26th Jul 2005 07:02
Cookson Group PLC26 July 2005 COOKSON GROUP PLC INTERIM REPORT TO SHAREHOLDERS 26 July 2005 First Half Year 2005 2004 2004Revenue (£m) 795 817 -3% 1,652Trading profit* (£m) 54.4 51.9 +5% 114.9Return on sales 6.8% 6.4% +0.4% pts 7.0% Profit before tax (£m)- Headline* 39.9 37.2 +7% 85.0- Basic 33.3 24.1 +38% 12.6Earnings per share (pence)- Headline* 13.9 12.4 +12% 30.1- Basic 8.5 4.4 (11.2) Free cash flow (£m) (22.8) (21.2) -£1.6m 51.6Net debt (£m) 362.8 402.0 £39m lower 321.8 The above information is at reported exchange rates *Refer to the income statement attached for definitions • Trading profit up 5% • Return on sales increases 0.4 % points • 7% rise in headline profit before tax • Headline EPS up 12% • Net debt £39 million lower than June 2004 • Progress on strategy implementation • Disposals to date raise £13 million Commenting on the results, Nick Salmon, Chief Executive, said: "The results for the first half of 2005 were in line with the guidance providedin May. The Group's performance benefited from a more profitable second quarterwhen compared to the first quarter. Over the first six months of 2005, we have also made good progress inimplementing our strategy to improve the operational performance of our corebusinesses and to dispose of non-core businesses and surplus properties. The Ceramics division has recorded excellent results on the back of continuedstrong growth in global steel production. The Electronics division hasexperienced mixed market conditions globally, with strong growth in the AsiaPacific region offset by more challenging conditions in NAFTA and Europe. ItsLaminates sector continues to face difficult markets and has made a loss in thefirst half, necessitating further restructuring in Europe and USA. The PreciousMetals division has had to cope with continued weakness in retail markets but,despite very low volumes, has remained profitable. The outlook for our markets remains unclear but we are confident that we aretaking the necessary steps to reduce our cost base and implement the strategy weset out in January. Given the market conditions we are currently experiencing,we would expect overall performance for the full year to be slightly better thanthat achieved in 2004." IFRS The results for the Group for the first half of 2005 and comparative periodshave been restated in accordance with International Financing ReportingStandards (IFRS). The impact on the Group's 2004 financial statements of its transition to IFRSwas communicated to shareholders on 22 July 2005 by way of a press and RNSannouncement and is available on the Company's website www.cooksongroup.co.uk. STRATEGY - PROGRESS As announced in January 2005 and as described in our 2004 Annual Report, ourstrategy focuses on performance enhancement, debt reduction and the disposal ofnon-core activities. Our objectives include improving profitability, with targeted return on sales by2007 of 10% in both the Ceramics and Electronics divisions and a return on netsales (i.e. excluding the precious metals content) of 15% for the PreciousMetals division. We also plan to reduce total debt significantly over the next2-3 years. This will be achieved through a combination of strong operationalcash flow - from improved profitability and working capital management - and adisposal programme which aims to raise over £100 million from the sale of anumber of non-core activities and assets by the end of 2006. In addition, weintend to resume a sustainable dividend payment as soon as possible withdividends funded from free cash flow. There are four main components to advancing this strategy and progress is beingmade in all of them: • Products and Markets We continue to focus on higher margin products with higher technology content,maintaining our investments in R&D and exiting commodity activities such asrigid laminates and certain types of ceramic bricks. Examples of new productswhere we are seeing encouraging sales growth in 2005 include thin slab casternozzles and solar crucibles in the Ceramics division, lead-free products, GETEK(TM)laminates and copper damascene in the Electronics division and ournewly-launched tarnish resistant silver alloy Argentium (R) in the PreciousMetals division. • Investment and Restructuring We continue to balance production facilities and customer marketsgeographically, progressively investing in emerging economies whilerestructuring as necessary in the more mature markets. Examples from the firsthalf of 2005 include: Ceramics - NAFTA: modernisation and rationalisation of plants in the USA and Mexico (completed). - South Africa: rationalisation of two plants into one (launched). - China, Brazil, Poland: additional production capacity for flow control products (nearing completion). - China: increasing Cookson's shareholding in its joint venture with Wuhan Steel from 25% to 50% plus capacity expansion (completed). Electronics - Germany and Sweden: reduction of laminates capacity in Germany and streamlining production in Sweden (underway). - Europe: rationalisation of certain Chemistry sector activities and reduction of overheads (underway). - NAFTA: Chemistry capacity expansion in Mexico and closure of a factory in California and related overhead reductions (nearing completion). - China: additional laminates production capacity (complete, further phase now planned); new R&D technology centres in Shanghai and Shenzhen (completed). - Singapore: Semiconductor packaging workforce reduction (completed). Precious Metals - USA: 8% reduction in workforce and consolidation onto one main site (completed). - Europe: restructuring of operations in France, exiting manufacturing and relocating the sales force (nearing completion). • Cost reduction By simplifying our structure and processes we can take out substantial overheadcosts. Progress has been made in many areas, particularly in the Group andElectronics division headquarters. In common with a number of other UKcompanies, we are now examining the required steps to de-register as a foreignprivate issuer with the U.S. Securities and Exchange Commission, which wouldsave significant administrative and audit costs. We also continue to focus on improving our materials purchasing efficiency tocontrol our raw material costs via centralised global procurement initiativesand sourcing from lower cost countries. • Disposals: To date, the following disposals of non-core activities and surplus propertieshave been completed and cash proceeds received: Proceeds Date Closed Revenue Trading 2004 Profit 2004 Fraternity Rings £3.0m Dec 2004 £2.5m £0.3mTechnical Ceramics £4.7m June 2005 £4.6m £1.0mConference Centre £1.3m June 2005Redundant Properties £4.4m June 2005 Total £13.4m The disposal programme is at an early stage and we remain confident that we willachieve the target of raising £100 million from disposals by the end of 2006. Conclusion We are satisfied with the progress in implementing our strategy achieved overthe last six months. We expect to maintain progress in all four of the aboveareas and to announce new related developments through the second half of 2005. CURRENT OUTLOOK The strong growth in global steel production, which benefited our Ceramicsdivision in the first half, is expected to moderate in the third quarter asglobal inventories correct. While we have limited visibility beyond this point,we expect growth to resume in the fourth quarter. In our Electronics division's global markets there are mixed signals ofcontinued growth in Asia-Pacific balanced by further slowdowns in NAFTA and EUmarkets. The Precious Metals division has experienced weak retail market conditions inthe USA and Europe. Whilst it is clearly too early to be specific on trends forthe rest of the year, the level of activity in the second half should improve onthat of the first given the influence on jewellery sales of the normal holidayperiod and Christmas season. The outlook for our markets remains unclear but we are confident that we aretaking the necessary steps to reduce our cost base and implement the strategy weset out in January. Given the market conditions we are currently experiencing,we would expect overall performance for the full year to be slightly better thanthat achieved in 2004. DIRECTORATE Mike Butterworth was appointed to the Board on 15 June 2005 and will replaceDennis Millard as Finance Director when Mr. Millard leaves the Company, aspreviously announced, at the end of July. Jeff Hewitt joined the Board on 1 June 2005 and was appointed Chairman of theAudit Committee on that date. Mr Hewitt replaces Kent Atkinson who resigned fromthe Company in April 2005. Gian Carlo Cozzani, executive Director and Chief Executive of the CeramicsDivision is to step down from the Board on reaching retirement age on 6 October2005. His designated replacement as Chief Executive of the Ceramics Division,Francois Wanecq, joined the Group last month thereby ensuring a smoothtransition. REVIEW OF OPERATIONS Note: The data provided in the tables on pages 5 to 14 are at reported exchangerates. Group First Half Year 2005 2004 2004Revenue (£m) 795 817 1,652Trading profit (£m) 54.4 51.9 114.9Return on sales 6.8% 6.4% 7.0% Group revenue in the first half of 2005 was 3% lower than the same period lastyear at both reported and constant exchange rates. Revenue for the Ceramicsdivision was up 3% over the previous half year and the Electronics divisionrevenue was virtually unchanged, whereas that of the Precious Metals divisionwas down 22%. Revenue for the Group's operations in the Asia-Pacific regioncontinued to grow strongly, now representing over 20% of Group revenue, whereasfor operations in NAFTA and Europe, revenue was down on 2004. Despite the decrease in revenue, trading profit of £54.4m in the first half of2005 was 5% higher than the same period in 2004 at both reported and constantexchange rates. The £2.5 million increase in trading profit in the first halfof 2005 arose from: a £6.7 million increase by the Ceramics division; GroupCorporate costs being £0.5 million lower than in the previous year, partlyoffset by decreases in trading profits of £3.6 million and £1.1 million by theElectronics and Precious Metals divisions respectively. Revenue of £408 million in the second quarter was 4% down year-on-year thoughtrading profit of £32.7 million was £3.5 million (12%) higher, more thanoffsetting the £1.1 million shortfall in the first quarter. Ceramics division First Half Year 2005 2004 2004Revenue (£m) 368 358 740Trading profit (£m) 34.4 27.7 60.0Return on sales 9.3% 7.7% 8.1% Revenue for the Ceramics division in the first half of 2005 was 3% higher