23rd Feb 2006 07:02
Elementis PLC23 February 2006 23 February 2006 ELEMENTIS plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Highlights • Group sales 7 per cent ahead of 2004, excluding portfolio changes.• Operating profit before exceptional items £20.3 million, 77 per cent up on 2004.• Earnings per share before exceptional items 2.8p (2004: 1.3p)• Final distribution to shareholders 1.1p (2004: 1.1p). 2.2p for the year (2004: 2.2p)• Operating loss from continuing operations after exceptional items £25.4 million (2004: profit £5.2 million).• Loss per share 8.8p (2004: earnings of 0.8p) Edward Bramson, Executive Chairman of Elementis plc, said: "We are pleased to report the solid strategic progress that has been made during2005. Our focus continues to be on improving the group's long term earningsquality and consistency to generate funds for growth and for distribution toshareholders. The first phase of our strategic review, which was announced in October 2005, ison track. Our second phase, which will be announced near the end of the firstquarter this year, will primarily address our Specialties division. Turning to the underlying financial performance during 2005, the increase inoperating profits was driven by positive pricing in all of our businesses,particularly Chromium. Softness in the coatings sector constrained volumes inSpecialties and Pigments but early indications for 2006 suggest that the sectoris improving. The Board recommends a final dividend of 1.1 pence per share,taking total distributions for the year to 2.2 pence." - Ends - Enquiries ElementisEdward Bramson, Executive Chairman 020 7408 9300Brian Taylorson, Finance Director Financial Dynamics 020 7831 3113Andrew DowlerGreg Quine Executive Chairman's Statement Sales in 2005 increased by 7 per cent on previous year to £439.9 million, afteradjustments for acquisitions and disposals. The major contributor to theincrease was improved pricing in each of our business segments, especiallyChromium. Operating profit before exceptional items increased to £20.3 million in 2005from £11.5 million in 2004. For the year, the Group reported exceptional itemsof £47.7 million (2004: £2.6 million) resulting, principally, from the Board'sstrategic review announced in October. As a result the Group reported anoperating loss from continuing operations of £25.4 million compared to a profitof £5.2 million in 2004. Market conditions in many of the Group's end markets such as aerospace alloys,oilfield chemicals and personal care were reasonably good. The coatings marketswhich are significant for both Pigments and Specialties were, however, somewhatsoft for most of the year which constrained volumes in both businesses.Conditions in the coatings market now appear to be improving. The relocation of Elementis Pigments US manufacturing operations to a newfacility in China progressed, essentially, as planned. As a result our marginsfor Pigments are approaching the levels that were anticipated when the projectwas initiated. The plant was in a parallel start-up phase during 2005 so littleor no operating margin benefit was reflected in this year's results. Lowerproduction costs should be reflected in Pigments profits for a significantportion of 2006 and the benefit of a full year's savings will be seen in 2007.The transition of customers to material produced in China has proceededremarkably smoothly which is a tribute to the professionalism of our Pigmentsmanagement team. In the interests of improved financial transparency, the Board has concludedthat we should henceforth disclose additional detail for the ElementisSpecialties business segment. As a result, we are now providing information inthe operating and financial review (OFR) on our historical Specialties business(Specialty products), predominantly rheological modifiers, separately fromSurfactants which are a significant part of the Servo business that was acquiredin June 2004. As we implement specific strategies for these differing productlines we believe it will be helpful to shareholders to have this additionaldata. As noted above, Specialty products was adversely affected by soft volumesin the coatings markets which were offset by price increases. Specialtyproducts results reflect the disposal of the Hardman adhesives business and theinternal transfer of a product line to the Pigments business. Adjusting forthese two factors Specialty products reported results essentially in line withthose of the previous year. Surfactants' profits increased principally as aresult of fixed cost reductions implemented during the year. In advance of the results of the Board's strategic review of Specialties that iscurrently in progress, we undertook some fixed cost reductions in the secondhalf of last year that include a contribution of around £4.0 million to theprofits of this segment in 2006, independently of the outcome of the review. Elementis Chromium reported a significant improvement in operating profit beforeexceptional items in 2005 after what was essentially a breakeven year in 2004.In a further step to increase financial transparency we are now reporting theresults of the UK and US chromium businesses separately in the OFR. As was thecase in the prior year, the UK chromium operation was unprofitable in 2005,although it moved into profitability in the second half. The first phase of theBoard's strategic review, announced in October, addressed the level of Chromiumprofits in the UK and particularly the volatility of these profits which had anundesirable effect on Group earnings as a whole. As a result of the review weare cutting production capacity in the UK and reducing fixed costs more thanproportionately. These actions, which are to be completed by the end of thefirst quarter, will materially reduce the worldwide breakeven level for theChromium segment. They will also have the effect of improving returns as wewill discontinue lower margin products which have also tended to be morevolatile. Lower breakeven levels will reduce our sensitivity to cyclicalfluctuations in demand in the future. Elementis will continue to be the world'slargest supplier of chromium chemicals and with significant unused capacityavailable to us we retain the ability to increase production in response tochanges in market conditions. The restructuring