5th Mar 2007 07:00
British Polythene Industries PLC05 March 2007 5 March 2007 BRITISH POLYTHENE INDUSTRIES PLC PRELIMINARY RESULTS FOR THE 12 MONTHS ENDED 31 DECEMBER 2006 • Sales £414million (2005: £410m) • Profit before tax £14.0million (2005: £19.7m) reflecting reduced volumes and margins in UK business • Diluted earnings per share 38.46p (2005: 54.28p) • Final dividend maintained at 15.0p • Balance sheet and interest cover remain strong • Increased pace of organic growth in Mainland Europe. Actions taken to improve UK performance Commenting on the results and prospects, Cameron McLatchie, BPI Chairman said: "These results are in line with the upper end of our expectations and reflect asatisfactory outcome to what was a challenging year due to market conditions. Our objective this year is to improve on the results for 2006. We have made areasonable start and have put in place certain steps to improve our performancein the UK. It is far too early to make any predictions, but we do feel that thebusiness is on a sound footing and has the potential to deliver a betterperformance in 2007." Enquiries Cameron McLatchie, ChairmanJohn Langlands, Chief Executive 01475 501000 Tim Spratt/ Nicola Biles Financial Dynamics 020 7831 3113 CHAIRMAN'S STATEMENT We indicated in our Pre-Close Trading Statement in December that our results for2006 would be in line with our expectations at that time. In the event, theoutcome was at the upper end of these expectations and I am pleased to reportthat, although our results fell short of the excellent outcome in 2005, theyexceeded the performance of each of the preceding three years. In light of thechallenges which 2006 presented, we have to regard this as a satisfactoryoutcome. RESULTS On sales of £414 million (2005 - £410 million), our operating profit declined to£17.1 million (2005 - £23.3 million), reflecting reductions in volumes andmargins in our UK based business during the year. After a decrease in net financing costs to £3.1 million (2005 - £3.6 million),the profit before tax was £14.0 million (2005 - £19.7 million). Diluted earningsper share fell to 38.46 pence (2005 - 54.28 pence). DIVIDEND The Board is recommending a maintained final dividend of 15 pence per share forthe year ended 31 December 2006 (2005 - 15 pence), giving a total for the yearof 22 pence (2005 - 22 pence). If approved by shareholders, the recommendedfinal dividend is payable on 11 May 2006 to shareholders on the register at theclose of business on 16 March 2007. CASH FLOW & BORROWINGS Our net borrowings increased slightly to £52.0 million ( 2005 - £47.1 million)as at 31 December 2006. Working capital has increased due to a higher level ofstockbuild for the 2007 silage season. We also paid additional pension fundcontributions of £3.5 million in December, as part of a package of measuresdesigned to address the scheme deficit. Interest cover on bank borrowings was very sound at over 6 times. Deferment ofcertain capital projects and late delivery of equipment reduced our spend onfixed assets to £12.5 million ( 2005 - £14.3 million). We currently envisage areturn to higher levels of capital expenditure in 2007. GROUP PENSION SCHEME Following extensive consultation with members of the scheme, the Group has nowmodified the future benefits accrued by members as part of a package to reducethe current deficit in the scheme. As previously commented on in the interim statement, the Group has agreed toinject an additional cash contribution of £20 million, on a tax efficient basis,over the next 5 years. As I indicated above, some £3.5 million of theseadditional contributions were paid at the end of 2006. At the year end, the gross deficit in the scheme stood at £33 million (2005 -£54 million). We believe that we have embarked on a course to reduce the deficitsignificantly in the foreseeable future and to create greater certainty for bothscheme members and other stakeholders in the Group. REGULATORY MATTERS & THE ENVIRONMENT We announced on 30 June that the European Commission had decided to close itsfiles on the original investigation into anti-competitive activities inIndustrial Films. This excellent news ended many years of uncertainty. It isgratifying that our full and early co-operation with the EC, during both thisinvestigation and the investigation on Industrial Bags, was reflected in thefinal outcome. We continue to ensure that we remain compliant with allcompetition legislation and all relevant employees are made fully aware of theconsequences of failure to comply on a regular basis. As we indicated last year, certain European polythene bag producers havecomplained to the European Commission regarding