers also recognise the expertise that Filtrona has in the supplyof special filters and are increasingly looking to outsource production inreturn for a simplification of their business and a reduction in their totalcosts. Cigarettes with multi-segment filters are expected to account for a growingshare of the future cigarette market. Filtrona is ideally placed to offer suchfilters to its global customer base and Filtrona believes that this represents asignificant future opportunity. 3.6 Bonded fibres (a) Products Filtrona, under the Fibertec brand, supplies bonded fibre structures for use asfunctional components in consumer and industrial products including those shownin the table below. The facilities for the bonded fibre products are located inRichmond, Virginia (US), Reinbek (Germany) and Ningbo (China), although themarkets for these products are global. Filtrona believes that it is the market leader in its primary market of bondedfibre ink reservoirs for high quality roller ball and fine liner pens, markersand highlighters. From this base Filtrona has expanded into wicking, filtrationand absorptive components for medical devices, absorptive media and ink transferwicks for inkjet printers, ink cartridges and other imprinting machines. It isalso growing strongly in household product applications for bonded fibres, suchas air fresheners and insect repellents. The table below shows some of the applications for Filtrona's core competence ofcapillary transfer science, as well as the key products for which Filtronasupplies components. Product categories Applications Writing instruments Roller ball pens Fine liner pens Markers Highlighters Printing systems Ink transfer wicks for inkjet printers Cartridges for inkjet printers Other imprinting machines Medical devices Diagnostics - detection of disease and conditions Life Sciences - bench top research in DNA/RNA Biotechnology - downstream processing Medical - directly treating or managing conditions Household products Air fresheners (bathroom, aromatherapy, cars) Insecticide/repellent dispensing (electrically heated) (b) Technology Capillary transfer science is the basis for many of the performance features andproduct functions of Filtrona's bonded fibre products. Capillary action is themeans by which fluid moves through porous channels within a medium due tosurface tension. Knowledge of the properties of the relevant fluid as well as the media substrateenables Filtrona to model capillary behaviour and to design bespoke transfersystems for a wide array of applications. Filtrona has invested heavily in process equipment to lower the unit cost ofproduction and is planning to relocate some of this equipment to China toexploit the regional market. Bonded fibre products are highly adaptable to meet fluid transfer and storagerequirements. Selection of a given fibre composition and structure can be madeto optimise function and fit. Bonded fibre products can provide one way or two way fluid transfer. A reservoirfor printer cartridges, for example, must be able to be quickly filled, safelycontain ink without leakage and release on demand over the product life cycle. Bonded fibre products may also serve as wicks, transferring fluids from onesubstrate to another using capillary action. (c) Markets In Western Europe and North America, the market for ink reservoirs is relativelymature. However in the new developing economies in Asia and the Far East, inkreservoirs represent a growth market in which Filtrona has a strong position. Filtrona's assessment of the competition in the medical and household productsmarkets is that it stems from alternative solutions rather than alternativefibre component suppliers. (d) Sources of differentiation Filtrona believes that long term investment in capillary fibre research hasyielded industry leading technology and Filtrona is recognised as a leadinginnovator in the continuous bonding of fibres. Since its foundation in 1954, thebusiness has patented more than 60 products in the US alone. This emphasis onfocused innovation is a key differentiator in this market. Filtrona has a trulyinternational supply position with customers on every continent supplied fromFiltrona Fibertec's existing European and US facilities and its new Chineseoperation. Filtrona believes that no other competitor can match FiltronaFibertec's global reach and service level. (e) Growth drivers Growth is driven both through a combination of product innovation and expandingthe use of existing technologies to provide new applications such as wicks andreservoirs for in vitro medical devices where Filtrona is now a leadingprovider. The new product development pipeline contains a number of significantproducts and applications in ink reservoirs, medical diagnostics, medicinedispensing and diesel filtration. The new Filtrona Fibertec facility in Ningbo, China offers a dual benefit ofbeing a low cost source of production as well as providing access to a growinglocal market. 