thanthe same period last year and up 2% at constant exchange rates. Excluding therevenue of the brick-making businesses that were sold in December 2004, revenuefor the division for the first half of 2005 was up 8% at reported exchangerates. Trading profit of £34.4 million was 24% higher than the first half of 2004 androse by 22% at constant exchange rates. Trading profit in the second quarter of£20.2 million was up 30% at constant exchange rates over the same period lastyear. This reflects the continuing improvement in profitability by the divisionand, as a consequence, the division's return on sales improved further, risingfrom 7.7% in the first half of 2004 to 9.3% in the period under review. Iron and Steel The Iron and Steel sector supplies flow control products that control andprotect the stream of molten metal as it passes through the continuous caststeelmaking process; bricks and monolithic linings to contain molten steel; andconstruction and installation services. The sector is the division's largest,accounting for over 70% of the division's revenue. Global steel production, to which the majority of this sector's sales aredirectly linked, rose by 8% to record levels in the first half of 2005. In thesector's two largest markets, the enlarged European Union and NAFTA, whichaccount for some 45% and 30% of the sector's revenue, steel production was downsome 2% year-on-year. In the fast growing Asia-Pacific region, which accountsfor some 15% of the sector's total revenue, steel production continued to growstrongly, mainly due to a 28% rise in steel production in China and a 12% risein India, both key markets for the sector. Revenue for the Iron and Steel sector rose by 7% to £262 million at constantexchange rates in the first half, boosted by strong underlying volume growth aswell as price increases, and by more construction and installation projects. Inthe second quarter, consistent with the slowdown in the year-on-year growthrates in steel production in the regions in which the sector operates, revenuegrowth moderated and was up 6% at constant exchange rates in comparison with thesecond quarter of the previous year. Overall, gross margins were maintained despite increases in raw material andenergy costs and an increase in relatively lower-margin construction andinstallation activity. In addition, a reduced level of overhead costs wasachieved, mainly as a result of the rationalisation programmes initiated inoperations in the USA in the second half of last year and from the increase incapacity in Mexico. As a result, trading profit for the sector in the first halfimproved over the previous year. In the first quarter, a programme to rationalise the sector's activities inSouth Africa commenced, which includes the relocation of activities onto asingle site. The one-off rationalisation costs for this initiative, and for thecompletion of the above-mentioned ones in the USA, amounted to £1.1 million inthe first half. Foundry and Industrial Processes These sectors produce heat containment and flow control products and otherspeciality ceramics products for a wide variety of industries and applications.Activities in Europe and NAFTA account for some 50% and 40% respectively of thesector total. Revenue for these sectors of £72 million was up 1% at constant exchange ratesover the first half of 2004. This was generally in line with activity levels inthe end markets in which they operate in their main geographic regions. As withthe Iron and Steel sector, profits rose on the back of improved gross marginsand a lower cost base. Glass The sector produces flow control and brick/lining products for the glassindustry as well as crucibles for making solar energy products. In the firsthalf, revenue of £34 million was down on the previous year but, excluding therevenue of the European brick businesses sold in 2004, revenue was 22% higherthan the previous year at constant exchange rates. As a result, profitabilityrose strongly, boosted by an excellent performance by the sector's operations inEastern Europe and China. In the second quarter, the sector's US technical ceramics business, McDanel, wassold. This business had revenue of £2.1 million in the six month period to thedate of sale (£4.6 million for the full year in 2004) and contributed some £0.3million of the sector's trading profit in the first half. Electronics division First Half Year 2005 2004 2004Revenue (£m) 309 308 625Trading profit (£m) 20.9 24.5 52.8Return on sales 6.8% 8.0% 8.4% Revenue for the division was virtually unchanged over the first half of lastyear at both reported and constant exchange rates. This broadly reflected marketconditions in the global electronics industry, where activity levels reached aplateau in the first half of 2005 following a period of strong growth in 2004.In the second quarter, underlying global activity levels in the electronicsindustry slowed, resulting in a 2% year-on-year decrease in revenue. Conditionswere challenging in the NAFTA and European operations, each accounting for some30% of the division's revenue; accordingly, revenue was down on the previousyear. For the Asia-Pacific region, which accounts for some 40% of the division'srevenue, strong growth in market demand continued, and revenue grew robustly,though the year-on-year rate of growth moderated