17th Feb 2005 07:00
Elementis PLC17 February 2005 17 February 2005 ELEMENTIS plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Financial Highlights • Sales £389.2 million (2003: £368.2 million) • Operating profit before goodwill amortisation and exceptionals £11.8 million (2003: £24.5 million) • Profit before tax, goodwill amortisation and exceptionals £6.2 million (2003: £18.3 million) • Earnings per share before goodwill amortisation and exceptionals 1.4p (2003: 3.0p) • Operating loss £2.5 million (2003: profit of £10.9 million) • Loss before tax £7.8 million (2003: profit of £5.5 million) • Basic loss per share 1.8p (2003: earnings of 1.0p) • Net year end borrowings £90.2 million including £36.3 million for the acquisition of Sasol Servo (2003: £46.9 million) • Net year end gearing 30 per cent* (2003: 16 per cent*) *ratio of net borrowings to shareholders' funds plus net borrowings Business Highlights • By January 2005 Chromium chemicals prices up 25 per cent from late 2003 low point • Volumes and prices up in Specialties, Pigments and Specialty Rubber • Accelerated sales growth and increased synergy expectations in Specialties • Chinese Pigments plant complete and commissioning underway • Specialty Rubber restored to profitability Geoff Gaywood, Chief Executive of Elementis plc, said:"Although external conditions were exceptionally challenging, 2004 has seen theimplementation of the major transformational steps in the Elementis strategy." "The chromium chemicals market turned and by January 2005 prices had reachedtheir highest level since 2001. This positive trend is expected to continue.Specialties completed a key acquisition, the successful integration of which, together with geographical expansion and new product introductions drove a 37per cent sales increase in US dollar terms. Our new world-scale Pigments plantin China is complete and will transform the cost base of this business.Specialty Rubber has demonstrated its performance potential and we have nowbegun the process of considering the strategic options for this business." "However, rapidly escalating energy, raw material and freight costs, adversecurrency movements and extreme weather conditions in Northern and CentralAmerica have hampered performance and eroded profitability. Higher variablecosts and and a weak US dollar are likely to remain a challenge in 2005 and arethe subject of intense management focus" "Current trading conditions are characterised by good demand in all businesssectors and a general upward movement in prices with the benefits of thestructural improvements implemented during 2004 expected to become increasingly apparent during 2005. We anticipate progressive price increases in chromiumchemicals, supported by expanding demand and a tightening of global supply;organic growth in Specialties and cost savings ahead of plan from the SasolServo acquisition; significant cost benefits from the new Chinese pigmentsplant; further strong sales growth at Specialty Rubber and operationalefficiencies as a result of the implementation of the ERP system." - Ends - An interview with Geoff Gaywood in video/audio format can be viewed on www.elementis.com and www.cantos.com from 0700 hours GMT. Enquiries Elementis 01784 227000 Geoff Gaywood Chief ExecutiveBrian Taylorson Finance DirectorHilary Reid Evans Head of Corporate Communications Brunswick 020 7404 5959 Kate HolgateWendel VerbeekChi Lo Chairman's Statement Turnover for the year was £21.0 million higher than 2003 at £389.2 million. Ouracquisition of Sasol Servo accounted for £34.2 million of the increase whilecurrency effects reduced turnover by £24.3 million. Operating profit for the year, before goodwill amortisation and exceptionalitems, was £11.8 million (2003: £24.5 million). After operating exceptionals of£2.9 million and goodwill amortisation the operating loss was £2.5 million(2003: profit of £10.9 million). Our Chromium business had a turbulent year following the de-registration of CCA(chromated copper arsenate) in the US for preserving timber for residential use.Margins were also affected by increased energy and freight costs and the weakdollar. During 2004 our average chromium chemical prices began to recover andbetter margins are expected in 2005 despite increases in input costs. Elementis Specialties increased underlying sales volumes by 6 per cent. Profitswere 3 per cent lower than 2003 mainly due to a planned increase in innovationspend and the implementation of a new ERP system. The integration of SasolServo, acquired on 30 June 2004, is proceeding well, with benefits from theacquisition now expected to exceed initial estimates. Servo complements ourtechnology and extends our market coverage. Continuing investment in R&D in ourSpecialty business is the key both to growth and good margins. Our InnovationStrategy continues to make good progress. At Elementis Pigments, the commissioning of the new iron oxide plant at TaiCang,China, is underway and when fully operational will result in a substantialreduction in manufacturing cost. Sales turnover grew by 8 per cent in SpecialtyRubber and profits increased as a consequence. After a tax credit following the resolution of a number of issues, earnings pershare for 2004 before goodwill amortisation and exceptionals, were 1.4 pence(2003: 3.0 pence). Basic earnings per share were a loss of 1.8 pence(2003: 1.0 pence). Capital expenditure for the year was £22.0 million (2003:£21.0 million) compared to depreciation of £15.4 million. With the acquisitionof Servo net debt ended the year at £90.2 million giving an interest cover of3.1 times. Distribution to ShareholdersOnce again, the distribution to shareholders will take the form of an issue ofredeemable B shares. Ordinary shareholders on the register on 26 April 2005 willreceive redeemable B shares with a total nominal value of 1.1 pence for eachordinary share held. This compares with 1.1 pence for the comparable issue lastyear. StrategyOur objective is to create shareholder value by improving the performance of ourbusinesses and drive them towards high margin speciality markets for ourproducts. We intend to intensify our efforts to return our