4. Joint ventures 4.1 Plastic Technologies In 2000 Globalpack, Filtrona's consumer packaging business in Brazil,established a joint venture with Euro-Matic, a leading internationalmanufacturer of plastic balls for a variety of applications, in order tomanufacture and supply roll-on deodorant balls. Combined with Globalpack'sability to produce bottles, housings and caps, Euro-Matic Filtrona has helpedposition Globalpack as the leading supplier of roll-on deodorant packaging inthe Brazilian market. In 2002 Filtrona established a Danish based joint venture, FractureCodeCorporation with ITO Technologies, in order to develop a new technology inconjunction with Filtrona's existing self-adhesive tear tape business Payne.FractureCode is a patented process which can apply a unique identifying mark totear tape or other packaging media with a randomly printed code, which enablescustomers to mark their products individually in such a way that they can betracked throughout the distribution chain. It can also be used as a brandauthentication device as it is very difficult to replicate. Initial trials ofFractureCode, which has not yet been used in commercial production, have beenencouraging. 4.2 Fibre Technologies Most of Filtrona's cigarette filters businesses are wholly-owned. However thefilter businesses in Thailand, India and Jordan are operated through jointventure companies Filthai Company Limited, ITC Filtrona Limited and FiltronaJordan respectively. Based in Bangkok, Filthai was established in the 1970s andmanufactures and supplies monoacetate and special filters principally to theThai market. ITC Filtrona was formed in 1993 in Bangalore to supply monoacetatefilters to the local Indian market. Filtrona Jordan was set up in 1995 and isbased near Amman, from where it manufactures and supplies monoacetate filtersfor both the local domestic market and exports. Together these companiesaccounted for less than 10% of Filtrona's total cigarette filter sales in 2004. 5. Summary financial information 5.1 Trading information The table below summarises the trading record of Filtrona for the three yearsended 31 December 2004. Year ended 31 December ---------------------------------------------------- IFRS UK GAAP UK GAAP UK GAAP 2004 2004 2003 2002 -------- -------- -------- -------- £m £m £m £mBy business segmentSales: Plastic Technologies 241.5 241.5 224.1 224.1 Fibre Technologies 236.0 236.0 228.5 218.3 -------- -------- -------- --------Total 477.5 477.5 452.6 442.4 ======== ======== ======== ======== Operating profit * Plastic Technologies 33.2 33.8 28.6 28.2 Fibre Technologies 23.9 27.8 31.1 29.2 Corporate activities (7.5) (7.4) (8.6) (9.4) -------- -------- -------- --------Total 49.6 54.2 51.1 48.0 ======== ======== ======== ======== By geographical origin**Sales: Europe 203.2 183.7 171.0 North America 187.8 193.2 202.1 Rest of the world 86.5 75.7 69.3 -------- -------- --------Total 477.5 452.6 442.4 ======== ======== ======== Operating profit * Europe 23.2 21.8 20.8 North America 22.6 24.3 24.4 Rest of the world 15.8 13.6 12.2 Corporate activities (7.4) (8.6) (9.4) -------- -------- --------Total 54.2 51.1 48.0 ======== ======== ======== * Before goodwill/intangible amortisation** Disclosure not required under IAS 14 5.2 Profit and loss - by business segment (a) Plastic Technologies Plastic Technologies sales were flat in 2003 compared with 2002 and grew by 7.8%in 2004 (at constant exchange rates, 4.3% and 14.7% respectively). 2004benefited from nine months of the Skiffy acquisition. The organic sales growthin 2004 at constant exchange rates was 11.3%. On a UK GAAP constant exchange rates basis, operating profit before goodwillamortisation increased by 6.3% in 2003 and increased by 25.7% in 2004. Theacquisition of the Skiffy business was projected at the time of acquisition tocontribute £l.8 million in 2004. Filtrona's post-acquisition focus has improvedSkiffy's profit to £2.3 million in 2004. Organic operating profit beforegoodwill growth at constant exchange rates for Plastics Technologies on a UKGAAP basis was 19.0% in 2004. The return on sales improved as a result of theincreased focus on current and new proprietary product ranges within PlasticTechnologies. (b) Fibre Technologies Fibre Technologies sales grew by 4.7% in 2003 and 3.3% in 2004 (at constantexchange rates, 6.9% and 9.7% respectively). 2004 benefited from the full yeareffect of the Baumgartner Fibertec acquisition which contributed sales of £15.7million in 2004, compared with £3.3 million for the three months in 2003.Excluding the impact of acquisitions, organic sales growth at constant exchangerates was 5.2% in 2003 and 4.0% in 2004. On a UK GAAP constant exchange rates basis operating profit before goodwillamortisation increased by 9.0% in 2003 and fell by 4.1% in 2004. The 2004reduction in operating profit was due to price positioning both in advance ofvolume growth and lower cost manufacture as well as the Baumgartner Fibertecbusiness, which was loss making on purchase but achieved breakeven in 2004. 5.3 Profit and loss - by geographical origin Both Plastic Technologies and Fibre Technologies operate throughout the world.Sales to the rest of the world segment (i.e. excluding Europe and NorthAmerica), which include many of the lower cost manufacturing regions, have grownas a proportion of the whole from 15.7% in 2002 to 18.1% in 2004. 