product allegedly being dumpedon the European market by producers in the Peoples Republic of China (PRC). InOctober, the Commission imposed an additional tariff of 8.2% on certainpolythene bags imported from the PRC. By 31 December 2006, we had already paid atariff of £0.1 million and our estimate going forward is for an annual tariff of£0.4 million on bags which we manufacture in Xinhui and import into the UnitedKingdom. We have already incurred legal costs of £0.2 million in makingrepresentations to the EC regarding the proceedings used in assessing thistariff and its relevance to our PRC operation. We may incur further considerablesums in legal fees as this tariff will have a significant effect on ourexpansion plans for our Xinhui operation and we are certain that its basis isflawed. After considerable legal expense and management time, we are pleased to note thedemise of the Environmental Levy on Plastic Bags (Scotland) Bill. This Billfizzled out after it became clear to all involved in the process that theenvironmental gains envisaged under the legislation were actually negative. Thisis a similar conclusion to previous serious studies on this topic and it is sadto note that in Ireland, where legislation has led to a reduction in carrierbags given out by retailers, overall levels of packaging waste have increased asretailers attempt to cope with the issues of unavailability of in-storesecondary packaging. We may now be faced with a repeat performance as certainU.K. politicians seek to gain electoral advantage without really understandingthis complex issue. It would be heartening if they were prepared to examine theevidence provided both by our industry and independent experts. It is also clear that the packaging industry, in general, is under attackparticularly from the media for so called excess packaging on retail goods.Having spent some 37 years listening to comments from our customers on the needto have adequate packaging to prevent loss or damage to their goods en route tothe final customers, I wonder if these complainants are looking through theright end of the telescope. Packaging in the Western World enables food to reachcustomers with less than 2% wastage compared to over 50% in certain undevelopedmarkets with no packaging. Typically the contents of modern packaging consumemore than 10 times the energy in their production than the packaging itself, soeven a 10% decrease in food wastage using modern packaging is environmentallycost neutral. Where packaging is preventing waste, then that avoided waste mustbe added into the environmental equation. The current debate needs to bebalanced by greater scientific and informed comment. Much evidence is available,but unfortunately, this does not sell newspapers. The scarcity of polythene scrap available for recycling in the UK is becomingincreasingly evident. This scarcity has affected the UK more than other ECcountries, as the export of scrap for recycling is considered to satisfy theobligations of the Packaging Waste Directive and counts under the UK system asqualifying for the issue of a Packaging Recovery Note (PRN). This had led to acollapse in the value of PRNs; previously a useful source of revenue for UKrecyclers. Inevitably, this will lead to a subsequent reduction in recyclingcapacity in the UK, as can be evidenced by the department closures we announcedat Greenock and Stockton earlier this year. Our number of accredited recyclingsites has reduced from seven at the start of the PRN system to only three now.Although the global market price is similar in all countries, the lack of anobligation to recycle scrap arising in the UK within the EC has fuelled the UKexport trade to the Far East. This is distinctly unfavourable when compared withschemes operating in other countries within the EC which have been devised topromote the recycling of scrap locally. As a direct consequence, a thrivingrecycling sector has developed in several member states under the aegis of thePackaging Waste Directive. With the UK public increasingly demanding action onthe recycling of waste packaging, the UK government would do well to re-examinethe UK system and modify it to promote increased recycling of waste within theUK. In 2001, UK recyclers handled around three quarters of UK plastic wastearisings; in 2006, over two thirds were exported to the Far East. Containerloads of UK plastic waste sailing to the Far East can only lead to containerloads of recycled plastic products sailing back to the EC, making a nonsense ofthe environmental logic behind the EC Packaging Waste Directive. GROUP DEVELOPMENT & STRATEGY Despite negotiations with several parties, we did not