chromium business togood profitability and have strengthened its top management to achieve this end.During the course of 2005 we expect further progress in Specialties led byinnovation and cost reductions in Europe, while the year will be one oftransformation for our Pigments business, with the new plant at TaiCangsubstantially impacting Pigments' cost base. With the improved results atSpecialty Rubber confirming its performance potential we are now considering thestrategic options for this business. Health Safety and the EnvironmentEnvironmental and safety performance continues to improve and is now firstclass. We are planning further initiatives to continue this performance. For thesecond year, we will publish a full Sustainable Development Report. Copies ofthe document can be obtained from our Corporate Communications department at ourhead office in Staines, UK. The BoardOur previous Chairman, Jonathan Fry, retired from the Board in October 2004,having served as Chairman of the Group since 1997. Jonathan's leadership guidedElementis from its creation and helped establish today's solid platform forgrowth. We wish him every happiness in his retirement and thank him for hisinvaluable contribution to the Group. We have today announced that Dr KevinMatthews, Chief Executive of Oxonica Ltd, has joined our board as anon-executive director. Kevin's experience both of the chemicals industry and ofnew technology start-ups brings additional strength to the Board. PeopleThe progress we have made towards our objectives in 2004 has been realisedthanks to the skill, hard work and commitment of our employees. On behalf of thedirectors and shareholders I thank everyone for their contribution. OutlookThis is my first statement as Chairman. It is clear that the key elements of theprogramme to bring about a step change in financial performance of the Group arein place. After a challenging year we expect to see improvements from ourbusinesses in 2005. Signs of the long awaited recovery in Chromium are evidentbut there remain the continuing challenges of higher input costs and a weakdollar. Keith HopkinsChairman17 February 2005 Business Review Sales volumes rose during 2004 in our Specialties, Pigments and Specialty Rubberbusinesses and were flat at Elementis Chromium, where increased sales to Chinacompensated in volume terms for the loss of the residential market for CCAs inthe US. Prices have risen in all businesses. However these increases were notsufficient to offset the negative impact on Group profitability of rapidlyescalating energy, raw material and freight costs, adverse currency movementsand extreme weather conditions in Northern and Central America. Although very challenging, 2004 has seen the successful implementation of someof the major transformational steps planned as part of the Elementis strategy.The chromium chemicals market has turned and by January 2005 realised priceswere 25 per cent ahead of the low point of late 2003. Elementis Specialtiescompleted a key acquisition and growth accelerated. Pigments executed aninvestment in China which will transform its cost base. Profitability wasrestored in Specialty Rubber and our company-wide ERP implementation progressedsuccessfully. At Elementis Specialties our strategy is to achieve sustainable high growth byexpanding our market and technology platforms. Sales at Specialties in 2004 haveincreased by approximately 37 per cent in US dollars, with the acquisition ofSasol Servo, geographical expansion and new product introductions contributingsignificantly. Potential synergies from the Sasol Servo acquisition arecurrently expected to exceed our original estimates by approximately 40 percent. The Elementis Pigments strategy is to secure leadership in premium markets whiletransforming our cost base in Asia Pacific to drive growth and profitability.Our new world scale Pigments plant in China is now complete and will be incommercial operation by the end of February 2005. Following the streamlining of global operations at Elementis Specialty Rubber,our strategy is to leverage our well-invested, low cost manufacturing cost base,local market presence in key mining areas, product performance advantages andbrand recognition to drive volume and continue to improve profitability.Specialty Rubber has maintained high sales growth and delivered a correspondingimprovement in margins. The performance potential of Specialty Rubber has nowbeen demonstrated and Elementis has therefore begun a process of considering thestrategic options for this business. At Elementis Chromium, our strategy is to strengthen and leverage our marketleadership to achieve superior returns on capital over the cycle. ElementisChromium successfully led a sustained recovery in global prices during 2004,after a four year period of decline. Margin recovery was not however achievedduring the year, due to intense variable cost pressures and adverse currencytrends, which led to a drop in overall Group profitability. Sales at ElementisChromium decreased by 9 per cent to £110.5 million. The operating loss for theyear was £3.8 million compared to a profit of £6.8 million in 2003. Greg McClatchy, who has led the turn-around in performance at Specialty Rubbersince his appointment as Managing Director in 2002, was appointed as ManagingDirector, Elementis Chromium, in February 2005. Neil MacLeod, previously FinanceDirector, Specialty Rubber, has taken over as Managing Director, SpecialtyRubber, on an interim basis. Elementis Chromium announced the first in a series of global price increases atthe end of 2003. Early resulting volume losses were recovered and the prices ofall chromium chemicals have risen world-wide since that time. During the courseof 2004, operations at our plant at Castle Hayne, US, were suspended on twooccasions in anticipation of hurricanes, which resulted in lost production. InJanuary 2005, aggregated selling prices for Elementis Chromium's productsreached the highest level since December 2001 and were more than 25 per centhigher than the historic low levels experienced in November 2003. The trading outlook for Elementis Chromium is encouraging. Fixed costs have