5.4 Corporate activities Corporate activities include the Filtrona business area central costs and aproportion of Bunzl's central costs allocated on a basis reflecting theproportion of those resources consumed by Filtrona. Filtrona believes that thelevel of central costs in 2004 is representative of the resources required torun an independent public company. 5.5 Cash flow and return on capital Year ended 31 Decmeber ---------------------------------------------------- IFRS UK GAAP UK GAAP UK GAAP 2004 2004 2003 2002 -------- -------- -------- ------- £m £m £m £mOperating profit (Note 1) 49.6 54.2 51.1 48.0Trading cash flow (Note 2) 30.7 30.7 44.4 36.4Cash conversion rate 62% 57% 87% 76%Capital employed 209.4 209.4 193.6 197.0Return on capital employed 23.7% 25.9% 26.4% 24.4% Notes1 Operating profit is stated before charging interest, taxation and goodwill/intangible amortisation.2 Trading cash flow is net cash inflow from operating activities less net cash outflow for capital expenditure. 5.6 Cash flow Under UK GAAP the cash conversion rate averaged 73% over the last three years.In 2004 net capital expenditure increased by £9.1 million to be £13.3 million inexcess of depreciation to invest in new facilities in Mexico and China tosupport the exploitation of new business opportunities. Working capitalincreased by £9.4 million in 2004 to support business growth and serviceenhancements through local stock availability of existing and new products. 5.7 Return on capital Inventory has increased throughout the period to support business growth andservice enhancements through local stock availability of existing and newproducts. Debtors' average payment days increased from 47 to 49 days reflectinglonger supply chains and growth in export markets with longer payment terms.Return on capital employed moved forward in 2002 and 2003 before dippingslightly in 2004. This was due to price positioning in Fibre Technologies inadvance of both volume growth and lower cost manufacture, as well as the impactof the Baumgartner Fibertec acquisition, although partially offset by strongproprietary product growth in Plastic Technologies. 6. Strategy and execution 6.1 Overview Filtrona's strategy is to continue to grow profitably through investingorganically and by acquisition in selected niche international markets withinPlastic Technologies and Fibre Technologies. Within each business segment it iscontinually seeking to enhance its competitive position through productinnovation, strengthen its sourcing and distribution capability, expand andadapt its global footprint to enhance its supply chain and reduce cost andinvest in IT, people and production capability to deliver superior customerservice and value. 6.2 Enhance competitive position through innovation Filtrona believes that its robust competitive positions will be enhanced throughthe continued development of its product offering both from own manufacture andexternal sources. In each of the lines of business there will continue to befocus on product innovation and range development. In some of the businessesthis will be driven by the established research and development functions and inothers by further developing product management and sourcing functions. Historically Filtrona has been able to use established locations within one lineof business to offer rapid, low cost market entry for other businesses throughoverhead sharing. There are many examples of this within Filtrona, such as teartape operations in cigarette filters and bonded fibres facilities, enabling theexploitation of new opportunities and servicing customers more quickly and costeffectively than competitors can achieve. This approach will continue as a keycomponent of enhancing competitive positions rapidly. 6.3 Expand and adapt the global footprint to improve supply chain and reducecost Filtrona has a comprehensive production and distribution footprint which can beflexed to respond to customers' needs, whether they be product, cost or supplychain driven. Filtrona has a well invested machinery base that is flexible andrelocatable. The current manufacturing locations are: (i) Americas - Brazil, Mexico, Paraguay, US and Venezuela; (ii) Europe - France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom; and (iii) Middle East and Asia - India, Indonesia, Jordan, Thailand and a recently completed facility in China. The recent investment by the filters business in Monterrey, Mexico was assistedby the prior experience that Filtrona had developed from the plastic profile andsheet business that has operated there since 2000. Similarly the recent investment in the Chinese facility is expected toaccelerate the growth not only of the bonded fibre business but also theprotection and finishing and the coated and security businesses in China. 6.4 Reduce production costs Filtrona seeks to reduce its production costs through a combination of: (i) standardisation of operating policies and procedures including health and safety, environment and human resources; (ii) standardisation of production equipment and information systems; (iii) continued investment in a competitive manufacturing base with the latest high output machinery and tooling located in low unit labour cost locations; and (iv) a lean organisation with competent, well trained and experienced people. 