of Chromium and the change inour management strategy are intended to reduce the historical volatility of thebusiness and to result in a more predictable and therefore valuable earningsstream to the Group in the medium term. In October, the Specialty Rubber business was sold for £18.2 million.Profitability of Specialty Rubber has improved over the last two years, but theBoard concluded that there was insufficient strategic fit with the rest of theGroup to justify further investment, and that a sale represented the best courseof action. Before exceptional items the Group reported basic earnings per share of 2.8pence in 2005 (2004: 1.3 pence). After exceptional items, discussed below, wereported a net loss of 8.8 pence per share (2004: earnings of 0.8 pence). Netborrowings at the end of 2005 were £99.4 million (2004: £90.2 million). Foreigncurrency translation gave rise to £8.8 million of the increase. The Board Kevin Matthews and Chris Girling joined the Board in February and Aprilrespectively and Michael Hartnall retired in April 2005. Hanover Investors, withwhich I am associated, became a significant shareholder in the Company in thefirst half of 2005. Subsequently, further changes were made to the compositionof the Board. Ian Brindle, Ken Minton, Matthew Peacock and I joined the Boardin June. Keith Hopkins and Edward Wilson resigned at the same time. PhilipBrown retired from the Board at the end of June and Geoff Gaywood resigned fromthe Board in August. The Board would like to express its appreciation to theseformer directors who laid the foundation for many of the positive developmentsthat we expect to see in 2006. Strategy Following its reorganisation in June the Board has been conducting a review ofthe Group's strategy. The first phase of the strategic review, announced inOctober, set out three main goals. The first is to increase the base level ofthe Group's profits significantly in 2006 as a base from which to grow earningsin subsequent years. We believe that a consistent increase in the level of ourreturns is necessary if we are to have the resources to finance growth withoutthe need for external financing, to increase distributions to shareholders inthe future, and to motivate employees to achieve above average returns. To this end, during 2005, we took a number of actions to reduce head officecosts and to combine certain overhead functions in Pigments and Specialties,both of which are based in the USA. As a result, we expect overhead expenses tobe reduced by more than £11.0 million per year in 2006 compared with 2005. Thiscost reduction is significant when compared with this year's reported results.The reduction also reflects a long-term change in the way that Elementis will bemanaged. Authority and responsibility in many areas have now been transferredto the management of the operating businesses with, I believe, resultantbenefits in improved decision making and employee motivation. The Board's second objective is to refocus resources and attention on theSpecialties business segment. This is our largest and highest profit marginbusiness and has, we believe, attractive growth opportunities. The next phaseof the strategic review will focus on Specialties and we anticipate that theBoard will make an announcement towards the end of the first quarter. The third objective that the Board has set is to improve the Group's longer-termearnings quality and consistency. In order to accomplish this it has beennecessary to change the strategic position of the Chromium business to reducevolatility in the manner described above. We are planning other steps toincrease the predictability of earnings in 2006 which will form part of theforthcoming Board review. Exceptional items As a result of the implementation of the first part of the Board's strategicreview, the Group has recorded an exceptional charge in 2005 of £32.9 million,representing £13.4 million of cash costs and £19.5 million of asset write downspartly offset by pension curtailment gains. The cash costs will be financedprincipally from the net proceeds of the Specialty Rubber sale. Totalexceptional items for the year, including management actions announced at theinterim stage, were £47.7 million. Environmental, health and safety Performance by the Group continued to be of a high standard in 2005 withimprovements being recorded in most of the key measures. In particular, oursafety performance is now in the top quartile of the industry, and we willcontinue to strive for improvements in all areas of this important aspect of ouroperations. Distribution to shareholders The Board has decided to recommend the resumption of dividend payments. TheGroup's tax position makes it no longer necessary to make distributions in theform of redeemable B shares as we have been doing for some years. Consequently,the directors recommend a final dividend of 1.1 pence per share taking the totalreturn to shareholders for the year to 2.2 pence. Subject to approval at theAnnual General Meeting, the dividend will be paid on 5 May 2006 to members onthe register at the close of business on 7 April 2006. The Board intends tocontinue to review the dividend policy as earnings performance permits. People This is my first year at Elementis and I have been tremendously impressed by thedepth of the talent and experience of the people I have met here. I would liketo express my appreciation and that of the entire Board for the dedication ofour employees during the recent period of restructuring. It is my hope andbelief that improving financial performance will create an environment in whichtheir efforts can be well rewarded. Going forward The actions that have already been taken create the conditions for significantimprovements in the coming year. The Board is, therefore, now able to turn itsattention to the development of strategies that will improve our position in2007 and beyond. Edward BramsonExecutive Chairman23 February 2006 Operating and Financial Review Revenue Effect of Acquisitions and Revenue exchange disposals 2004 rates 2005 £million £million £millionSpecialties- Specialty products 140.3 0.1 (5.3)- Surfactants 19.3 0.2 19.5 ______ ______ ______Specialties total 159.6 0.3 14.2Pigments 79.1 0.9 13.4Chromium 110.5 0.3 -Specialty Rubber 45.9 (0.3) (5.1)Inter-segment (5.9) - - ______ ______ ______ 389.2 1.2 22.5 ______ ______ ______ Operating and Financial Review (continued)Revenue Inc/(dec) Revenue 2005 2005 £million £millionSpecialties- Specialty products 4.6 139.7- Surfactants 6.7 45.7 ______ ______Specialties total 11.3 185.4Pigments (2.7) 90.7Chromium 18.6 129.4Specialty Rubber - 40.5Inter-segment (0.2) (6.1) ______ ______ 27.0 439.9 ______ ______ International financial reporting standards (IFRS) The Group has reported on the basis of IFRS as adopted by the European Union(EU), and comparative data has been restated accordingly. In addition, the Grouphas restated its segmental information, in order to provide a clearer view ofthe underlying profit performance of the business units. Consequently centralcosts, which are not identifiable as costs of particular segments, are reportedas a separate item and consist of those expenditures incurred by the Board ofDirectors, Company Secretary, Group finance and internal legal costs. IFRS requires separate disclosure of items of income and expense which arematerial by virtue of their nature or amount. These items are considered to bemost appropriately disclosed as exceptional. Elementis plc management considerthat the information presented in the OFR provides useful financial informationrelating to the performance of the Group. This information should not beconsidered as an alternative, but as a supplementary to the full IFRS incomestatement presented on page 12. Group results Group sales were £439.9 million in 2005 compared to £389.2 million for theprevious year. Sales increased by £33.8 million as a result of having a fullyear of sales from Sasol Servo BV ('Servo'), which was acquired in June 2004.Two businesses were sold during the year, the Hardman adhesives business andSpecialty Rubber, which reduced reported sales by £11.3 million. After adjustingfor these changes, sales increased by 7 per cent over the previous year.Improved pricing in all businesses, but particularly in Elementis Chromium, wasthe main driver of the increase in sales, with average prices improving by 7 percent. Sales volumes were 2 per cent lower due to softer demand in the USCoatings market and the effects of price improvement programs. Operating profit before exceptional items increased by £8.8 million to £20.3million (2004: £11.5 million). Improved pricing contributed £31.2 million,offsetting increases in energy of £6.0 million and raw materials ofapproximately £10.3 million, with most of the variances occurring in ElementisChromium. Lower volumes reduced operating profit by £5.7 million, while currencymovements had a positive impact of £2.2 million. Exceptional items before taxation in 2005 were a charge of £47.7 million (2004:£2.6 million). Consequently the Group is reporting an operating loss for theyear from continuing operations of £25.4 million (2004: profit of £5.2 million). Elementis Specialties Phase one of the integration of the Servo business, acquired in June 2004, wascompleted during the year, generating £3.5 million of annualised cost savings.Servo products in the coatings and oilfield sectors complement well theElementis products in those same markets, and have been fully integrated intothe Elementis Specialties commercial organisation. Servo also produces a rangeof surfactants for industrial applications and the pulp and paper markets, andthese do not directly overlap with existing Elementis products and markets. In addition, Servo produces a range of driers for the coatings market, whichwere reported as part of Elementis Specialties in 2004. These were transferredto Elementis Pigments in 2005 where there is a similar range of products servingthe same markets. Operating profit 2005£million Operating profit Exceptional items* Adjusted operating profitContinuing operationsSpecialties - Specialty products 14.6 2.4 17.0 - Surfactants 0.1 0.5 0.6 ______ ______ ______ 14.7 2.9 17.6Pigments (5.9) 7.1 1.2Chromium (21.7) 29.5 7.8Central costs (12.5) 5.0 (7.5) ______ ______ ______ (25.4) 44.5 19.1Discontinued operationsSpeciality Rubber 1.2 - 1.2 ______ ______ ______ (24.2) 44.5 20.3 ______ ______ ______ * excluding profit / (loss) on disposal of business (continued from table above)Operating profit 2004£million Operating profit Exceptional items* Adjusted operating profitContinuing operationsSpecialties - Specialty products 16.5 2.3 18.8 - Surfactants (2.9) 1.6 (1.3) ______ ______ ______ 13.6 3.9 17.5Pigments 1.8 - 1.8Chromium (0.9) 1.3 0.4Central costs (9.3) - (9.3) ______ ______ ______ 5.2 5.2 10.4Discontinued operationsSpeciality Rubber 3.7 (2.6) 1.1 ______ ______ ______ 8.9 2.6 11.5 ______ ______ ______ * excluding profit / (loss) on disposal of business Specialty Products Global markets for Specialty products grew by around 2-3 per cent in the year,with China showing above average growth. The market for architectural coatingsbenefited from a robust US housing market, while growth in industrial coatingswas strong in Asia, but relatively flat in Europe and the US, due in part tolower car production rates. The market for oil field products benefited fromstrong growth in North America, where there was a record number of drillingprograms in Canada and good growth in the US despite some slowdown in the secondhalf of the year due to hurricane damage. Growth in this sector is also beingenhanced by the search for new reserves in increasingly remote and extremeenvironments, that require greater quantities of performance chemicals such asthose produced by Elementis Specialties. Product development programs resulted in four new products being introduced inthe year for the growing Chinese market and for the oilfield sector. Sales of Elementis Specialty products in 2005 were £139.7 million (2004: £140.3million). Having a full year of sales from the Servo acquisition added £7.6million to 2005 sales, but the sale of the Hardman adhesives business in June 2005 and the transfer of the Servo driers business to Pigments reduced reported turnover by £12.9 million. After adjusting for these changes, sales increased by 3 per cent over the previous year. Improved pricing added 4 per cent while volumes were down 2 per cent due to the softer US coatings market and the effects of the price improvement program. Volumes were also impacted bychanges in supply chain processes