beenfurther lowered as a result of a manufacturing rationalisation at theEaglescliffe, UK, plant. Global industry capacity utilisation is now estimatedto be in excess of 90 per cent and it is anticipated this figure will continueto rise throughout 2005 as demand increases and further industry capacityrationalisation occurs. Elementis Chromium is today announcing price increasesof up to 20 per cent effective from 1 April 2005. We anticipate that sellingprices for chromium chemicals will continue to increase as the year progresses. At Elementis Specialties, a recovery in demand in the coatings and constructionmarkets world-wide, increased sales in Asia Pacific and new productintroductions drove a 6 per cent sales growth in volume terms, excluding theimpact of the Sasol Servo acquisition. Good growth was experienced in thecritical coatings and construction markets, with European sales in particularshowing significant increases. Our oilfield business was however impacted by twomonths of hurricane-related oil rig shut-downs in the Gulf of Mexico. The Specialties Innovation Board has generated a significant number of newtechnology platforms and the business is targeted with building a new productpipeline to deliver sustainable double-digit growth. Innovation spend, despite2004 increases, is trending towards industry averages, and the contribution ofnew products to sales is now growing. Production at the Changxing, China, planttripled during 2004. The performance of the Sasol Servo acquisition has fullymet expectations to date. Annualised synergistic benefits, originally estimatedat £2.5 million, are now expected to be £3.5 million. These benefits will befully realisable in 2006. In sterling, operating profit before goodwillamortisation and exceptionals has decreased by 3 per cent, reflecting the impactof planned increases in innovation spend and ERP implementation costs. Volumes and turnover continued to improve at Elementis Pigments during 2004.While price increases and improved volumes had a substantial favourable impacton profitability, this was reversed by rapidly escalating raw material andfreight prices, and pre-start-up costs for the new Chinese plant. Full-scaleproduction was rapidly resumed at the plant at Easton, US, following flashflooding in September. Although the flooding affected performance in 2004, nolong term financial or operating impact is anticipated. In addition to the newplant at TaiCang, the Pigments plant at Shenzhen, China was expanded. Theseactivities will substantially lower the aggregate cost base for this businessand provide a strong platform for further growth. Elementis Specialty Rubber has once again shown significant growth in 2004, withsales increasing by over 20 per cent in US dollars for the second year insuccession and all regions showing good volume increases. On conversion tosterling, the sales increase was 8 per cent, again reflecting the impact of theweaker US dollar. In sterling, Specialty Rubber's operating profit increasedfrom breakeven in 2003 to £0.2 million in 2004. During the course of 2004 a newoperation was established in China to address the needs of the rapidlymodernising Chinese mining industry, while in January 2005 Specialty Rubberannounced the opening of a new joint venture in Santiago to serve the large,fast growing Chilean mining market. Health and SafetyElementis achieved an outstanding level in its safety performance in 2004 asevidenced by its lowest ever Recordable Incident Rate of 1.46 per 200,000 hoursfor the year. The performance of the Specialties, Chromium and Specialty Rubberbusinesses was below 1.0 per 200,000 hours worked, which is in line with the topquartile of the world's chemical companies. Sustainable DevelopmentOur Sustainable Development programme, which was summarised in our 2003 annualreport, won the UK Chemical Industry Association's Sustainable DevelopmentAward. Elementis was cited as an example of industry best practice. ERPThe ERP system was implemented in our Chromium and Specialty Rubber businessesduring 2004, without any significant disruption to operations. Francis Lendersjoined Elementis as Director, Global Supply Chain, in December 2004. Francis isa member of the Management Team and is charged with bringing operationalexcellence to our supply chain operations and ensuring that the full potentialbenefits of the ERP system are realised. Six SigmaThe Elementis Six Sigma programme continued to contribute operational savings in2004. Since its introduction in 2001, the total accumulated benefits from theElementis Six Sigma programme have passed £9.0 million, with total associatedcosts estimated at £2.6 million. Six Sigma is a methodology widely used inprocess industries to increase quality and efficiency by reducing processvariability. REACHThroughout 2004 senior management at Elementis has continued to work alongsidethe European and UK chemical industry associations to press for improvements tothe workability of the proposed European REACH (registration, evaluation andauthorisation of chemicals) regulation. While there has been considerableprogress, the proposed regulation still needs substantial improvement to avoiddamaging the competitiveness of the chemical industry, particularly of smallercompanies. OutlookCurrent trading conditions are characterised by good demand in all businesssectors, accompanied by a general upward movement in prices. Continued rawmaterial, energy and freight cost inflation, combined with the impact of theweaker US dollar are however ongoing concerns. Variable costs are receivingintense management focus and are being fixed or hedged as consideredappropriate. We anticipate that the benefits of structural improvementsimplemented during 2004 will become apparent during 2005. These improvementsinclude progressive price increases in chromium chemicals supported by expandingdemand and a tightening of global supply; cost savings and sales growth from theSasol Servo acquisition and organic growth at Specialties; the cost benefits ofthe new TaiCang plant in Pigments; further strong sales growth at SpecialtyRubber and operational efficiencies as a result of the implementation of