in the second quarter. Trading profit of £20.9 million for the first half of 2005 was down £3.6 million(14%) on the previous year at both reported and constant exchange rates, withthe majority of the shortfall (£2.9 million) arising in the Laminates sector. Asa consequence, return on sales decreased from 8.0% to 6.8%. Profits in the second quarter of 2005 of £12.5 million were £1.1 million lowerthan the second quarter last year due to losses in the Laminates sector. A number of cost-saving initiatives were put in place in the first half forwhich rationalisation charges of £6.0 million were recognised in the period asdetailed under each sector below. Assembly Materials First Half Year 2005 2004 2004Revenue (£m) 139 135 280Trading profit (£m) 11.2 11.0 24.2Return on sales 8.1% 8.1% 8.6% Some 70% of the products of the Assembly Materials sector are sold into the PCBassembly and semi-conductor packaging markets of the electronics industry, withthe balance for industrial and medical applications. Revenue for the sector wasup 3% and by 4% at constant exchange rates over the previous year. However, mostof this increase related to higher tin prices being passed onto customers,reducing the underlying rate of increase to approximately 1% at constantexchange rates. The average price of tin in the first half was c. 7.5% higher insterling terms than the same period last year though, by the end of the firsthalf of 2005, the tin price was similar to that at the end of the first half of2004. Tin is the primary raw material used in the manufacture of the majority ofthe sector's products and the cost of tin in the first half of 2005 wasequivalent to some 35% of the sector's revenue. Revenue for the core solderproducts range grew strongly in the Asia-Pacific region (some 45% of the total),but decreased in the NAFTA and European operations, and revenue ofsemi-conductor packaging products for the Asia-Pacific market was down on theprevious year. Trading profit for the sector of £11.2 million was up 2% versus the previousyear at reported and constant exchange rates. Improvements in profits in thecore solder products and speciality coating operations were achieved, however,this was held back by lower profits from the semi-conductor packaging productsbusiness. A one-off rationalisation charge of £0.6 million has been taken to cover thecosts of reducing the workforce of semi-conductor packaging activity in Asia andfor the completion of similar programmes initiated in Europe last year. Chemistry First Half Year 2005 2004 2004Revenue (£m) 105 107 213Trading profit (£m) 11.9 12.8 27.8Return on sales 11.3% 12.0% 13.1% The Chemistry sector's products are primarily plating chemicals for PCBfabrication and the general electronics industry and, in equal measure, forother industrial and automotive applications. Revenue for the sector was 2%lower than the first half of 2004 at reported and constant exchange rates. Inthe NAFTA operations, which account for some 30% of the total, revenue was welldown on the previous year, mainly due to weak demand for PCB related productsand temporary de-stocking in the first quarter by the sole distributor of highmargin copper damascene products for the semi-conductor market. This followed abuild up in inventory of this product in the fourth quarter of 2004. Theunderlying demand for copper damascene, however, remains healthy and theover-stocking in the first quarter was cleared by the end of the second quarter.Revenue in the European operations, which account for some 50% of the total, wasup on last year with growth in products for the automotive market a feature. Inthe Asia-Pacific region, revenue was unchanged, mainly due to a decrease insales of lower margin industrial products offsetting growth in those directed atthe PCB market. The fall in revenue in the high margin copper damascene products and thegenerally weak performance in the NAFTA operations resulted in profits in thatregion being well down on last year, offsetting strong increases in profits inthe European and Asia-Pacific operations. As a result, trading profit for thesector of £11.9 million in the first half was 7% down on 2004 at reportedexchange rates but only 4% down at constant exchange rates. Cost savings initiatives in Europe and the USA, as outlined in the strategyupdate above, resulted in a one-off rationalisation charge of £1.5 million. Laminates First Half Year 2005 2004 2004Revenue (£m) 65 66 132Trading profit (£m) (2.2) 0.7 0.8Return on sales (3.4)% 1.1% 0.6% Following an increase in revenue in the first quarter of 2005 over the previousyear, revenue in the second quarter plateaued and, as a result, was down 8% onthe strong volumes experienced in the second quarter of last year. This, inturn, resulted in revenue for the first half at reported exchange rates being 2%lower than that of the first half of 2004, though unchanged at constant rates.Revenue in the US and European operations, which collectively account for some50% of the total, was well down on the previous year, offsetting strong growthin the Asia-Pacific operations. This fall in revenue arose despite someincreases in prices to cover higher raw material costs. Volumes of the highermargin products, such as GETEK(TM) and other high temperature/reliabilitylaminates, held up well. As a consequence