following the implementation of the ERPprogram. Within this overall result, personal care made good progress and oilfield sales enjoyed strong growth due to the market dynamics described above,and new opportunities from the Servo business. The latter included a one timeopportunity to supply a large customer during a plant expansion, and the openingof a new pipeline in Azerbaijan. Operating profit before exceptional items was £17.0 million (2004: £18.8million) which is £0.4 million lower than the previous year after adjusting foracquisitions and disposals. Higher pricing was more than offset by lowervolumes and higher energy costs and overheads. In addition, the revaluation ofhectorite ore at its mine in California contributed £0.8 million to its resultin the first half of 2005. Surfactants The surfactants business was acquired as part of the Servo acquisition. Theglobal market for surfactants grew by around 3 per cent in 2005, but marginsremained low due to strong competition and high raw material costs. Asurfactant is a surface active ingredient used primarily in the formulation ofdetergents. Sales of surfactants in 2005 were £45.7 million (2004: £19.3 million). Theeffect of owning Servo for a full year in 2005 increased reported sales by £19.5million. Otherwise sales volumes improved by 18 per cent following the reorganisation of the commercial group as part of the acquisition integration process. Overall pricing was flat versus the previous year. The operating profit before exceptional items in 2005 was £0.6 million (2004:loss of £1.3 million). If the Group had owned Servo for a full year in 2004,this would have represented an annualised improvement of £3.2 million and wasthe result of higher sales volumes and £1.5 million of cost savings from thereorganisation announced in July 2005. As part of this reorganisation employeenumbers were reduced and business processes were streamlined to improveefficiency. Elementis Chromium Elementis Chromium for 2005 was characterised by a significant improvement inselling prices, which more than offset higher raw material and energy costs, andimproved profitability by £7.4 million. The global market for Chrome chemicals grew by 1-2 per cent in 2005, driven bystrong growth in the US industrial CCA (Chromated copper arsenate) market andstrong aerospace demand. The US CCA market for timber treatment benefited fromexceptionally high demand for treated timber, especially utility poles, torepair hurricane damage in the second half of the year. The chromium oxidemarket for aerospace alloys grew by around 10 per cent driven by good recoveryin aircraft production. Other market segments showed more modest growth whilechromium oxide demand for pigments was depressed by a weaker US coatings market.Global supply-demand balances during the year were favourable, leading tohigher sales prices, and were supported by plant closures in the Far East. 2005 2004 £million £million ______ ______Sales - UK 56.4 51.7 - US 73.0 58.8 ______ ______ 129.4 110.5 ______ ______Adjusted operating profit/(loss)* - UK (0.3) (6.3) - US 8.1 6.7 ______ ______ 7.8 0.4 ______ ______ * before exceptional items Elementis Chromium sales in 2005 were £129.4 million, an improvement of 17 percent over the previous year. This was largely driven by a program of quarterlyprice increases, led by Elementis to restore profit margins, and resulted in a21 per cent improvement in average prices versus the previous year. Pricesimproved in all major product sectors, but there were some related volume losseswhich resulted in an overall volume reduction of 4 per cent compared to 2004.Volumes were higher in North America, due to strong CCA demand, but lower in allother major geographic sectors. In Asia Pacific, there was a reduction inChina, where pricing was less robust, but an increase in Japan where plantclosures led to additional supply opportunities. Operating profit before exceptional items in 2005 was £7.8 million compared to£0.4 million in 2004. Higher selling prices were the main driver of the overallimprovement, and more than offset increases of £5.6 million in energy costs and£6.8 million in raw material costs. The US business reported a profit of £8.1 million for the year (2004: £6.7million) while the UK business, which is being restructured, reported a loss of£0.3 million (2004: £6.3 million). The UK business made a loss in the firsthalf of the year but was profitable in the second half due to higher sellingprices. Operating profit before exceptional items Acquisitions Operating Effect of and profit * exchange disposals 2004 rates 2005 £million £million £millionSpecialties- Specialty products 18.8 1.2 (1.3)- Surfactants (1.3) - (1.3) ______ ______ ______Specialties total 17.5 1.2 (2.6)Pigments 1.8 0.5 3.0Chromium 0.4 0.9 -Specialty Rubber 1.1 (0.1) -Central costs (9.3) (0.3) - ______ ______ ______ 11.5 2.2 0.4 ______ ______ ______ * before exceptional items Operating profit before exceptional items (continued) Operating Inc/(dec) profit * 2005 2005 £million £millionSpecialties- Specialty products (1.7) 17.0- Surfactants 3.2 0.6 ______ ______Specialties total 1.5 17.6Pigments (4.1) 1.2Chromium 6.5 7.8Specialty Rubber 0.2 1.2Central costs 2.1 (7.5) ______ ______ 6.2 20.3 ______ ______ * before exceptional items Elementis Pigments In 2005 Elementis Pigments successfully completed the transitioning of its NorthAmerican manufacturing base to a new plant in China. The majority of operationsat the East St Louis plant closed on 30 June 2005 and most major customers haveapproved the new Chinese material. Coatings markets served by Elementis Pigments showed the same overall trends asdescribed under Elementis Specialty products. Good growth was seen in Asia butdemand was relatively flat in the US and Europe. The US represents ElementisPigments largest market and while there was reasonable growth in thearchitectural sector, demand for industrial applications was lower than theprevious year leading to an overall softer coatings market for the year. In theconstruction market demand was also lower, albeit from record levels in theprevious year. Sales in Elementis Pigments were £90.7 million (2004: £79.1 million). Thetransfer of the driers business from Elementis Specialties in early 2005contributed £13.4 million of the increase in