the ERPsystem. Financial Review Sales-------------------------------------------------------------------------------- Sales Effect of Acquired Inc/(dec) Sales 2003 exchange rates in 2004 2004 2004 £million £million £million £million £million--------------------------------------------------------------------------------Specialties & Pigments 209.3 (14.4) 34.2 9.1 238.2--------------------------------------------------------------------------------Chromium 121.9 (9.5) - (1.9) 110.5--------------------------------------------------------------------------------Specialty Rubber 42.7 (0.4) - 3.6 45.9--------------------------------------------------------------------------------Inter-company (5.7) - - 0.3 (5.4)-------------------------------------------------------------------------------- 368.2 (24.3) 34.2 11.1 389.2-------------------------------------------------------------------------------- Operating profit before goodwill amortisation and exceptionals-------------------------------------------------------------------------------- Operating Effect of Operating profit* exchange Acquired Inc/(dec) profit* 2003 rates in 2004 2004 2004 £million £million £million £million £million--------------------------------------------------------------------------------Specialties & Pigments 17.7 (0.5) 0.9 (2.7) 15.4--------------------------------------------------------------------------------Chromium 6.8 (2.9) - (7.7) (3.8)--------------------------------------------------------------------------------Specialty Rubber - - - 0.2 0.2-------------------------------------------------------------------------------- 24.5 (3.4) 0.9 (10.2) 11.8--------------------------------------------------------------------------------* before goodwill amortisation and exceptionals Sales increased by 6 per cent from the previous year to £389.2 million. Thisincludes Sasol Servo BV, which was acquired on 30 June 2004 and contributed£34.2 million to sales in the second half. After adjusting for the acquisitionand exchange rates, sales increased by 3 per cent at constant currency. The sales increase was mainly due to higher volumes at Specialties & Pigmentsand Specialty Rubber. Marginally higher average prices for the Group were offsetby adverse mix effects. In terms of geography, lower volumes in North America and Europe, largely due tothe loss of CCA business in the US and the effect of price increases inChromium, were more than offset by increased volumes into Asia Pacific and therest of the world. Operating profit before goodwill amortisation and exceptionals was £12.7 millionbelow previous year at £11.8 million. On a constant currency basis the decreasewas £9.3 million. The increase in sales was more than offset by increases in raw materials,freight costs and energy particularly in the second half of 2004, and costsassociated with the implementation of the ERP system. The operating loss after goodwill amortisation and exceptionals was £2.5 million(2003: profit of £10.9 million) for the year. Goodwill amortisation in the yearamounted to £11.4 million (2003: £12.4 million) and operating exceptional costswere £2.9 million (2003: £1.2 million). Specialties & Pigments-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Sales 238.2 209.3--------------------------------------------------------------------------------Adjusted operating profit * 15.4 17.7--------------------------------------------------------------------------------Operating profit 2.4 3.8--------------------------------------------------------------------------------* before goodwill amortisation and exceptionals Sales in Specialties & Pigments increased by 14 per cent to £238.2 million.After adjusting for the business acquired in June 2004, sales in constantcurrency were 4 per cent higher than previous year. This was primarily due toincreased volumes while higher prices were offset by adverse mix in the year dueto higher sales into lower price geographies, such as Asia Pacific. Operating profit before goodwill amortisation and exceptionals was £2.3 millionlower than the previous year at £15.4 million. After adjusting for acquisitionsand currency, operating profit was £2.7 million lower. Increased volumes weremore than offset by higher raw materials, energy and fixed costs. Sales in Elementis Specialties on a constant currency basis excluding theacquisition were 3 per cent higher than the previous year. Volumes were up 6 percent largely due to a strong performance in the coatings and constructionsectors, and included new business in the growing but lower margin markets inAsia, Latin America and the Middle East. Increased sales to some largercustomers, where rebates are more prominent, had a mitigating effect on realisedsales values and margins. Prices improved in some key sectors, but were onaverage at similar levels to the previous year. Operating profit before goodwill amortisation and exceptionals on a constantcurrency basis was 5 per cent lower than the previous year. Higher volumes wereoffset by adverse mix, planned increases in the innovation programme and ERPimplementation costs. Sales in Elementis Pigments on a constant currency basis increased by 7 per centdue to higher volumes and improved pricing. Operating profit was however lowerthan the previous year as higher raw material costs and start up costs inTaiCang, offset volume and price improvements. Elementis Chromium -------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Sales 110.5 121.9--------------------------------------------------------------------------------Adjusted operating (loss)/profit * (3.8) 6.8--------------------------------------------------------------------------------Operating (loss)/profit (5.1) 7.4--------------------------------------------------------------------------------* before exceptionals Sales in Elementis Chromium decreased by 9 per cent to £110.5 million and on aconstant currency basis decreased by 2 per cent. Overall volumes which were 3 per cent down in the first half following aninitial round of price increases, recovered strongly in the second half to be inline with previous year. The loss of CCA business for residential uses in