3rd Mar 2008 07:01
British Polythene Industries PLC03 March 2008 3 March 2008 BRITISH POLYTHENE INDUSTRIES PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 • Sales of £424million (2006: £414m) • Profit before tax £11.5million (2006: £14.0m) reflecting, aspreviously indicated, challenging market conditions including significantincreases in raw material costs and patchy demand from certain sectors • Total dividend maintained at 22.0p • Strategic acquisition of AT Films business in Canada to developinternational agricultural markets • 2008 has begun with record raw material and energy prices. Commenting on the results and prospects, Cameron McLatchie, BPI Chairman said: "These results are in line with our comments at the time of our pre-closetrading update in December and reflect challenging trading reflecting conditionsin certain markets and the price of raw materials. 2008 has begun with record raw material and energy prices and the margincompression we experienced during 2007 intensified in January and February. Weare actively working to pass on these costs. However, for many parts of ourGroup, 2008 looks to be a very challenging year". EnquiriesCameron McLatchie, ChairmanJohn Langlands, Chief Executive 01475 501000 Tim Spratt/ Nicola Biles Financial Dynamics 020 7831 3113 CHAIRMAN'S STATEMENT We indicated during the last year that trading conditions would be challengingand, in our Pre-Close Trading Statement, that pre-tax profits for 2007, beforerestructuring costs, would be some 15% below that for 2006. The final outcomehas confirmed this, reflecting conditions in certain markets and the price ofraw materials. RESULTS On sales of £424 million (2006 - £414 million), our operating profit, before netrestructuring costs and non-recurring items, declined to £14.6 million (2006 -£17.1 million). Net restructuring costs and non-recurring items of £0.7 million(2006 - nil) reflect closure costs of £2.0 million, a gain on the sale of aclosed site of £1.2 million, and negative goodwill of £0.1 million on theacquisition of AT Films. After a decrease in net financing costs to £2.4 million (2006 - £3.1 million),the profit before tax was £11.5 million (2006 - £14.0 million). Earnings pershare were 32.36p (2006 - 38.46p) This drop in profit is despite actions we had taken, early in the year, torationalise our cost base in the UK, that led to cost reductions in the secondhalf, and the benefit of favourable weather conditions for sales of silagestretchwrap. Most of the downside in operating profit is related to increases in raw materialcosts, and also patchy demand from certain sectors which particularly impactedour margins towards the end of year. DIVIDEND The Board is recommending a maintained final dividend of 15 pence per share forthe year ended 31 December 2007 (2006 - 15 pence), giving a total for the yearof 22 pence (2006 - 22 pence). If approved by shareholders, the recommendedfinal dividend is payable on 9 May 2008 to shareholders on the register at theclose of business on 14 March 2008. The drop in profits has reduced dividendcover to just under 1.5 times (2006 - 1.75 times). CASH FLOW & BORROWINGS Our net borrowings increased to £65 million (2006 - £52 million) as at 31December 2007. This increase included the £6.5 million we spent purchasing ATFilms in Edmonton, Canada, and the additional pension fund contributions of £6million. Interest cover on bank borrowings was sound at almost four times. As weenvisaged last year, our net annual capital expenditure rose to £13.2 millionfrom the slightly lower than normal spend of £11.6 million in 2006. Wecurrently envisage that this higher level will continue through 2008. GROUP PENSION SCHEME We indicated last year that the Group had agreed to inject an additional cashcontribution of £20 million, on a tax efficient basis, over a 5 year period.Following a payment of £3.5 million in December 2006, the Group made additionalcontributions of £6 million in 2007. At the end of the year, the gross deficit in the scheme stood at £18 million(2006 - £33 million), a very significant improvement on the £54 million deficitat the end of 2005. This reduction has been achieved despite an increase in theactuarial assumptions on longevity, and is due to a number of factors includinginvestment performance, additional funding by the Group, the increase in longterm bond yields and careful management of liability growth. REGULATORY MATTERS In 2006, the European Commission imposed an