conclude any acquisitionsduring 2006, due on each occasion to price. All had recorded excellent resultsin 2005 and wished to base exit valuations on these results. In many cases evenhigher numbers were projected for 2006 and beyond. Whilst we can empathise withprojections based on an upward trend from 2004, it became clear during 2006 thatour industry's results for 2005 were achieved against an unusually favourablebackground. We remain vigilant for acquisition opportunities, but we are awareof what results can be achieved in our industry and what we are prepared to pay. Our organic growth on the European Mainland and the Peoples Republic of Chinacontinues at an increasing pace. These areas are where we see the greatestopportunities and where, as a consequence, we are spending a proportionallyhigher percentage of our capital expenditure. In the UK, we continue to have the issues of overcapacity and enthusiasticpricing by loss making competitors and some loss of business as customersrelocate or source overseas. As a result, we have had to re-assess ourcapacities and we have announced several closures and internal redistribution ofcapacities since the end of the year. On 16 January, we announced the closure of our loss making film extrusionoperation at Scunthorpe. On 9 January, we entered negotiations with theworkforce at our Stockton Refuse Sacks business with a view to relocating thatcapacity to our site at Heanor. On 23 January, we announced the closure of ourRecycling Department at Greenock and the cessation of the production, fromrecycled materials, of plastic pallets and geoblock, our plastic reinforcementblock for grass and similar surfaces. These latter two closures were driven by the increasing price and lack ofavailability of scrap polythene in the UK as volumes of export scrap continueapace to low labour cost economies in the Far East. The total costs of closure will be around £1.5 million and should have a minimalimpact on our 2007 results. OUR PEOPLE The number of people employed by the Group at the year end fell to 2,840compared to the 3,000 employed at the end of 2005. The numbers will fall againin 2007, after the closures announced early this year. I am pleased to report that we will have recorded a further improvement in ourreported accident statistics with a record low number of lost time accidents. TRADING FOR 2006 AND PROSPECTS FOR 2007 Writing at this time last year, I indicated that our objective for 2006 was tomaintain and hopefully improve on our performance for 2005. However, as wereported at the time of the interim statement, despite a good first quarter, itbecame clear during the summer and early autumn that 2006 was not going to go aswell as 2005. There were a number of reasons for this, all related to marketconditions. Firstly, the abnormally fine weather we experienced in the summer months,following a cold spring, had a significant effect on volumes of silage andtherefore the demand for silage stretchwrap. Farmers experienced low yields withtheir first silage cuts and in the summer many ended up making hay. Secondly, we continued to note attrition in sales of industrial products in theUK. In addition to furnishings, which continue to be affected by imports, we sawa downturn in many construction related industries. Horticultural sales,affected by the cold spring, did not recover during the summer months. Thirdly, as outlined earlier in this statement, margins in our recyclingoperations came under great pressure as their basic raw material, scrappolythene film and bags, became both more expensive and scarce due to demandfrom the Far East. Fourthly, we were faced with an unprecedented increase in energy costs duringthe year. Year on year these costs increased by some £4 million, and although wedid manage to pass through some of this increase to our customers, marketconditions did not permit us to pass on all of it. The above four factors were mainly responsible for the significant reduction inour UK operating profits in 2006. Our European business was slightly affected bythe silage and energy issues, but produced improved results in a less difficulttrading environment. 