theUS, which reduced sales by approximately £15.0 million, was offset by strongdemand for Chrome Oxide and by sales into the Asia Pacific market. Prices wereincreased throughout the year and average US Dollar prices were around 10 percent higher in December 2004 than twelve months earlier. However average pricingfor the whole year was still marginally below that for the previous year, andaccounted for most of the decrease in constant currency sales. The operating loss before exceptionals for the year was £3.8 million compared toa profit of £6.8 million in the previous year. The increase in energy costs was£2.2 million while the weakness of the US Dollar was the main cause of anadverse currency impact of £2.9 million. Higher raw material and freight costsaccounted for most of the remaining reduction. Specialty Rubber-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Sales 45.9 42.7--------------------------------------------------------------------------------Adjusted operating profit * 0.2 ----------------------------------------------------------------------------------Operating profit/(loss) 0.2 (0.3)---------------------------------------------------------------------------------* before exceptionals Sales in Specialty Rubber increased by 8 per cent to £45.9 million, due tostrong volume growth largely in Asia Pacific, South Africa and Europe. Highersales volumes and improved pricing were partly offset by fixed cost increases.The operating profit before exceptionals for the year was £0.2 million comparedto break even in the previous year. ExceptionalsTotal exceptional items before taxation in the year were £2.6 million (2003:£0.4 million). These comprised: £million---------------------------------------------------------------------------------Operating :--------------------------------------------------------------------------------Redundancy and restructuring costs (2.9)---------------------------------------------------------------------------------Non operating:---------------------------------------------------------------------------------Profit on disposal of property 2.6--------------------------------------------------------------------------------Loss on termination of business (2.3)--------------------------------------------------------------------------------- (2.6)------------------------------------------------------------------------------- The redundancy and restructuring costs comprise £1.3 million of redundancy costsat Chromium's Eaglescliffe site and £1.6 million incurred in the first phase ofthe integration of Sasol Servo BV following its acquisition in June 2004. The profit on disposal of property of £2.6 million is from the sale andleaseback of Specialty Rubber's Yateley, UK property. The loss on termination ofbusiness of £2.3 million is to provide for the book value of the Group's 50 percent interest in Enenco together with any residual site clean-up costs. Thisfollows a decision made by the joint venture parties during 2004 to close thebusiness. Interest-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------On net borrowings (3.8) (1.9)--------------------------------------------------------------------------------Pension finance charge (1.1) (4.2)---------------------------------------------------------------------------------Discount on provisions (0.9) (0.9)--------------------------------------------------------------------------------Other 0.2 0.8---------------------------------------------------------------------------------Total (5.6) (6.2)------------------------------------------------------------------------------- Interest payable on net borrowings increased during the year by £1.9 million dueto higher borrowings and a higher cost of borrowing. The finance charge inrespect of pension and post-retirement benefits decreased by £3.1 million in theyear due a lower pension deficit and an improvement on the expected return onpension scheme assets. Interest cover - the ratio of operating profit before goodwill amortisation andexceptionals to interest on net borrowings - was 3.1 times (2003: 12.9 times). Taxation--------------------------------------------------------------------------------- EffectiveTax (charge)/credit £million rate--------------------------------------------------------------------------------Before goodwill amortisation and exceptionals (0.2) 2%--------------------------------------------------------------------------------Goodwill amortisation - ----------------------------------------------------------------------------------Exceptionals 0.2 9%---------------------------------------------------------------------------------Total - --------------------------------------------------------------------------------- The effective rate of tax on profit before goodwill amortisation andexceptionals was 2 per cent (2003: 29 per cent). The decrease in the rate was due to the resolution of open issues from priorperiods and the utilisation of losses. Potential deferred tax assets of£28.8 million (2003: £23.2 million) have not yet been recognised. The effective tax rate on profit before goodwill amortisation and exceptionalsin 2005 will continue to be dependent on the mix of profits primarily betweenthe UK and overseas. Earnings per shareEarnings per share for the year was a loss of 1.8 pence per share (2003:earnings of 1.0 pence per share), mainly due to the lower operating profit forthe year. Earnings per share before goodwill amortisation and exceptionals was60 per cent lower at 1.4 pence (2003: 3.0 pence) due to the lower operatingprofit but partly offset by lower FRS17 pension finance charges and a lower taxrate. Dividends and issue of redeemable B sharesThe Board did not declare an interim dividend and, similarly, is not proposing afinal dividend. The Board instead intends to continue with the programme,started in 2000, of issuing and redeeming redeemable B shares. The total nominal value of redeemable B shares issued to shareholders during2004 was 2.2 pence per ordinary share. The Board intends to issue further redeemable B shares to ordinary shareholderson the register on 26 April 2005, such that they receive redeemable