anti-dumping duty of 8.4% on thinbags imported into the EU from China. This affected a significant volume of theproduct which we manufacture at our plant in Xinhui. We applied for anindividual review of our position and in January 2008 we were informed that theduty rate for the Group would be reduced to 4.3%. As I have commented before, it is now clear that the greatest risk, wheninvesting in China, is much closer to home than one might envisage. The decisionby the EC to impose duties on the importation of goods by an EC manufacturerfrom its Chinese based subsidiary sends a clear message to potential investorsin China, and brings into question the issue of globalisation of manufacture.British Polythene has done more to modernise its manufacturing base than most ofour EC competitors, yet it is these competitors who are now being protected byarcane regulations implemented after considerable political pressure frominterest groups determined to maintain the status quo of uncompetitive ECmanufacture. It is hard to see how this benefits European consumers. In China, we will continue to manufacture certain products, for the EC market,that do not attract additional import duty, as they do not fall within the scopeof the regulations. We are also diversifying the sales territories for thoseproducts which do attract this duty, and have been successful in gaining newcustomers in the Middle East, North America and Australasia. We have also been impacted by rules recently imposed on exporting companies bythe Chinese authorities relating to recoverability of VAT on imports. This hashad an impact on our cashflow and margin in China as we import almost all of ourraw material. It is inevitable that the EC duty and the new Chinese VAT regulations will havea detrimental effect on the performance on our Chinese site in the short term aswe reposition our sales efforts. ACQUISITION On Tuesday 21 August, we announced the acquisition of the AT Films business ofAT Plastics Inc (Canada), a subsidiary company of Celanese Corporation, for acash consideration of US$12 million subject to an adjustment to reflect the bookvalue of working capital at completion. The initial payment for working capitalwas US$11 million, which was included in the cash consideration of US$ 12million. AT Films manufactures polythene film products for the horticultural andagricultural markets, mainly in North America. The company has facilities inEdmonton and Westlock, Alberta, Canada and employs 65 people. In the lastfinancial year to 31 December 2006, AT Films sold 12,500 tonnes of polythenefilm products with an annual value of US$ 35 million. This acquisition enables us to progress our strategy of developing ourinternational agricultural and horticultural films business. In addition tooffering new geographic markets, AT Films brings new products to BPI including arange of large agricultural bags which are used to store silage and grain. Thestored grain is subsequently used as animal feed or as raw material in themanufacture of biofuels. We believe that there is significant opportunity toexpand sales of this product as global demand for biofuels increases. Our experience so far confirms that this acquisition does indeed present us withthe opportunities that we envisaged. We have already embarked on a modestupgrading of the production facilities in Edmonton and envisage that the salesopportunities will be up to our expectations. RAW MATERIAL PRICES The price of polyethylene polymer, our major raw material, has now reachedunprecedented levels. This price is driven by the high costs of crackerfeedstock in North West Europe where the ethylene required to make polyethyleneis mainly derived from naptha, a by-product of crude oil. The prices of these oil derived by-products seem to have lost their relationshipto the price of a barrel of oil, as the cash margin between a tonne of oil and atonne of polyethylene has almost doubled in five years. When one tonne of oilcost £150, one tonne of low density polyethylene cost £500. Now one tonne ofoil costs £350, and low density polyethylene costs over £1,000. It is no coincidence that major oil and petrochemical companies are reportingrecord profits. It would seem an appropriate time for the EC to consider dropping tariffs onpolymer imports into the EC. The consumer is being indirectly hurt by increasedpackaging prices, the EC packaging industry is fighting imports of finishedproduct, and the only client group being protected