6.5 Continue to enhance supply chain capability Filtrona seeks to achieve supply chain and service excellence to add increasedvalue to customers. Recent examples of this process are the opening of newwarehousing arrangements in Russia and Korea to serve cigarette filter customersin these markets more effectively. These arrangements have not only facilitatedjust-in-time supply, they have also enabled customers to reduce inventories andto avoid the administration associated with importing products. Filtrona will continue to build its distribution capability and geographicspread to assist growth. The recent opening of a new protection and finishingproducts distribution centre to serve the Czech Republic market follows on fromthe successful establishment of a distribution centre in Poland. IT investment will continue to play a critical role in service enhancement. Theenterprise resource planning packages in place have delivered significantimprovement from the application of new technologies in areas such as finitescheduling and bar coding and business relationship management modules are inthe process of implementation. 6.6 Selective acquisitions Filtrona has made a number of selective acquisitions which have eitherstrengthened a core competence, added geographic scale, brought new productsinto the portfolio or a combination of all three. There continues to be a numberof acquisition targets which Filtrona believes could supplement its underlyinggrowth rate, and Filtrona plans to recruit a corporate development executive toincrease the focus on this activity. 7. Sales, marketing and purchasing The sales, marketing and purchasing teams in Filtrona are based in the operatingbusinesses and report through the senior management executive. Filtrona believesit is critical to maintain this commercial focus within each line of business. In Plastic Technologies larger customers are served by a key account structure.Smaller customers are reached through the marketing programme and a rapid sampleservice. Ultimately they are served by efficient telesales, internet or faxorder entry. In Fibre Technologies the relatively large size of the customers supports a keyaccount approach that is closely linked to product development. Filtrona's top 10 customers represent 34% of Filtrona's sales, but the fifthlargest customer represents less than 2%. The principal area of customerconcentration is within the tobacco industry. Filtrona believes thatdifferentiated products and a low cost supply chain mitigate the concentrationrisk. The major element of supplier concentration again falls within the tobaccoindustry and relates specifically to the suppliers of cellulose acetate tow forcigarette filter production. This is a market served by five principal globalsuppliers all of whom supply Filtrona. The top 10 suppliers to Filtrona accountfor 53% of raw material purchases. Filtrona considers that alternative sources of supply exist for all major rawmaterials. These major materials include acetate tow, filter paper, polyesteryarns, polypropylene film and various readily available engineering andcommodity polymers. 8. Research and development Filtrona's worldwide R&D centre for the cigarette filters business is based inJarrow in the UK and supports R&D activities on both proprietary and customerdevelopments. Filtrona expects that by the end of 2005 its dedicated filters R&Dteam will comprise 40 personnel. R&D is undertaken to identify solutions forproducing new additives and product styles to assist customers in the selectivereduction of smoke constituents, to develop lower cost production techniques andto develop new filter styles. Fibertec's worldwide R&D is centred in Richmond, Virginia (US), with somelimited development work occurring in Reinbek (Germany). Fibertec's dedicated R&D group focuses approximately 80% of its effort on customer driven projects and20% on core technology projects. Principal research areas are in developing theknowledge and processes in the production of non-woven bonded fibres to givematerials with different capillary transfer rates that support the identifiedneeds in the current and prospective customer base. In coated and security products, the global R&D centre and print studio islocated at the Nottingham (UK) site where new print and security features aredeveloped. The FractureCode joint venture is responsible for its own softwareand application development. Within the other lines of business the focus is on development rather thanresearch. Development is driven by a combination of product marketing andengineering, resulting in either in-house development or outsourcing of theproducts concerned. 