B shareswith a total nominal value of 1.1 pence for each ordinary share held. Thiscompares with 1.1 pence for the comparable issue last year. This will be coupledwith an offer to redeem these new shares for cash at their nominal value on3 May 2005. A further offer will also be made to existing holders of redeemableB shares to redeem these shares for cash at their nominal value on 3 May 2005. Cash flowNet borrowings increased by £43.3 million in the year to £90.2 million. The cashoutflow due to changes in working capital increased by £5.1 million as higherstocks and debtors due to increased volumes and the transitional effects of theERP implementation, were partially offset by higher creditors. The ratio ofworking capital to sales increased from 17.5 per cent to 18.3 per cent afteradjusting for the acquisition in Specialties which was made part way through theyear. The cash flow is summarised below:-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Earnings before interest, tax, exceptionals,depreciation and amortisation 27.2 40.1--------------------------------------------------------------------------------Change in working capital (5.1) (2.9)--------------------------------------------------------------------------------Other (7.0) (22.0)--------------------------------------------------------------------------------Capital expenditure (22.0) (21.0)-------------------------------------------------------------------------------- (6.9) (5.8)-------------------------------------------------------------------------------- Redemption of B shares (9.2) (9.5)--------------------------------------------------------------------------------Acquisitions and disposals (30.7) 0.8--------------------------------------------------------------------------------Currency fluctuations 3.5 5.0-------------------------------------------------------------------------------- (43.3) (9.5)--------------------------------------------------------------------------------Net borrowings at start of year (46.9) (37.4) --------------------------------------------------------------------------------Net borrowings at end of year (90.2) (46.9)-------------------------------------------------------------------------------- Other cash flows decreased by £15.0 million, due to lower contributions topension schemes, less paid on provisions, and net tax refunds of £4.5 million. Capital expenditureCapital expenditure in the year was 143 per cent of depreciation (2003: 134 percent) as the Group continued to invest in the ERP project and largely completedthe construction of a new Pigments plant in TaiCang, China. Total spend in the year included £2.6 million (2003: £7.7 million) in relationto the ERP project and £7.3 million (2003: £1.9 million) for the Pigments plantin China. Balance Sheet-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Intangible fixed assets 144.4 159.3--------------------------------------------------------------------------------Other net assets 155.7 139.9-------------------------------------------------------------------------------- 300.1 299.2--------------------------------------------------------------------------------Shareholders' funds 209.9 252.3--------------------------------------------------------------------------------Net borrowings 90.2 46.9-------------------------------------------------------------------------------- 300.1 299.2-------------------------------------------------------------------------------- Gearing 1 30% 16% 1 the ratio of net borrowings to shareholders' funds plus net borrowings Currency fluctuations had a significant impact on shareholders' funds. The maincurrency exchange rates relevant to Elementis are set out below:-------------------------------------------------------------------------------- 2004 2003 Year end Avge Year end Avge--------------------------------------------------------------------------------US Dollar 1.92 1.83 1.79 1.64Euro 1.41 1.47 1.42 1.45-------------------------------------------------------------------------------- The majority of the Group's assets are stated in US dollars and the weakening ofthe US dollar in 2004 reduced shareholders' funds by a net £11.8 million. Thebalance of the reduction was due to the current year trading result, the issueand redemption of B shares, actuarial adjustments to the pension fund valuationand associated deferred taxation. Pensions and other post retirement benefitsThe 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 market values of the schemes' assets and liabilities, increased by£11.7 million to £64.5 million. The increase was primarily due to a change inthe rate of deferred tax related to the UK pension scheme from 30 per cent to10 per cent to reflect surplus ACT. This change increased the net pensionliability by £9.8 million and the balance was due to the acquisition of SasolServo B.V. The total cost of pensions and post-retirement health care in the year was£7.2 million (2003: £8.5 million). The charge in 2003 included a credit inrespect of past service of £1.3 million. Costs were lower in 2004 principallydue to a £3.1 million reduction in finance charges to £1.1 million (2003:£4.2 million). Total contributions to pension and post retirement schemes in theyear amounted to £10.7 million (2003: £14.4 million). The estimated contributionin 2005 is approximately £12.0 million. International Accounting StandardsAll listed companies are required to present consolidated financial informationthat fully complies with International Financing Reporting Standards (IFRS) foraccounting periods starting on or after 1 January 2005. The project to assessthe impact of this change of accounting standards is almost complete and aseparate announcement will be made in March 2005. The current indications arethat the comparative for earnings per share before goodwill amortisation andexceptionals under UK Gaap will not be materially different under IFRS. Consolidated profit & loss accountfor the year ended 31 December 2004------------------------------------------------------------------------------------------------------------ Before Before goodwill Goodwill goodwill Goodwill amortisation