are the mainly integratedpetrochemical companies who seem perfectly able to take care of themselves. We envisage that these record levels are unsustainable in the medium term, asmore competitively priced feedstocks are available in other parts of the world.A 30% increase in the global manufacturing capacity of polyethylene is scheduledover the next three years. This additional capacity should exert downwardpressure on current price levels. In the meantime, we are passing on these price increases to our customers, in astimely a manner as commercially feasible. Although we do succeed in passing onthe increases in the fullness of time, the short term lag results in margincompression and poor short term financial performance. We neither have physicalstocks of raw material nor any workable hedge against these rising raw materialcosts. ENERGY COSTS We entered 2008 with energy prices reaching record levels. The outlook for anearly reduction is not good and we are attempting to pass on these increases toour customers. We continue to reduce our energy consumption and install energyefficient motors and lighting, however, this is of little effect against abackground of massive increases in energy costs. OUR PEOPLE The number of people employed by the Group at the year end fell to 2,757, downfrom 2,840 at the end of 2006, despite the extra numbers from the Canadianacquisition. UK headcount fell by almost 150. Our performance in Health & Safety was broadly in line with the better overallperformance achieved in 2006 and we will try, wherever possible, to build onthis trend which demonstrates the overall improvements in safety culture acrossthe Group. TRADING & PROSPECTS 2008 has begun with record raw material and energy prices and the margincompression we experienced during 2007 intensified in January and February. Weare actively working to pass on these costs. Volumes have been mixed, with demand for certain products a little slow.However, early season sales of silage stretchwrap have been encouraging and, atthis stage, 2008 has the signs of another good year for this product. It is, of course, far too early to comment on the likely result for the fullyear, but your Board is confident that when the current raw material issues arebehind us, our businesses will generate better returns than we have seen in thelast few months. Any such improvement will not, however, be sufficient to deliver the resultswhich your Board expects from all of our businesses. To make theseimprovements, we have to tackle some underlying issues in the UK that will beresolved by careful restructuring of certain parts of the business. Erosion ofour traditional UK customer base has left us with certain assets which do notalign to current customer demands. Any such action will be taken at a pace whichpreserves our skills and abilities to service our customer base. For many parts of our Group, 2008 looks to be a very challenging year, however,BPI has previously adapted to market changes and opportunities and thisexperience will hold us in good stead. British Polythene Industries PLCConsolidated income statementFor the year ended 31 December 2007 2007 2006 Note £m £mTurnover 2 424.1 414.2 Profit from operations 13.9 17.1 Borrowing costs (3.6) (2.8)Net retirement benefit income / (financing) 1.2 (0.3)Net financing costs (2.4) (3.1) Profit before tax 11.5 14.0Tax (3.0) (3.9) Profit for the year 8.5 10.1 Attributable to:Equity holders of the parent 8.5 10.1 Earnings per shareBasic 4 32.41p 38.79pDiluted 4 32.36p 38.46p British Polythene Industries PLCConsolidated statement of recognised income and expenseFor the year ended 31 December 2007 2007 2006 £m £mProfit for the year 8.5 10.1 Cash flow hedges: effective portion of net changes in fair value (0.3) (0.3)Actuarial gain on defined benefit pension scheme 8.4 17.4Tax on items taken directly to equity (3.0) (5.2)Movement on translation of overseas undertakings and related borrowings 0.3 (0.2)Net income recognised directly in equity 5.4 11.7 Total recognised income and expense for the period 13.9 21.8 Attributable to:Equity holders of the parent 13.9 21.8 British Polythene Industries PLCConsolidated balance sheetAt 31 December 2007 2007 2006 £m £m NoteNon-current assetsGoodwill 0.3 0.3Other intangible assets 1.8 1.8Property, plant and equipment 82.5 77.3Investments 0.1 0.1Deferred tax assets 1.9 5.9 86.6 85.4Current assetsInventories 62.1 59.5Trade and other receivables 64.0 60.5Current tax assets 1.1 -Cash at bank 0.6 0.5 127.8 120.5Current liabilitiesBank overdraft 16.8 6.4Other loans and borrowings 1.1 1.0Trade and other payables 62.1 60.2Current tax liabilities 1.4 0.7 81.4 68.3 Net current assets 46.4 52.2 Total assets less current liabilities 133.0 137.6 Non-current liabilitiesOther loans and borrowings 47.5 45.1Retirement and employee benefit obligations 5 19.1 34.7Deferred tax liabilities 3.2 2.5Deferred government grants 0.8 0.9 70.6 83.2 Net assets 62.4 54.4 EquityIssued share capital 6.6 6.6Share premium account 25.1 25.0Other reserves 7.4 7.4Retained earnings 23.1 15.2Total equity attributable to equity holders of the parent 62.2 54.2Minority interests 0.2 0.2 Total equity 62.4 54.4 British Polythene Industries PLCConsolidated cash flow statementFor the year ended 31 December 2007 2007 2006 £m £m NoteProfit from operations 13.9 17.1 Amortisation of intangible assets 0.6 0.4Depreciation of property, plant and equipment 12.1 12.3Negative goodwill recognised in the income statement (0.1) -IFRS 2 charge in relation to equity settled transactions 0.1 0.3Gain on disposal of property, plant and equipment (1.4) (0.6)Adjustment relating to pensions (6.0) (4.0)Operating cash flows before movements in working capital 19.2 25.5 Decrease / (increase) in inventories 3.3 (4.5)Decrease in trade and other receivables 0.4 2.1Decrease in trade and other payables (0.9) (3.7)Movements in working capital 2.8 (6.1) Cash generated from operations 22.0 19.4 Interest paid (3.6) (2.8)Income taxes paid (2.2) (5.6)Net cash from operating activities 16.2 11.0 Investing activitiesPurchase of property, plant and equipment (15.4) (12.0)Purchase of intangible assets - (0.5)Purchase of businesses 6 (6.5) -Proceeds from sale of property, plant and equipment 2.2 0.9Net cash used in investing activities (19.7) (11.6) Net cash flows before financing (3.5) (0.6) Financing activitiesDividends paid 3 (5.8) (5.7)Net increase in bank loans 1.3 5.4Repayment of obligations under finance leases (1.0) (1.0)Repurchase of ordinary shares (0.3) (0.5)Proceeds from the issue of share capital 0.1 1.3Net cash used in financing activities (5.7) (0.5) Net decrease in cash and cash equivalents (9.2) (1.1) Cash and cash equivalents at beginning of year (5.9) (4.9)Effect of foreign exchange rate changes (1.1) 0.1 Cash and cash equivalents at end of year (16.2) (5.9) 1. Basis of preparation The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards as adopted by the EU (" adoptedIFRSs"). 2. Segment reporting Segment information is presented in respect of the Group's geographical andbusiness segments. Inter-segment pricing is determined on an arms length basis.Segment results, assets and liabilities include items directly attributable tothe segment as well as those that can be allocated on a reasonable basis. Primary segments - Geographical British Polythene Industries PLCNotes to the consolidated financial statementsFor the year ended 31 December 2007 Segment information by geographic region UK & Continental North Eliminations Consolidated Ireland Europe America £m £m £m £m £m 2007 2007 2007 2007 2007TurnoverExternal sales 324.7 92.9 6.5 - 424.1Inter-segment sales 1.3 0.9 - (2.2) -Total turnover 326.0 93.8 6.5 (2.2) 424.1 Profit from operations 7.0 6.7 0.2 - 13.9 Net financing costs (2.4)Profit before tax 11.5Tax (3.0)Profit for the year 8.5 Segment assets 160.6 48.5 6.8 (5.1) 210.8Segment liabilities (63.6) (22.1) (1.4) 5.1 (82.0)Net segment assets 128.8Net borrowings (64.8)Taxation (1.6)Net assets per balance sheet 62.4 Capital expenditure 13.0 2.5 - - 15.5Depreciation and amortisation 9.7 2.9 0.1 - 12.7Other cash flow adjustments (7.2) (0.1) (0.1) - (7.4) 2006 2006 2006 2006 2006TurnoverExternal sales 328.7 85.5 - - 414.2 Inter-segment sales 1.6 0.4 - (2.0) - Total turnover 330.3 85.9 - (2.0) 414.2 Profit from operations 9.7 7.4 - - 17.1 Net financing costs (3.1)Profit before tax 14.0Tax (3.9)Profit for the year 10.1 Segment assets 161.3 44.4 - (6.2) 199.5Segment liabilities (84.4) (17.6) - 6.2 (95.8)Net segment assets 103.7Net borrowings (52.0)Taxation 2.7Net assets per balance sheet 54.4 Capital expenditure 8.6 3.4 - - 12.0Depreciation and amortisation 9.9 2.8 - - 12.7Other cash flow adjustments (4.3) - - - (4.3) 2. Segment reporting (continued) The Group operates in three principal geographic regions - "UK & Ireland", "Continental Europe", and "North America". UK & Ireland includes all of the UKmanufacturing and merchanting activities along