of the fall in revenue, the sector recorded an operating lossof £2.2 million in the first half in comparison with a profit of £0.7 million inthe same period last year. The US operations recorded an unchanged loss versusthat of the previous year, Asia-Pacific remained profitable whereas the Europeanoperations moved from break-even into heavy loss. As outlined previously, a number of initiatives are underway to improve thesector's profitability. These include a programme to increase the level of salesof higher margin products, to increase capacity further in the fast growingAsia-Pacific region and to rationalise activities in Germany and Sweden. Withregard to the latter, this programme is well underway and a charge of £3.9million for this and the completion of initiatives in the USA has beenrecognised in the first half. Precious Metals division First Half Year 2005 2004 2004Revenue (£m) 118 151 288Net Sales Value (£m) 47 60 116Trading profit (£m) 2.7 3.8 11.0Return on net sales value 5.7% 6.3% 9.5% Trading conditions for the Precious Metals division remained difficult in thefirst half due to unprecedented falls in demand for jewellery products in the UKand Continental Europe, which collectively account for some 45% of thedivision's activities, together with weak consumer confidence in these regionsand in the USA. As a result, revenue for the division was down 22% in the firsthalf at reported and 21% at constant exchange rates and, after excluding theprecious metals content, net sales value was also down 21% at constant exchangerates. Demand for the division's higher margin gold-based products remainedweak, especially in the UK where hallmarking of gold jewellery items has fallenby 16% in the first half, though volumes of relatively lower margin silverproducts was less affected. Trading profit for the division of £2.7 million was well down on last year atboth reported and constant exchange rates, though the decrease in profits waspartially mitigated by the benefits of the recently completed restructuring ofthe European operations that commenced in 2004. As a result, the return on netsales value was down only 0.6%. As previously reported, in response to the weak market conditions in the USA andto Tiffany increasing its level of in-house manufacturing, a programme wasinitiated in the second quarter to reduce the US workforce by 8% and toconsolidate most activities in the region onto a single site. As a result, aone-off charge of £0.6 million has been raised in the first half. Group Corporate The Group's corporate costs, being the costs directly related to managing theGroup holding company, were £3.6 million in the first half which was £0.5million lower than 2004. Costs for the full year 2004 amounted to £8.9 millionand, following a programme to streamline activities, the expectation is for afurther year-on-year decrease in costs in the second half. GROUP FINANCIAL REVIEW First Half Year 2005 2004 2004Profit Before Tax (£m)- headline 39.9 37.2 85.0- basic 33.3 24.1 12.6 Earnings per share (pence)- headline 13.9 12.4 30.1- basic 8.5 4.4 (11.2) Free cash flow (£m) (22.8) (21.2) 51.6Net debt (£m) 363 402 322 Profit before tax Headline profit before tax was £39.9 million for the first half of 2005, whichwas £2.7 million higher than the same period in 2004. The increase arose asfollows: • £2.6 million increase in trading profit at constant exchange rates for Group operations, as analysed in the Review of Operations above • £0.1 million negative trading profit exchange rate translation variance • £1.1 million lower charge for net interest payable for ongoing activities mainly due to a decrease of some £35 million in the average level of borrowings (average rates on gross borrowings were 7.0% in the first half) partly offset by: • £0.9 million decrease in income from joint ventures from £1.3 million to £0.4 million, primarily in the Chemistry sector's Japanese joint venture; this shortfall was anticipated following an exceptionally high level of profitability in the first quarter of 2004. A net charge for the following items not related to trading profit amounting to£6.6 million was incurred in the first half of 2005 (2004: £9.9 million). Thisconsisted of the following: - one-off rationalisation costs of £7.7 million (2004: £11.0 million), of which £4.0 million related to a non-cash write down of assets. - amortisation of intangibles of £0.4 million - profit on disposal of surplus properties of £1.6 million (2004: £1.1 million). - £1.2 million write-off of prior period debt refinancing costs. - £1.1 million profit on disposal of operations Group profit before tax and after the above items amounted to £33.3 million inthe first half of 2005. This compares with £24.1 million in the same period lastyear. Taxation The tax charge and effective tax rate for ongoing activities was £11.9 millionand 30% respectively (2004: 30%). A tax charge of £3.5 million arose forexceptional items. Earnings per share Headline earnings per share amounted to 13.9 pence per share which was 12%higher than the 12.4 pence per share in 2004. Basic earnings per share amounted to 8.5 pence per share, compared with 4.4pence per share in 2004. The calculation of earnings per share is based on 188 million shares in issue inboth periods and takes into account the 1 for 10 share