sales. Otherwise prices improvedby approximately 3 per cent due to increases being applied in all key marketsectors to offset rising raw material and energy costs. Volumes were 6 per centlower than 2004 due to the effects of the price increases as well as softermarket demand. Operating profit before exceptional items for the year was £1.2 million (2004:£1.8 million). Benefits from higher pricing and the inclusion of the Servodriers business were offset by lower sales volumes and second halfinefficiencies from the transfer of production to the China plant. Additionalinventory was produced at the higher cost East St Louis plant to support keycustomers during the transition, and this effectively delayed the benefits ofselling the lower cost Chinese product until 2006. In addition the US plantcontinued to run during July and August as part of the shut down process andthis led to some duplication of manufacturing costs with the Chinese plant,which started up at the same time. Going forward, the transfer of production tothe new plant is expected to reduce annualised manufacturing costs by around£3.0 million, once the East St Louis inventory is fully depleted. Consequently2006 is expected to benefit from around 70 per cent of this saving. Central costs Central costs in 2005 were reduced by £1.8 million to £7.5 million (2004: £9.3million). The reduction was the result of a reorganisation of head office inwhich functions were downsized or absorbed by business units. Annual employeerelated costs were reduced by around 80 per cent, by the end of 2005 and thefull effect of the reductions will be reflected in 2006. Exceptional items In the first half, exceptional charges of £6.3 million were announced. Thesecomprised the closure of the majority of operations at the Pigments' East StLouis plant, the first phase of the Servo integration, a head office restructureand the disposal of the Hardman adhesives business. The first phase of astrategic review was announced on 31 October 2005, which resulted in exceptionalcharges of £38.4 million. These related to the closure of a kiln at Chromium,together with severance and other restructuring costs. Further exceptionalitems of £3.0 million have been incurred in the second half from the sale ofSpecialty Rubber, curtailment gains on pension schemes related to therestructuring and the settlement of legal and insurance claims. Total exceptional items before taxation in the year were £47.7 million (2004:£2.4 million) and are set out in note 5. Interest Net interest payable increased by £2.0 million to £7.6 million in 2005 (2004:£5.6 million). This includes £0.1 million (2004: £0.2 million) in respect ofdiscontinued operations. Interest payable on net borrowings increased by £2.6million to £6.4 million (2004: £3.8 million) due to higher average borrowingsand higher interest rates. The finance charge in respect of pension andpost-retirement benefits decreased by £0.7 million in the year, to £0.4 million(2004: £1.1 million) due to a higher expected return on UK pension scheme assetsand contributions paid into the UK scheme. Interest cover - the ratio of operating profit before exceptional items tointerest on net borrowings - was 3.3 times (2004: 3.3 times). TaxationTax charge £million Effective rate per centBefore exceptional items 0.3 2.6Exceptional items 3.1 (7.8) ______ ______Total 3.4 (12.0) ______ ______ The low rate of taxation on profit before exceptional items is due to theamortisation of goodwill in the US for tax purposes. Taxation on exceptionalitems of £3.1 million arose on pension scheme curtailment gains and due to thewrite off of £2.3 million in relation to deferred tax previously provided on UKpension schemes. Potential deferred tax assets of £31.6 million (2004: £28.8million) in respect of carried forward losses have not yet been recognised. The effective tax rate on profit before exceptional items in 2006 will continueto be dependent on the mix of profits primarily between the UK and overseas, andthe utilisation of tax losses in the UK and the US. Earnings per share Earnings per share for the year was a loss of 8.8 pence per share (2004:earnings of 0.8 pence), due to the exceptional charges in the year. Basicearnings per share before exceptional items increased to 2.8 pence (2004: 1.3pence) due to the increased operating profit partly offset by increased netinterest costs. Dividends and issue of redeemable B shares The Board has decided not to continue with the programme of issuing andredeeming redeemable B shares, and is proposing a final dividend of 1.1 penceper share. The total nominal value of redeemable B shares that were issued toshareholders during 2005 was 2.2 pence per ordinary share. A final offer willbe made to existing holders of redeemable B shares to redeem any remaining Bshares in issue for cash at their nominal value in November 2006. Cash flow The cash flow is summarised below: 2005 2004 £million £millionEbitda(1) 38.5 27.0Change in working capital 1.9 (5.1)Capital expenditure (16.8) (22.0)Pension (14.1) (4.6)Interest and tax (9.4) 1.8Other (1.8) (2.2) ______ ______ (1.7) (5.1)Redemption of B shares (9.7) (9.2)Acquisitions and disposals 23.7 (36.3)Exceptional items (12.7) 3.8Currency fluctuations (8.8) 3.5 ______ ______Increase in net borrowings (9.2) (43.3)Net borrowings at start of year (90.2) (46.9) ______ ______Net borrowings at end of year (99.4) (90.2) ______ ______ (1)Ebitda - earnings before interest, tax, exceptional items, depreciation andamortisation Net borrowings increased by £9.2 million in the year to £99.4 million. Thestrengthening of the US dollar against sterling increased reported borrowings by£8.8 million. Ebitda(1) increased by £11.5 million to £38.5 million (2004:£27.0 million) due to the improved operating performance. Cash flow from workingcapital was an inflow of £1.9 million. Inventory and debtors for continuingbusinesses both improved compared to the previous year end. Debtor days were 4days lower at 57 days and inventory was 12 days lower at 77 days. Year endcreditors were down 6 days to 66 days. Capital expenditure in the year was £5.2 million lower than previous year at£16.8 million due to the completion of the ERP project in 2004 and the Tai CangPigments plant in June 2005. Total spend in 2005 represented 93 per cent