amortisation amortisation & amortisation & & exceptionals & exceptionals 2004 exceptionals exceptionals 2003 Note £million £million £million £million £million £million-------------------------------------------------------------------------------------------------------------Turnover-------------------------------------------------------------------------------------------------------------Continuingoperations: -------------------------------------------------------------------------------------------------------------Ongoing 355.0 - 355.0 368.2 - 368.2-------------------------------------------------------------------------------------------------------------Acquisitions 34.2 - 34.2 - - -------------------------------------------------------------------------------------------------------------- 2 389.2 - 389.2 368.2 - 368.2-------------------------------------------------------------------------------------------------------------Operating profit/(loss) -------------------------------------------------------------------------------------------------------------Continuing operations:------------------------------------------------------------------------------------------------------------- Ongoing 10.9 (12.5) (1.6) 24.5 (13.6) 10.9-------------------------------------------------------------------------------------------------------------Acquisitions 0.9 (1.8) (0.9) - - --------------------------------------------------------------------------------------------------------------Operatingprofit/(loss) 2,3 11.8 (14.3) (2.5) 24.5 (13.6) 10.9-------------------------------------------------------------------------------------------------------------Loss ontermination ofbusiness (1) 3 - (2.3) (2.3) - - -------------------------------------------------------------------------------------------------------------Profit ondisposal ofproperties (1) 3 - 2.6 2.6 - - -------------------------------------------------------------------------------------------------------------Profit ondisposal ofproperties (2) 3 - - - - 0.8 0.8-------------------------------------------------------------------------------------------------------------Profit/(loss) onordinary activitiesbefore interest 11.8 (14.0) (2.2) 24.5 (12.8) 11.7-------------------------------------------------------------------------------------------------------------Net interestpayable 4 (3.6) - (3.6) (1.1) - (1.1)-------------------------------------------------------------------------------------------------------------Other financecharges 4 (2.0) - (2.0) (5.1) - (5.1)-------------------------------------------------------------------------------------------------------------Profit/(loss) onordinary activitiesbefore tax 6.2 (14.0) (7.8) 18.3 (12.8) 5.5-------------------------------------------------------------------------------------------------------------Tax on profit/(loss) onordinaryactivities 5 (0.2) 0.2 - (5.3) 4.2 (1.1)-------------------------------------------------------------------------------------------------------------Profit /(loss)onordinary activitiesafter tax 6.0 (13.8) (7.8) 13.0 (8.6) 4.4-------------------------------------------------------------------------------------------------------------Minorityinterests -equity - - - (0.1) - (0.1)-------------------------------------------------------------------------------------------------------------Profit/(loss) for thefinancial yeartransferred(from)/ toreserves 6.0 (13.8) (7.8) 12.9 (8.6) 4.3------------------------------------------------------------------------------------------------------------ Earnings/(loss)per ordinaryshare 6------------------------------------------------------------------------------------------------------------Basic anddiluted 1.4p (1.8)p 3.0p 1.0p------------------------------------------------------------------------------------------------------------- (1) Continuing operations(2) Discontinued operations Balance sheetat 31 December 2004------------------------------------------------------------------------------- Group 2004 2003 £million £million--------------------------------------------------------------------------------Fixed assets---------------------------------------------------------------------------------Intangible assets 144.4 159.3--------------------------------------------------------------------------------Tangible fixed assets 173.4 157.7---------------------------------------------------------------------------------Investments 1.9 3.2--------------------------------------------------------------------------------- 319.7 320.2--------------------------------------------------------------------------------Current assets--------------------------------------------------------------------------------Stocks 70.1 54.4--------------------------------------------------------------------------------Debtors 85.5 68.9---------------------------------------------------------------------------------Cash at bank and in hand 11.5 23.8-------------------------------------------------------------------------------- 167.1 147.1---------------------------------------------------------------------------------Creditors: amounts falling due within one year---------------------------------------------------------------------------------Borrowings (4.4) (5.3)--------------------------------------------------------------------------------Creditors (81.0) (63.5)-------------------------------------------------------------------------------- (85.4) (68.8)--------------------------------------------------------------------------------Net current assets 81.7 78.3--------------------------------------------------------------------------------Total assets less current liabilities 401.4 398.5--------------------------------------------------------------------------------Creditors: amounts falling due after more than one year--------------------------------------------------------------------------------Borrowings (97.3) (65.4)--------------------------------------------------------------------------------Government grants (2.4) (1.3)-------------------------------------------------------------------------------- (99.7) (66.7)--------------------------------------------------------------------------------Provisions