capital consolidationthat was approved by shareholders and effected in May 2005. Dividends While no dividends have been declared for the first half of 2005, it is theBoard's intention to return to the dividend list as soon as possible, withdividends paid on a sustainable basis from free cash flow. Cash flow Net cash from operating activities In the first half of 2005, the Group's net cash outflow from operatingactivities was £16.8 million, £7.0 million higher than in the first half of2004, with the net increase made up as follows: - £2.6 million higher cash outlay for rationalisation of activities - £0.4 million increase in tax payments, and - £17.9 million net outlay for other operating provisions and other items, including £2.5 million higher payments to "top-up" the UK and US defined benefits pension funds and £6.0m additional incentive payments to employees throughout the Group, with the remainder arising from movements on other non-trading debtors and creditors partly offset by: - £2.6 million higher profit from operations after the add-back of non-cash items - £10.8 million lower cash outflow for trade working capital. - £0.5 million less net interest paid. Cash outflow for rationalisation was £8.1 million of which £3.0 million relatedto programmes that were initiated in 2005 and the balance from prior periodinitiatives, with the largest being the restructuring of the European PreciousMetals activities and the Laminates operations in Germany. Trade working capital rose by £42.8 million in the first half, a consistentseasonal trend to that of the prior year (up £53.6 million) and in years priorto that. The ratio of average working capital to sales was marginally higherthan the same period last year at 21.4%. Net cash from investing activities Capital expenditure. Payments to acquire property, plant and equipment in thefirst half of 2005 were £13.8 million which represented 58% of depreciation(2004: 61%). Proceeds from the sale of redundant properties, in the USA andFrance, were £5.7 million (2004: £2.9 million). Dividends from joint ventures. Dividends of £4.7 million were received in thefirst half (2004: £2.2 million) from the Chemistry division's Japanese jointventure. Acquisitions and disposals. Net cash outflow for acquisitions and disposals in the first half of 2005 was£4.5 million which included the following: - an increase in the Ceramics division's joint venture interest with Wuhan Steel Corp in China from 25% to 50% for £2.3 million - deferred consideration for prior period acquisitions of £1.6 million - trailing costs and purchase price adjustments for prior period disposals of £3.7 million - proceeds from the disposal of businesses, net of cash, of £2.4 million Free cash flow Free cash flow is defined as net cash flow from operating activities after netoutlays for acquisitions and disposals of fixed assets, dividends from jointventures and dividends paid to minority shareholders. Free cash outflow for the first half of 2005 was £22.8 million which was £1.6million higher than the £21.2 million outflow in the first half of 2004. The Group traditionally experiences free cash outflows in the first half of theyear. This is then followed by inflows in the second half, mainly due to theseasonality of trade working capital cash flows and generally higher tradingprofits in the second half. The annualised free cash inflow for the year endedJune 2005, was £50.0 million. This compares with the £51.6 million cash inflowin the year ended December 2004. Net cash flow before financing and net debt Net cash outflow before financing for the first half of 2005 was £24.7 millionand, together with a £3.1 million outflow for financing activities, net cashoutflow for the first half was £27.8 million. This, together with a negativetranslation exchange rate effect of £13.2 million, mainly due to the decrease inthe value of sterling from $1.92 to $1.83 over the six month period, resulted innet debt rising from £321.8 million at 31 December 2004 (restated to IFRS) to£362.8 million in the first half of 2005. However, net debt is £39 million lowerthan in June 2004. As at 30 June 2005, the Group had gross borrowings of £394 million which weredrawn on available medium to long-term committed facilities of c. £500 million.The Group's net debt comprises the following: 30 June 31 December 30 June 2005 2004 2004 £m £m £mUS Private Placement loan notes 298 297 3127% Convertible Bonds - - 80Committed bank facility 68 40 10Other loans 14 16 17Asset securitisation and lease financing 15 13 15Gross borrowings 395 366 434Cash (32) (44) (32)Net Debt 363 322 402 The US Private Placement loan notes ($570 million) are repayable at variousdates between 2007 and 2012. $25 million of notes were repaid on maturity inMay 2005. A new unsecured committed bank facility for £200 million was arranged in March2005 on improved pricing and terms. The facility matures in March 2008, withoptions to extend by a further 2 years. Only £68 million was drawn on thisfacility at June 2005. PENSION FUND AND OTHER POST-RETIREMENT OBLIGATIONS At 30 June 2005, a liability of £213.6 million is recognised in respect ofemployee benefits; an increase of £23.7 million over the £189.9 million as at 31December 2004. This increase results from an interim actuarial valuation of theGroup's