ofdepreciation (2004: 143 per cent). Payments to pension schemes net of service cost were £9.5 million higher than2004 at £14.1 million as the Group made an additional contribution of £7.0million into the UK scheme following the disposal of Specialty Rubber. Balance sheet 2005 2004 £million £millionIntangible fixed assets 170.6 155.7Other net assets 118.6 155.8 289.2 311.5 ______ ______Equity 189.8 221.3Net borrowings 99.4 90.2 ______ ______ 289.2 311.5 ______ ______ Gearing (2) 34% 29% (2)the ratio of net borrowings to equity plus net borrowings Currency fluctuations had a material impact on equity. The main currencyexchange rates relevant to Elementis are set out below: 2005 2004 Year end Average Year end AverageUS dollar 1.72 1.82 1.92 1.83Euro 1.46 1.46 1.41 1.47 ______ ______ ______ ______ The majority of the Group's assets are stated in US dollars and thestrengthening of the US dollar in 2005 increased equity by £18.3 million. Thispartly offset the loss after exceptional items in equity of £38.1 million. Pensions and other post retirement benefits The Group provides retirement benefits for the majority of its employees mainlythrough defined benefit schemes. A small number of defined contribution schemesare also provided and an unfunded post-retirement medical benefit scheme isprovided in the US. The net pension liability, which is calculated by the Group's actuaries andbased upon fair value of the schemes' assets and present value of schemes'liabilities, decreased by £19.4 million to £62.0 million. This was due to a 16per cent return from the assets of the UK pension plan plus employercontributions of £19.1 million and curtailment gains of £9.0 million associatedwith restructuring program. This more than offset liability increases of £33.3million due to changes in mortality estimates and other assumptions. In 2005, due to the curtailment gains there was a net credit to the incomestatement of £3.0 million (2004: charge of £7.2 million). Excluding these gainsthe total cost of pensions and post-retirement health care in the year wassimilar to 2004. Total contributions to pension and post retirement schemes inthe year amounted to £19.1 million (2004: £10.7 million). Estimatedcontributions in 2006 are approximately £12.0 million. Consolidated income statementfor the year ended 31 December 2005 2005 Before Exceptional After exceptional items exceptional items (note 5) items Note £million £million £millionContinuing operationsRevenue 399.4 - 399.4Cost of sales (280.8) (41.0) (321.8) ______ ______ ______Gross profit 118.6 (41.0) 77.6Distribution costs (58.5) (2.6) (61.1)Administrative expenses (41.0) (0.9) (41.9) ______ ______ ______Operating profit/(loss) 19.1 (44.5) (25.4)Profit on disposal of business - 4.6 4.6Investment income 3 0.3 - 0.3Finance costs 4 (7.8) - (7.8) ______ ______ ______Profit/(loss) before income tax 11.6 (39.9) (28.3)Tax 6 (0.3) (3.1) (3.4) ______ ______ ______Profit/(loss) for the year from continuingoperations 11.3 (43.0) (31.7) Discontinued operationsProfit/(loss) from discontinued operation 1.1 (7.8) (6.7)Profit/(loss) for the year 12.4 (50.8) (38.4) ______ ______ ______Attributable to:Equity holders of the parent 12.2 (50.3) (38.1)Minority interests 0.2 (0.5) (0.3) ______ ______ ______ 12.4 (50.8) (38.4) ______ ______ ______Earnings per share 7 2.8 (11.6) (8.8) From continuing and discontinuedoperations: Basic (pence)From continuing operations: 7 2.6 (9.8) (7.2) Basic (pence) ______ ______ ______ Consolidated income statementfor the year ended 31 December 2005 (continued) 2004 Before Exceptional After exceptional items exceptional items (note 5) items Note £million £million £millionContinuing operationsRevenue 343.3 - 343.3Cost of sales (236.6) - (236.6) ______ ______ ______Gross profit 106.7 - 106.7Distribution costs (56.4) - (56.4)Administrative expenses (39.9) (5.2) (45.1) ______ ______ ______Operating profit/(loss) 10.4 (5.2) 5.2Profit on disposal of business - - -Investment income 3 0.8 - 0.8Finance costs 4 (6.2) - (6.2) ______ ______ ______Profit/(loss) before income tax 5.0 (5.2) (0.2)Tax 6 1.0 0.2 1.2 ______ ______ ______Profit/(loss) for the year from continuingoperations 6.0 (5.0) 1.0 Discontinued operationsProfit/(loss) from discontinued operation (0.2) 2.6 2.4Profit/(loss) for the year 5.8 (2.4) 3.4 ______ ______ ______Attributable to:Equity holders of the parent 5.8 (2.4) 3.4Minority interests - - - ______ ______ ______ 5.8 (2.4) 3.4 ______ ______ ______Earnings per share 7 1.3 From continuing and discontinuedoperations: (0.5) 0.8Basic (pence)From continuing operations: 7 1.4 (1.2) 0.2 Basic (pence) ______ ______ ______ Consolidated balance sheetat 31 December 2005 2005 2004 31 December 31 December £million £millionNon-current assetsGoodwill and other intangible assets 170.6 155.7Property, plant and equipment 141.1 173.0Interests in associates 0.7 0.6Other investments 2.6 1.3Deferred tax assets 11.1 16.9 ______ ______Total non-current assets 326.1 347.5 ______ ______ Current assetsInventories 63.5 68.3Trade and other receivables 75.6 84.0Cash and cash equivalents 13.0 11.5Assets classified as held for sale - 3.7 ______ ______Total current assets 152.1 167.5 ______ ______Total assets 478.2 515.0 ______ ______ Current liabilitiesBank overdrafts and loans (4.6) (4.4)Trade and other payables (69.5) (71.6)Current tax liabilities (5.6) (8.2)Provisions (11.8) (0.8)Liabilities classified as held for sale - (1.3) ______ ______Total current liabilities (91.5) (86.3) Non-current liabilitiesLoans and borrowings (107.8) (97.3)Retirement benefit obligations (62.0) (81.4)Deferred tax liabilities (0.3) (2.9)Provisions (22.4) (21.6)Government grants (2.3) (2.4) ______ ______Total non-current liabilities (194.8) (205.6) ______ ______Total liabilities (286.3) (291.9) ______ ______Net assets 191.9 223.1 ______ ______ EquityShare capital 21.8 23.8Share premium 1.9 1.2Other reserves 89.5 59.9Retained earnings 76.6 136.4 ______ ______Total equity attributable to equity holders of the parent 189.8 221.3Minority equity interests 2.1 1.8 ______ ______Total equity 191.9 223.1 ______ ______ Consolidated cash flow statementfor the year ended 31 December 2005 2005 2004 £million £millionOperating activities:(Loss)/profit for the year (38.4) 3.4Adjustments for:Investment income (0.3) (0.9)Finance costs 7.9 