2007 is a different year for silage and we have to hope that growing conditionsreturn to a more normal pattern. We have additional high quality capacitycompared to last season and we are well positioned to service this market whichexhibits a growing trend as demand for organic feed increases. Furtherinvestment in silage stretchwrap production is planned for the end of 2007. We have already taken steps to rationalise our overall UK capacity and we willtake further action if the market does not improve. We are very aware that sometrends may be temporary and that we have a customer base that demands service,as and when required. However, the retention of currently under-utilisedcapacity has to be balanced against producing a return for shareholders andgenerating sufficient cash to re-invest in the new and improved products whichour customer base demands. Raw material prices had a significant impact on our 2006 results. We indicatedat the time of our Interim Results that prices were rising. These increases wereviewed by our industry as transient and selling prices failed to reflect inputcosts in September and October. Raw material prices did fall back late in theyear and margins recovered. In January, we were faced with a re-run of Septemberalthough we detected less enthusiasm from our suppliers as they were benefitingfrom reduced feedstock costs as oil reduced in price. This sentiment changedtowards the end of January and, as their costs increased again and feedstockprices started to look more realistic, suppliers insisted on increased pricesfor February. Attempts at developing a futures market in plastics by the London Metal Exchangeare floundering on their insistence on equating to metals and running a physicalmarket. This type of approach does not lend itself to a commodity market whenthe commodity is actually hundreds, if not thousands, of grades of product andnot simply one commodity. Our industry is unlikely to find a remedy to pricefluctuations until a more flexible futures market has evolved. The proposedintroduction of spot prices and local contracts may provide some increasedliquidity, but the link to the physical market and a limited range of productgrades remains. In short, we continue to have months where margins are affected by the seldomrandom actions of our suppliers and the reaction thereto by competitors tryingto guess the direction of the next movement. This is unlikely to change, but Ibelieve that we handle this well and I see no evidence that any of ourcompetitors do any better. Our objective this year is to improve on the result for 2006. We have made areasonable start and have put in place certain steps to improve our performancein the UK. It is far too early to make any predictions, but we do feel that thebusiness is on a sound footing and has the potential to deliver a betterperformance in 2007. British Polythene Industries PLC Consolidated income statement For the year ended 31 December 2006 2006 2005 Note £m £mTurnover 2 414.2 410.2------------------------------ ----- ---------- ---------- Profit from operations 17.1 23.3 Borrowing costs (2.8) (3.2)Net retirement benefit financing (0.3) (0.4)------------------------------ ----- ---------- ----------Net financing costs (3.1) (3.6)------------------------------ ----- ---------- ---------- Profit before tax 14.0 19.7Tax (3.9) (5.4)------------------------------ ----- ---------- ---------- Profit for the year 10.1 14.3------------------------------ ----- ---------- ---------- Attributable to:Equity holders of the parent 10.1 14.2Minority interests - 0.1------------------------------ ----- ---------- ---------- 10.1 14.3------------------------------ ----- ---------- ---------- Earnings per share------------------------------ ----- ---------- ----------Basic 4 38.79p 55.20p------------------------------ ----- ---------- ----------Diluted 4 38.46p 54.28p------------------------------ ----- ---------- ---------- British Polythene Industries PLC Consolidated statement of recognised income and expense For the year ended 31 December 2006 2006 2005 £m £mProfit for the year 10.1 14.3--------------------------------- ---------- ---------- Cash flow hedges: effective portion of net changes infair value (0.3) 0.3Actuarial gain/(loss) on defined benefit pension scheme 17.4 (11.8)Tax on items taken directly to equity (5.2) 3.5Movement on translation of overseas undertakings andrelated borrowings (0.2) 0.2--------------------------------- ---------- ----------Net income / (expense) recognised directly in equity 11.7 (7.8)--------------------------------- ---------- ------------------------------------------- ---------- ----------Total recognised income and expense for the period 21.8 6.5--------------------------------- ---------- ---------- Attributable to:Equity holders of the parent 21.8 6.4Minority interests - 0.1--------------------------------- ---------- ---------- 21.8 6.5--------------------------------- ---------- ---------- British Polythene Industries PLC Consolidated balance sheet At 31 December 2006 2006 2005 £m £m NoteNon-current assetsGoodwill 0.3 0.3Other intangible assets 1.8 1.7Property, plant and equipment 77.3 79.2Investments 0.1 