for liabilities and charges (25.5) (24.8)-------------------------------------------------------------------------------- (125.2) (91.5)--------------------------------------------------------------------------------Net assets excluding net pension liability 276.2 307.0--------------------------------------------------------------------------------Net pension liability (64.5) (52.8)--------------------------------------------------------------------------------Net assets including net pension liability 211.7 254.2-------------------------------------------------------------------------------- Capital and reserves--------------------------------------------------------------------------------Called up share capital 23.8 23.5--------------------------------------------------------------------------------Share premium 1.2 1.2--------------------------------------------------------------------------------Capital redemption reserve 71.5 62.3--------------------------------------------------------------------------------Profit and loss account 113.4 165.3--------------------------------------------------------------------------------Shareholders' funds 209.9 252.3--------------------------------------------------------------------------------Minority equity interests 1.8 1.9-------------------------------------------------------------------------------- 211.7 254.2-------------------------------------------------------------------------------- Shareholders' funds--------------------------------------------------------------------------------Equity 207.7 250.4--------------------------------------------------------------------------------Non-equity 2.2 1.9-------------------------------------------------------------------------------- 209.9 252.3-------------------------------------------------------------------------------- Consolidated cash flow statementfor the year ended 31 December 2004-------------------------------------------------------------------------------- 2004 2003 Note £million £million--------------------------------------------------------------------------------Net cash inflow from operating activities 7 13.1 18.3--------------------------------------------------------------------------------Returns on investments andservicing of finance --------------------------------------------------------------------------------Interest received 1.4 2.0--------------------------------------------------------------------------------Interest paid (4.1) (3.6)-------------------------------------------------------------------------------- (2.7) (1.6)--------------------------------------------------------------------------------Taxation 4.5 (1.3)--------------------------------------------------------------------------------Capital expenditure and financialinvestment --------------------------------------------------------------------------------Purchase of fixed assets (lessgrants received) (22.0) (21.0)--------------------------------------------------------------------------------Disposal of fixed assets 0.2 0.4--------------------------------------------------------------------------------Disposal of properties - 5.6 1.1exceptional -------------------------------------------------------------------------------- (16.2) (19.5)--------------------------------------------------------------------------------Acquisitions and disposals--------------------------------------------------------------------------------Acquisition of businesses (36.3) (0.3)--------------------------------------------------------------------------------Cash outflow before use of liquidresources and financing (37.6) (4.4)--------------------------------------------------------------------------------Financing--------------------------------------------------------------------------------Redemption of B shares (9.2) (9.5)--------------------------------------------------------------------------------(Decrease)/increase in borrowingsrepayable within one year (0.8) 0.2--------------------------------------------------------------------------------Increase/(decrease) in borrowingsrepayable after one year 35.8 (7.0)--------------------------------------------------------------------------------Capital element of finance lease payments (0.2) (0.2)-------------------------------------------------------------------------------- (12.0) (20.9)--------------------------------------------------------------------------------Management of liquid resources--------------------------------------------------------------------------------Repayment of cash deposits - 14.5--------------------------------------------------------------------------------Decrease in cash in the year (12.0) (6.4)--------------------------------------------------------------------------------Reconciliation of net cash flow to movement in net borrowingsfor the year ended 31 December 2004-------------------------------------------------------------------------------- 2004 2003 £million £million--------------------------------------------------------------------------------Change in net borrowings resulting from cash flows:--------------------------------------------------------------------------------Decrease in cash in the year (12.0) (6.4)--------------------------------------------------------------------------------(Increase)/decrease in borrowings (34.8) 7.0--------------------------------------------------------------------------------Decrease in liquid resources - (14.5)-------------------------------------------------------------------------------- (46.8) (13.9)--------------------------------------------------------------------------------New finance leases - (0.6)--------------------------------------------------------------------------------Currency translation differences 3.5 5.0--------------------------------------------------------------------------------Increase in net borrowings (43.3) (9.5)--------------------------------------------------------------------------------Net borrowings at beginning of the financial year (46.9) (37.4)Related Shares:
Elementis