with the Irish sales office whichdistributes predominantly UK manufactured products. It also includes themanufacturing operation in China from which substantially all of the output isexported for sale by the Group in the UK. Continental Europe comprises themanufacturing and merchanting activities located in Belgium, Holland and France.North America comprises the manufacturing business acquired during the year inCanada. These three regions are the basis on which the Group reports its primarysegment information. Secondary segments - BusinessSegment information by business segment External Sales Segment assets Capital expenditure 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £mFilms 168.9 161.4 83.5 78.7 5.5 2.0Converted 167.2 177.4 91.3 92.5 5.0 4.4Recycled 88.0 75.4 41.1 34.5 5.0 5.3Eliminations - - (5.1) (6.2) - - 424.1 414.2 210.8 199.5 15.5 11.7 The Group has the following principal secondary business segments: "Films" - Single process of extruded polythene reels "Converted" - Predominantly two or three stage process of extrusion, print andconversion "Recycled" - Recycles scrap from group and external sources and converts intopredominantly recycled products. 3. Dividends 2007 2006 £m £mAmounts recognised as distributions to equity holders in the year:Final dividend for the year ended 31 December 2006 of 15.0p per share (2005:15.0p) 4.0 3.9 Interim dividend for the year ended 31 December 2007 of 7.0p per share (2006: 7.0p) 1.8 1.8 5.8 5.7 Proposed final dividend for the year ended 31 December 2007 of 15.0p per share (2006:15.0p) 4.0 4.0 The proposed final dividend is to be approved by shareholders at the AnnualGeneral Meeting on 8 May 2008 and has not been included as a liability as at 31December 2007. 4. Earnings per ordinary share 2007 2006 Weighted average number of ordinary shares 000s 000sIssued ordinary shares at 1 January 26,462 25,894Effect of shares issued 33 367Effect of own shares held (270) (221)Weighted average number of ordinary shares 26,225 26,040Effect of share options and long term incentive plan shares in issue 42 220 Diluted weighted average number of ordinary shares 26,267 26,260 Profit attributable to ordinary shareholders £8.5m £10.1mBasic earnings per ordinary share 32.41p 38.79pDiluted earnings per ordinary share 32.36p 38.46p 5. Retirement and employee benefit obligations 2007 2006 £m £mBritish Polythene Industries Pension SchemeFair value of scheme assets 185.0 169.5Present value of scheme liabilities (202.6) (202.7)Deficit in the scheme (17.6) (33.2)Other employee benefits (1.5) (1.5)Retirement and other employee benefit obligations (19.1) (34.7)Related deferred tax asset 5.0 10.0Net pension liability (14.1) (24.7) 6. Acquisitions On 20 August 2007, the Group acquired the AT Films business and assets of ATPlastics Inc (Canada), a subsidiary company of Celanese Corporation. AT Filmsmanufactures polythene film products for the horticultural and agriculturalmarkets, mainly in North America. The business has facilities in Edmonton andWestlock, Alberta, Canada.Analysis of assets and liabilities acquired 2007 Cost Fair value Fair value on adjustment acquisitionNon-current assets £m £m £mOther intangible assets - property lease - 0.6 0.6Property, plant and equipment 0.5 - 0.5 0.5 0.6 1.1Current assetsInventories 4.5 (0.1) 4.4Trade and other receivables 3.2 - 3.2 7.7 (0.1) 7.6Current liabilitiesTrade and other payables (1.8) - (1.8)Non-current liabilitiesRetirement and employee benefit obligations (0.1) (0.1) (0.2)Deferred tax liabilities - (0.1) (0.1) (0.1) (0.2) (0.3)Net assets acquired 6.3 0.3 6.6Expenses 0.2 (0.2) -Negative goodwill arising on acquisition - (0.1) (0.1)Net cash outflow (including expenses) 6.5 - 6.5 7. Statutory accounts The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2007 or 2006 but is derivedfrom the 2007 accounts. Statutory accounts for 2006 have been delivered to theregistrar of companies, and those for 2007 will be delivered in due course. Theauditors have reported on those accounts; their reports were (i) unqualified and(ii) did not contain statements under section 237(2) or (3) of the Companies Act1985. 8. Annual General Meeting The Annual General Meeting will be held on Thursday, 8 May 2008 at 12 noon atthe Company's Head Office, 96 Port Glasgow Road, Greenock, PA15 2UL. 9. Results The results will not be advertised in any newspapers. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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