0.1Deferred tax assets 5.9 12.2------------------------------- ------ -------- -------- 85.4 93.5Current assetsInventories 59.5 55.3Trade and other receivables 60.5 63.2Cash at bank 0.5 0.9------------------------------- ------ -------- -------- 120.5 119.4Current liabilitiesBank overdraft 6.4 5.8Other loans and borrowings 1.0 1.0Trade and other payables 60.2 64.9Current tax liabilities 0.7 3.8------------------------------- ------ -------- -------- 68.3 75.5------------------------------- ------ -------- -------- Net current assets 52.2 43.9------------------------------- ------ -------- -------- Total assets less current liabilities 137.6 137.4------------------------------- ------ -------- -------- Non-current liabilitiesOther loans and borrowings 45.1 41.2Retirement and employee benefit obligations 5 34.7 56.0Deferred tax liabilities 2.5 2.3Deferred government grants 0.9 0.7------------------------------- ------ -------- -------- 83.2 100.2------------------------------- ------ -------- -------- Net assets 54.4 37.2------------------------------- ------ -------- -------- EquityIssued share capital 6.6 6.5Share premium account 25.0 23.8Other reserves 7.4 7.9Retained earnings 15.2 (1.2)------------------------------- ------ -------- --------Total equity attributable to equity holders of the parent 54.2 37.0Minority interests 0.2 0.2------------------------------- ------ -------- -------- Total equity 54.4 37.2------------------------------- ------ -------- -------- British Polythene Industries PLC Consolidated cash flow statement For the year ended 31 December 2006 2006 2005 £m £m NoteProfit from operations 17.1 23.3 Amortisation of intangible assets 0.4 0.9Depreciation of property, plant and equipment 12.3 12.4IFRS 2 charge in relation to equity settled transactions 0.3 0.3Gain on disposal of property, plant and equipment (0.6) (0.9)Adjustment relating to pensions (4.0) (0.9)-------------------------------- ----- -------- --------Operating cash flows before movements in working capital 25.5 35.1 (Increase) / decrease in inventories (4.5) 2.7Decrease / (Increase) in trade and other receivables 2.1 (1.4)Decrease in payables (3.7) (2.6)-------------------------------- ----- -------- --------Movements in working capital (6.1) (1.3)-------------------------------- ----- -------- --------Cash generated from operations 19.4 33.8 Interest paid (2.8) (3.2)Income taxes paid (5.6) (4.0)-------------------------------- ----- -------- --------Net cash from operating activities 11.0 26.6-------------------------------- ----- -------- -------- Investing activitiesPurchase of property, plant and equipment (12.0) (14.0)Purchase of intangible assets (0.5) (0.3)Proceeds from sale of property, plant and equipment 0.9 2.7-------------------------------- ----- -------- --------Net cash used in investing activities (11.6) (11.6)-------------------------------- ----- -------- --------Net cash flows before financing (0.6) 15.0-------------------------------- ----- -------- -------- Financing activitiesDividends paid 3 (5.7) (5.4)Net increase /(decrease) in bank loans 5.4 (0.9)Repayment of obligations under finance leases (1.0) (1.1)Repurchase of ordinary shares (0.5) (0.4)Proceeds from issue of share capital 1.3 0.1-------------------------------- ----- -------- --------Net cash used in financing activities (0.5) (7.7)-------------------------------- ----- -------- --------Net (decrease) / increase in cash and cash equivalents (1.1) 7.3-------------------------------- ----- -------- -------- Cash and cash equivalents at beginning of year (4.9) (12.4)Effect of foreign exchange rate changes 0.1 0.2-------------------------------- ----- -------- -------- Cash and cash equivalents at end of year (5.9) (4.9)-------------------------------- ----- -------- -------- British Polythene Industries PLC Notes to the consolidated financial statements For the year ended 31 December 2006 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 segment - Geographical The Group operates in two principal geographic regions - "UK & Ireland" and"Continental Europe". UK & Ireland includes all of the UK manufacturing andmerchanting activities along with the Irish sales offices which distributepredominantly UK manufactured products. It also includes the manufacturingoperation in China from which substantially all of the output is exported forsale by the Group in the UK. Continental Europe comprises the manufacturing andmerchanting activities located in Belgium, Holland and France. These two regionsare the basis on which the Group reports its primary segment information. Segment information about these regions is presented below. Segment information by