defined benefit pension and other post-retirement obligations as at 30June 2005. Of the total liability, £166.8 million relates to the combineddeficits on the Group's principal defined pension schemes in the UK and the USA,£12.7 million to pension arrangements in the Rest of the World, and £34.1million to unfunded post-retirement benefit arrangements, being mainlyhealthcare benefit arrangements in the USA. The valuations represent a "roll-forward" from the last full individual schemevaluations which, in the case of the UK pension scheme, was 31 December 2003,and for the US pension schemes was 31 December 2004. For the UK and US pensionschemes, the principal component of the increase in the combined valuationdeficit in the first half of 2005 resulted from a change in actuarialassumptions, namely a reduction in discount rates. For valuation purposes, thediscount rates used were 5.0% for the UK (December 2004: 5.25%) and 5.25% forthe USA (December 2004: 5.75%). The total charge to the income statement for the first half of 2005 in respectof the Group's defined benefit pension and other post-retirement obligations was£7.9 million (2004: half year £8.0 million; full year £15.6 million). Shareholder/analyst enquiries:Nick Salmon, Chief Executive Cookson Group plcDennis Millard, Group Finance Director Tel: + 44 (0)20 7061 6500Isabel Vilela, Investor Relations Manager Press enquiries:John Olsen Hogarth Partnership Tel: +44 (0)20 7357 9477 Cookson management will make a presentation to analysts on 26 July at 9:30 am(UK time). This will be broadcast live on Cookson's website,www.cooksongroup.co.uk. An archive version of the presentation will beavailable on the website later that day. Forward Looking Statements This report contains certain forward looking statements regarding the Group'sfinancial condition, results of operations, cash flows, dividends, financingplans, business strategies, operating efficiencies or synergies, budgets,capital and other expenditures, competitive positions, growth opportunities forexisting products, plans and objectives of management and other matters.Statements in this document that are not historical facts are hereby identifiedas "forward looking statements" for the purpose of the safe harbour provided bySection 21E of the Exchange Act and Section 27A of the Securities Act. Suchforward looking statements, including, without limitation, those relating to thefuture business prospects, revenues, working capital, liquidity, capital needs,interest costs and income, in each case relating to Cookson, wherever they occurin this document, are necessarily based on assumptions reflecting the views ofCookson and involve a number of known and unknown risks, uncertainties and otherfactors that could cause actual results, performance or achievements to differmaterially from those expressed or implied by the forward looking statements.Such forward looking statements should, therefore, be considered in light ofvarious important factors. Important factors that could cause actual results todiffer materially from estimates or projections contained in the forward lookingstatements include without limitation: economic and business cycles; the termsand conditions of Cookson's financing arrangements; foreign currency ratefluctuations; competition in Cookson's principal markets; acquisitions ordisposals of businesses or assets; and trends in Cookson's principal industries. The foregoing list of important factors is not exhaustive. When relying onforward looking statements, careful consideration should be given to theforegoing factors and other uncertainties and events, as well as factorsdescribed in documents the Company files with the UK and US regulators from timeto time including its annual reports and accounts. Such forward looking statements speak only as of the date on which they aremade. Except as required by the Rules of the UK Listing Authority and the LondonStock Exchange and applicable law, Cookson undertakes no obligation to updatepublicly or revise any forward looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks, uncertaintiesand assumptions, the forward looking events discussed in this report might notoccur. Cookson Group plc265 Strand, London WC2R 1DB, United KingdomTel: +44 (0) 20 7061 6500 Fax: +44 (0) 20 7061 6600 www.cooksongroup.co.ukRegistered in England & Wales No. 251977 Independent review report to Cookson Group plc Introduction We have been engaged by the company to review the financial information set outon pages 17 to 25 and we have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility to anyone other than the companyfor our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. This isbecause, as disclosed in note 1, the directors have anticipated that certainstandards, which have yet to be formally adopted for use in the EU, will be soadopted in time to be applicable to the next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005. KPMG Audit Plc Chartered Accountants 26 July 2005, London Group Income Statement For the six months ended 30 June 2005 Note Half year Half Full year year 2005 2004 2004 £m £m £m Revenue 2 794.7 816.7 1,652.5Manufacturing - raw materials (359.5) (364.3) (755.8)costs - other (218.3) (226.2) (447.1)Administration, selling and distribution costs (162.5) (174.3) (334.7) Trading