6.5Tax 3.4 (0.1)Depreciation and amortisation 18.2 15.5Decrease in provisions (1.3) (2.4)Pension contributions net of current service cost (14.1) (4.6)Share based payments 0.8 0.2Exceptional items charged less cash flow 35.0 0.6 ______ ______Operating cash flow before movement in working capital 11.2 18.2Increase in inventories (1.0) (7.2)Decrease/(increase) in trade and other receivables 0.3 (3.4) ______ ______Increase in trade and other payables 2.6 5.5 ______ ______Cash generated by operations 13.1 13.1Income taxes (paid)/received (2.6) 4.5Interest paid (7.2) (4.1) ______ ______Net cash flow from operating activities 3.3 13.5Investing activities:Interest received 0.4 1.4Disposal of property, plant and equipment - 5.8Purchase of property, plant and equipment (16.8) (22.0)Acquisition of businesses - (36.3)Disposal of businesses 23.7 - ______ ______Net cash flow from investing activities 7.3 (51.1) ______ ______Financing activities:Issue of shares 0.9 -Redemption of B shares (9.7) (9.2)Decrease in borrowings repayable within one year (3.0) (0.8)Increase/(decrease) in borrowings repayable after one year (0.9) 35.8Repayment of obligations under finance lease (0.2) (0.2) ______ ______Net cash (used in)/from financing activities (12.9) 25.6 ______ ______Net decrease in cash and cash equivalents (2.3) (12.0)Cash and cash equivalents at 1 January 10.3 22.6Foreign exchange on cash and cash equivalents 0.4 (0.3) ______ ______Cash and cash equivalents at 31 December 8.4 10.3 ______ ______ Consolidated statement of recognised income and expensefor the year ended 31 December 2005 2005 2004 £million £millionExchange differences on translation of foreign operations 18.3 (11.8)Actuarial loss on pension and other post-retirement schemes (1.5) (4.7)Deferred tax associated with pension and other post-retirement schemes (0.9) (8.9)Gains on cash flow hedges taken to equity 0.7 - ______ ______Net income/(expense) recognised in equity 16.6 (25.4)(Loss)/profit for the year (38.4) 3.4 ______ ______Total recognised income and expense (21.8) (22.0)Effect of change in accounting policyEffect of adoption of IAS 32 and 39 on 1 January 2005 (with 2004 not restated)on:Share capital (2.2) - ______ ______ (24.0) (22.0) ______ ______Total recognised income and expense is attributable to:Equity holders of the parent (23.7) (22.0)Minority interests (0.3) - ______ ______ (24.0) (22.0) ______ ______ Notes to the financial statements 1 Preparation of the preliminary announcement The financial information in this statement is unaudited and does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.The comparative figures for the year ended 31 December 2004 are not the Group'sfinancial statements for that year. Those financial statements, which wereprepared under UK Generally Accepted Accounting Principles, have been reportedon by the Group's auditor and delivered to the Registrar of Companies. Thereport of the auditor was unqualified and did not contain statements undersection 237(2) or (3) of the Companies Act 1985. The preliminary announcementwas approved by the Board of Directors on 20 February 2005. 2 Basis of preparation Elementis plc is a company incorporated in the UK. The information within thisdocument has been prepared and approved by the directors in accordance withInternational Financial Reporting Standards as adopted by the EU (adopted IFRS). The Group financial statements have been prepared on the historical cost basisexcept that derivative financial instruments and financial instruments held fortrading or available for sale are stated at their fair value. Non-currentassets held for sale are stated at the lower of carrying amount and fair valueless costs to sell. The accounting policies have been consistently appliedacross group companies to all periods presented and in preparing an opening IFRSbalance sheet at 1 January 2004 for the purposes of the transition to adoptedIFRS, other than in respect of IAS 32 and IAS 39 which, as allowed by IFRS 1,have been implemented from 1 January 2005. The principal exception is thatfinancial instruments accounting is determined on a different basis in 2005 and2004 due to the transitional provisions of IAS 32 and IAS 39. 3 Investment income Continuing operations Discontinued operations 2005 2004 2005 2004 £million £million £million £millionInterest on bank deposits 0.3 0.2 - 0.1Interest on other loans - 0.4 - -Interest on corporation tax refunds - 0.2 - - ______ ______ ______ ______ 0.3 0.8 - 0.1 ______ ______ ______ ______ Investment income (continued) Total 2005 2004 £million £millionInterest on bank deposits 0.3 0.3Interest on other loans - 0.4Interest on corporation tax refunds - 0.2 ______ ______ 0.3 0.9 ______ ______ 4 Finance costs Continuing operations Discontinued operations 2005 2004 2005 2004 £million £million £million £millionInterest on bank loans 6.5 4.1 0.1 0.3Interest on other loans 0.1 0.1 - - ______ ______ ______ ______Total borrowing costs 6.6 4.2 0.1 0.3Interest on corporation tax payments 0.1 - - -Unwind of discount on provisions 0.7 0.9 - -Expected return on pension scheme assets (24.8) (23.4) - -Interest on pension scheme liabilities 25.2 24.5 - - ______ ______ ______ ______Pension and other post retirement liabilities 0.4 1.1 - - ______ ______ ______ ______ 7.8 6.2 0.1 0.3 ______ ______ ______ ______ Finance costs (continued) Total 2005 2004 £million £millionInterest on bank loans 6.6 4.4Interest on other loans 0.1 0.1 ______ ______Total borrowing costs 6.7 4.5Interest on corporation tax payments 0.1 -Unwind of discount on provisions 0.7 0.9Expected return on pension scheme assets (24.8) (23.4)Interest on pension scheme liabilities 25.2 24.5 ______ ______Pension and other post retirement liabilities 0.4 1.1 ______ ______ 7.9 6.5 ______ ______ 5 Exceptional items Cost of sales Distribution costs Administrative expenses £million £million £millionContinuing operations:Pigments East St Louis rationalisation (6.2) (0.5) (0.4)Chromium restructure (29.7) - (1.7)Integration of Specialties and Pigments (2.0) (0.6) (0.7)Integration of Servo business (3.1) (1.5) (1.9)Disposal of business - - -Insurance recovery - 1.1Settlement of legal claims - - (2.4)Head office restructure - - (3.4)Curtailment gains on pension schemes - - 8.5Impairment of joint venture - - - ______ ______ ______ (41.0) (2.6) (0.9)Discontinued operations:Disposal of business - - -Profit on disposal of property - - - ______ ______ ______ (41.0) (2.6) (0.9)Tax (charge)/ credit on exceptional items - - - ______ ______ ______ Exceptional items (continued) Profit /(loss) on 2005 2004 disposal of business £million £million £millionContinuing operations:Pigments East St Louis rationalisation - (7.1) -Chromium restructure - (31.4) (1.3)Integration of Specialties and Pigments - (3.3) -Integration of Servo business - (6.5) (1.6)Disposal of business 4.6 4.6 -Insurance recovery - 1.1 -Settlement of legal claims - (2.4) -Head office restructure - (3.4) -Curtailment gains on pension schemes - 8.5 -Impairment of joint venture - - (2.3) ______ ______ ______ 4.6 (39.9) (5.2)Discontinued operations:Disposal of business (7.8) (7.8) -Profit on disposal of property - - 2.6 ______ ______ ______ (3.2) (47.7) (2.6)Tax (charge)/ credit on exceptional items - (3.1) 0.2 ______ ______ ______ (50.8) (2.4) ______ ______ Following the implementation of adopted IFRS, the Group has decided to continueits separate presentation of certain items as exceptional. These are itemswhich, in management's judgement, need to be disclosed separately by virtue oftheir size or incidence in order for the reader to obtain a proper understandingof the financial information. Subsequent to its reorganisation in June, the Board has been conducting a reviewof the Group's strategy. The first phase of the strategic review set out threemain goals: to increase the base level of future earnings, to refocus resourceson Specialties and to improve the quality and consistency of future earnings.As a result of strategic action taken in the first half of 2005 and, followingthe implementation of the first part of the Board's strategic review, a numberof exceptional charges and credits have arisen. In Chromium, in order to reduce the volatility of its UK business, one of itskilns at Eaglescliffe was closed resulting in an asset impairment of £25.2million and redundancy costs of £6.2 million. The business also received £1.1million of insurance recoveries in relation to claims from several years ago. In Specialties, the integration of Sasol Servo BV, which was acquired in June2004, was implemented resulting in redundancy charges of £6.5 million. Inaddition, the US based administration functions of the Specialties and Pigmentsbusinesses, were combined resulting in a charge of £3.3 million. Specialtiesalso disposed of its Hardman adhesives business in June 2005 resulting in aprofit of £4.6 million. On 30 June 2005, the majority of operations at Pigments' East St Louis plantwere closed resulting in an asset impairment of £4.8 million and redundancy anddecommissioning costs of £2.3 million. The Elementis head office was also restructured during 2005 for a charge of £3.4million, which comprised £0.7 million in respect of an onerous lease and £2.7million in respect of redundancies. In addition, the Group settled a legalclaim, previously disclosed as a contingent liability, for £4.8 million. Thisrelated to a contract for the sale of Pauls Malt Limited and the repayment ofrefunds to the Department for Environment, Food and Rural Affairs. This waspartly offset by the receipt of £2.4 million in respect of an environmentalclaim. Curtailment gains on pension schemes following the restructuring during2005 amounted to £8.5 million. Exceptional charges and income have been classified in the profit and lossaccount in accordance with their nature. Exceptional items in 2004 comprised£5.2 million which was charged to administrative expenses, less a gain ondisposal of property of £2.6 million which was included in other operatingincome. 6 Income tax expense Continuing operations Discontinued operations 2005 2004 2005 2004 £million £million £million £millionCurrent tax:UK corporation tax at 30% (0.3) (0.1) - 0.3Overseas corporation tax 0.5 0.5 0.1 (0.2)Adjustments in respect of prior years - 0.3 (2.2) (0.3) -overseas ______ ______ ______ ______Total current tax 0.5 (1.8) (0.2) 0.1Deferred tax:United Kingdom (4.0) (3.6) - 1.0Overseas 2.4 0.1 - -Adjustments in respect of prior periods 2.1 1.3 0.2 -ACT written off 2.4 2.8 - - ______ ______ ______ ______Total deferred tax 2.9 0.6 0.2 1.0 ______ ______ ______ ______Income tax expense for the year 3.4 (1.2) - 1.1 ______ ______ ______ ______ Income tax expense (continued) Total 2005 2004 £million £millionCurrent tax:UK corporation tax at 30% (0.3) 0.2Overseas corporation tax 0.6 0.3Adjustments in respect of prior years - overseas - (2.2) ______ ______Total current tax 0.3 (1.7)Deferred tax:United Kingdom (4.0) (2.6)Overseas 2.4 0.1Adjustments in respect of prior periods 2.3 1.3ACT written off 2.4 2.8 ______ ______Total deferred tax 3.1 1.6 ______ ______Income tax expense for the year 3.4 (0.1) ______ ______ The tax charge on profit before exceptional items of £0.3 million (2004: £0.1million) results in an effective tax rate on profit before exceptional items forthe year to 31 December 2005 of 2.6 per cent (2004: 2.0 per cent). The rate islower than the standard UK corporation tax due to the utilisation of losses.Tax on exceptional items was a charge of £3.1 million (2004: credit of £0.2million). 7 Earnings per share The calculation of the basic earnings per share attributable to the ordinaryequity holders of the parent is based on the following: 2005 2004 £million £millionEarnings:Earnings for the purpose of basic earnings per share (38.1) 3.4Exceptional items net of tax 50.3 2.4 ______ ______Adjusted earnings 12.2 5.8 ______ ______ 2005 2004Number of shares:Weighted average number of shares for the purposes of basic earnings per share 434.2 431.9 ______ ______ The calculation of the basic earnings per share from continuing operationsattributable to the ordinary equity holders of the parent is based on thefollowing: 2005 2004 £million £million(Loss)/profit for the year attributable to equity holders of the parent (38.1) 3.4(Loss)/profit for the year from discontinued operations 6.7 (2.4) ______ ______Loss from continuing operations (31.4) 1.0Exceptional items from continuing operations after minority interest 42.5 5.0 ______ ______Adjusted earnings from continuing operations 11.1 6.0 ______ ______ This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Elementis