geographic region UK & Ireland Continental Europe Eliminations Consolidated 2006 2005 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m £m £mTurnoverExternal sales 328.7 330.5 85.5 79.7 - - 414.2 410.2Inter-segment sales 1.6 2.3 0.4 0.4 (2.0) (2.7) - - Total turnover 330.3 332.8 85.9 80.1 (2.0) (2.7) 414.2 410.2 Profit fromoperations 9.7 17.8 7.4 5.5 - - 17.1 23.3 Net financingcosts (3.1) (3.6) Profit before tax 14.0 19.7Tax (3.9) (5.4) Profit for the year 10.1 14.3 Segment assets 161.3 165.5 44.4 41.9 (6.2) (7.6) 199.5 199.8Segment liabilities (84.4) (112.3) (17.6) (16.9) 6.2 7.6 (95.8) (121.6)Net segment assets 103.7 78.2 Net borrowings (52.0) (47.1)Taxation 2.7 6.1Net assets perbalance sheet 54.4 37.2 Capitalexpenditure 8.6 11.2 3.1 3.5 11.7 14.7Depreciationand amortisation 9.9 10.4 2.8 2.9 12.7 13.3Other adjustments tooperating cash flows (4.3) (1.5) - - (4.3) (1.5) 2. Segment reporting (continued) Secondary segments - Business The Group comprises 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. Segment information about these businesses is presented below. Segment information by business segment External Sales Segment assets Capital expenditure 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £mFilms 161.4 160.8 78.7 77.1 2.0 4.4Converted 177.4 175.8 92.5 98.1 4.4 8.3Recycled 75.4 73.6 34.5 32.2 5.3 2.0Eliminations - - (6.2) (7.6) - ----------------------- ------ ------ ------ ------ ------ ------Total 414.2 410.2 199.5 199.8 11.7 14.7---------------------- ------ ------ ------ ------ ------ ------ 3. Dividends 2006 2005 £m £mAmounts recognised as distributions to equity holders in the year:Final dividend for the year ended 31 December 2005 of 15.0p pershare(2004:14.0p) 3.9 3.6Interim dividend for the year ended 31 December 2006 of 7.0pper share(2005: 7.0p) 1.8 1.8--------------------------------------- ------- ------ 5.7 5.4--------------------------------------- ------- ------ Proposed final dividend for the year ended 31 December 2006 of15.0p per share (2005: 15.0p) 4.0 3.9--------------------------------------- ------- ------ The proposed final dividend is to be approved by shareholders at the AnnualGeneral Meeting on 10 May 2007 and has not been included as a liability as at 31December 2006. 4. Earnings per ordinary share The calculation of basic and diluted earnings per share at 31 December 2006 wasbased on the profit attributable to ordinary shareholders of £10.1 million(2005: £14.2 million). Weighted average number of ordinary shares 2006 2005 000s 000sIssued ordinary shares at 1 January 25,894 25,864Effect of shares issued 367 22Effect of own shares held (221) (160)--------------------------------------- ------ -------Weighted average number of ordinary shares 26,040 25,726Effect of share options and long termincentive plan shares in issue 220 433--------------------------------------- ------ -------Diluted weighted average number of ordinaryshares 26,260 26,159--------------------------------------- ------ ------- 5. Retirement and employee benefit obligations 2006 2005 £m £m Fair value of scheme assets 169.5 154.5Present value of scheme liabilities (202.7) (208.8)-------------------------------------- -------- --------Deficit in the scheme (33.2) (54.3)Other employee benefits (1.5) (1.7)-------------------------------------- -------- --------Retirement and other employee benefit obligations (34.7) (56.0)Related deferred tax asset 10.0 16.5-------------------------------------- -------- --------Net pension liability (24.7) (39.5)-------------------------------------- -------- -------- 6. Statutory accounts The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2006 or 2005 but is derivedfrom the 2006 accounts. Statutory accounts for 2005 have been delivered to theregistrar of companies, and those for 2006 will be delivered in due course. Theauditors have reported on those accounts; their reports were (i) unqualified,(ii) did not contain statements under section 237(2) or (3) of the Companies Act1985 and (iii) the 2005 report included a reference to the uncertainty over theamount of financial penalties that may result from the Competition Directorateof the European Commission inquiry into alleged infringement from EuropeanCompetition law. On 30 June 2006 we announced that the European Commission haddecided to close the files on the investigation into anti-competitive activitiesin Industrial Films. 7. Annual general meeting The Annual General Meeting will be held on Thursday, 10 May 2007 at 12 noon atthe Company's Head Office, 96 Port Glasgow Road, Greenock, PA15 2UL. 8. 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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