9. Further investment considerations Filtrona's business, financial position, results of operation, growth,strategies or dividend policy could be materially adversely affected by risks,including any of those set out below. These risks could also have an adverseeffect on the trading price of the Filtrona Shares. (i) Fluctuations in exchange rates Filtrona may be adversely affected by fluctuations in exchange rates. Theconsolidated results of Filtrona's operations are accounted for in poundssterling but the majority of Filtrona's sales are made and income earned in USdollars and other foreign currencies. Movements in exchange rates used totranslate foreign currencies into sterling may have a significant impact onFiltrona's reported results of operations from year to year. This has been mostnoticeable recently in subsidiaries based in the US, due to the weakening of theUS dollar against sterling, and has adversely affected the consolidated resultsin sterling in the 2002, 2003 and 2004 financial years. (ii) Effective tax rate The most recent effective tax rate for Filtrona is close to 31%. This rate isnot indicative of the future as the capital structure of Filtrona after theDemerger will be different from the historic capital structure. The futureeffective tax rate is likely to be higher and equate more closely to thestatutory tax rates of the countries in which Filtrona's principal operationsare located. (iii) Ability to complete acquisitions and successfully integrate operations of acquired businesses A portion of Filtrona's historic growth has been achieved through theacquisition of businesses. The rate of any future growth that Filtrona mayachieve may in part be dependent on making additional acquisitions. WhilstFiltrona has in the past made and successfully integrated a number ofacquisitions, there can be no assurance that Filtrona will be able to identify,complete and integrate successfully suitable acquisitions in the future. (iv) Relationship with the tobacco industry A significant part of Filtrona's business relates to the supply of cigarettefilters and tear tape to manufacturers in the tobacco industry. Accordingly thefuture performance of Filtrona's cigarette filters and tear tape businesses maybe affected by changes in conditions within those sections of the tobaccoindustry which they supply, such as changes in consumption of cigarettes,changes in demand for different types of cigarette and changes in regulationsaffecting cigarettes. Whilst Filtrona has no history of involvement in tobaccorelated litigation, it could be adversely affected by the incidence of suchlitigation. Filtrona has no reason to believe that regulation specific to thetobacco industry is likely to cause a material adverse change in demand for itscigarette filters and tear tape. (v) Product liability claims Like any other manufacturer, Filtrona faces the inherent risk of exposure toproduct liability claims if the products Filtrona supplies fail to meetspecification or the required standard. Filtrona has, and Filtrona believes thatthe companies it has acquired have had, product liabilityinsurance at levels thought to be appropriate in relation to the productsmanufactured or sold by Filtrona, with the exception of cigarette filters, forwhich product liability insurance, as for other cigarette components, is notavailable. However, there can be no guarantee that this insurance will continueto be available at reasonable cost or at all, or will be adequate to coverproduct liability claims against Filtrona. If Filtrona does not have adequateinsurance, product liability claims and costs associated with product recalls,including loss of business, could have a material adverse effect on Filtrona'sbusiness, operating results and financial position. Filtrona is not and has notbeen a party to or otherwise involved in any litigation in relation to itscigarette filters. (vi) Unfavourable economic conditions or other developments and risks in the countries in which Filtrona operates Filtrona's business strategy has involved and continues to involve manufacturein low cost production locations. Filtrona may be adversely affected bypolitical and economic conditions in some of these production locations.Transition towards these locations may also give rise to other execution risksnormally associated with such moves, including delays to the start of productionand the establishment of new distribution channels and other unforeseen factors. (vii) Disruption to distribution or production facilities and information systems Filtrona would be adversely affected if there was a significant failure of oneor more of its major distribution or production facilities or of a major part of its supply chain. Disruptions may be caused by industrial disputes, fire, information systems disruption or other material business disruption. Many of the manufacturingprocesses of Filtrona are carried out in more than one location and henceFiltrona has the ability to mitigate this risk in part by meeting productionrequirements with the use of alternative manufacturing sites. (viii) Customer base In some of Filtrona's businesses the market, and hence the customer base, isrelatively concentrated. This is true primarily of Filtrona's cigarette filterand tear tape businesses. Should the customers of Filtrona in those businessesdecide to satisfy their requirements internally or from other suppliers, and ifFiltrona were unable to win other customer orders, this could result in asignificant loss of business and a resulting adverse effect on Filtrona'soperating results. In the cigarette filter business, there does not appear to bea clear trend among customers as both self-manufacture and outsourcing decisionshave occurred in recent years. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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