profit 1,2 54.4 51.9 114.9 Rationalisation of operating activities 3 (7.7) (11.0) (22.7)Amortisation and impairment of intangibles (0.4) (0.4) (0.8)Profit/(loss) relating to fixed assets 1.6 1.1 (16.8) Profit from operations 2 47.9 41.6 74.6 Finance income: 4 Ongoing activities 1.4 1.7 3.4 Income from swap close-out - 2.7 5.4 Finance costs: 4 Ongoing activities (16.3) (17.7) (35.6) Write-off of prepaid debt-raising fees (1.2) - - Share of post-tax profit from joint ventures 0.4 1.3 2.3Profit/(loss) on disposal of operations 5 1.1 (5.5) (37.5) Profit before tax 33.3 24.1 12.6 Income tax costs: 6 Ongoing activities (11.9) (11.3) (24.3) Other income tax costs (3.5) (2.0) (5.3) Profit/(loss) for the period 17.9 10.8 (17.0) Profit attributable to minority interests (1.8) (2.5) (4.1) Profit/(loss) attributable to parent company equity holders 16.1 8.3 (21.1) Basic earnings per share 7 8.5p 4.4p (11.2)p Diluted earnings per share 7 8.3p 4.3p (11.2)p Headline profit before tax and earnings per share Trading profit 54.4 51.9 114.9Share of post-tax profit from joint ventures 0.4 1.3 2.3Finance costs of ordinary activities, net (14.9) (16.0) (32.2) Headline profit before tax 39.9 37.2 85.0 Income tax on ordinary activities (11.9) (11.3) (24.3)Profit attributable to minority interests (1.8) (2.5) (4.1) Headline profit attributable to parent company equity holders 26.2 23.4 56.6 Headline basic earnings per share 7 13.9p 12.4p 30.1p Group Statement of Cash Flows For the six months ended 30 June 2005 Note Half year Half year Full year 2005 2004 2004 £m £m £m Cash flows from operating activitiesProfit from operations 47.9 41.6 74.6Add/(deduct): Rationalisation of operating activities 7.7 11.0 22.7 (Profit)/loss relating to fixed assets (1.6) (1.1) 16.8 Amortisation of intangibles 0.4 0.4 0.8 Depreciation 23.9 23.8 46.9 Net increase in trade working capital (42.8) (53.6) (16.9) Outflows related to rationalisation of operating activities 3 (8.1) (5.5) (14.2) Other items (20.4) (2.5) 14.8Cash generated from operations 7.0 14.1 145.5 Interest paid (16.6) (17.8) (35.9)Interest received 1.8 2.5 4.4Income taxes paid (9.0) (8.6) (20.7) Net cash (outflow)/inflow from operating activities (16.8) (9.8) 93.3 Cash flows from investing activitiesAcquisition of property, plant and equipment (13.8) (14.4) (42.3)Proceeds from sale of property, plant and equipment 5.7 2.9 1.4Acquisition of subsidiaries, net of cash acquired (3.9) (4.5) (12.0)Disposal of subsidiaries, net of cash disposed of 2.4 (2.4) 1.4Dividends received from joint ventures 4.7 2.2 2.3Other, including additional costs for prior years' disposals (3.0) (5.1) (10.0) Net cash outflow from investing activities (7.9) (21.3) (59.2) Net cash (outflow)/inflow before financing activities (24.7) (31.1) 34.1 Cash flows from financing activitiesIncrease in/(repayment of) borrowings 15.1 12.3 (39.7)Proceeds from the issue of share capital 0.1 0.8 0.9Payment of transaction costs (0.6) (1.1) (1.1)Dividends paid to minority shareholders (2.6) (2.1) (3.1) Net cash inflow/(outflow) from financing activities 12.0 9.9 (43.0) Net decrease in cash and cash equivalents (12.7) (21.2) (8.9)Cash and cash equivalents at 1 January 44.0 52.8 52.8Effect of exchange rate fluctuations on cash held 0.2 (0.1) 0.1 Cash and cash equivalents at end of period 31.5 31.5 44.0 Free cash flow Net cash (outflow)/inflow from operating activities (16.8) (9.8) 93.3 Acquisition of property, plant and equipment (13.8) (14.4) (42.3) Proceeds from sale of property, plant and equipment 5.7 2.9 1.4 Dividends received from joint ventures 4.7 2.2 2.3 Dividends paid to minority shareholders (2.6) (2.1) (3.1) Free cash flow (22.8) (21.2) 51.6 Group Balance Sheet As at 30 June 2005 Note 30 June 31 Dec 30 June 2005 2004 2004 £m £m £m Assets Property, plant and equipment 312.8 322.9 335.7 Intangible assets 8 497.0 485.2 503.5 Investments in joint ventures 12.9 14.7 14.5 Other investments 9 13.8 16.7 36.0 Income tax recoverable 2.2 2.2 2.2 Deferred tax assets 27.3 31.2 46.9 Other assets 7.4 10.6 10.1 Total non-current assets 873.4 883.5 948.9 Cash and cash equivalents 31.5 44.0 31.5 Inventories 186.1 174.1 193.9 Trade and other receivables 330.0 303.4 324.8 Income tax recoverable 0.7 0.9 - Other financial assets 10 13.4 - - Total current assets 561.7 522.4 550.2 Total assets 1,435.1 1,405.9 1,499.1 Equity Issued share capital 11 375.5 375.5 375.4 Share premium 643.8 643.4 643.4 Reserves (563.1) (587.5) (560.4) Total parent company shareholders' equity 456.2 431.4 458.4 Minority interests 11.3 11.7 11.7 Total equity 467.5 443.1 470.1 Liabilities Interest-bearing loans and borrowings 370.3 326.1 334.0 Employee benefits 12 213.6 189.9 188.8 Trade and other payables 24.4 58.3 97.9 Provisions 9.4 10.3 16.8 Deferred tax liabilities 15.3 8.6 11.5 Total non-current liabilities 633.0 593.2 649.0 Interest-bearing loans and borrowings 24.0 39.7 99.5 Trade and other payables 283.8 303.2 247.2 Income tax payable 13.4 11.6 15.8 Provisions 13.2 15.1 17.5 Other financial liabilities 0.2 - - Total current liabilities 334.6 369.6 380.0 Total liabilities 967.6 962.8 1,029.0 Total equity and liabilities 1,435.1 1,405.9 1,499.1 Net debt Interest-bearing loans and - non current 370.3 326.1 334.0 borrowingsRelated Shares:
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