Overview
2001 was a particularly difficult year. Our business was very severely impacted by the global economic downturn. Conditions were worst in the US where the majority of our business is situated. As a result, profits before goodwill amortisation and exceptionals were halved in the first half of 2001 and then, as markets deteriorated further, virtually eliminated in the second half.

In response to these pressures, a number of measures were adopted. First, great attention was paid to cash conservation and a programme implemented which ensured that, in spite of the profits decline, cashflow remained positive for the year as a whole. Secondly, the overriding focus of management was concentrated on the short-term trading position. Thirdly, a new Chief Executive was appointed who has moved swiftly to strengthen the management team, streamline the managerial process and address strategic issues.

Financial results
Operating profit before goodwill amortisation and exceptionals on continuing operations was £15.8 million, compared to £57.5 million in 2000. Operating profit on the same basis for the second half of 2001 was £0.2 million, compared to £28.3 million in the second half of 2000.

A major factor was lower sales. Sales on continuing operations decreased in sterling terms by 5 per cent on 2000 and by 8 per cent on a constant currency basis. Sales on continuing operations in the second half of the year were 11 per cent lower than in the second half of 2000.

In addition, higher energy costs adversely impacted operating profit by £9.3 million versus 2000 on a comparable basis, of which £7.2 million was in the
first half.

Other adverse factors included some pressure on prices, lower pension credits on historic surpluses and manufacturing inefficiencies caused by the actions taken to reduce inventory levels. Unusually high maintenance expenditure at Elementis Chromium and losses on Linatex process technology equipment contracts also contributed.

Profit before goodwill amortisation, exceptionals and tax was £14.0 million, compared to £58.4 million in 2000. Basic earnings per share before goodwill amortisation and exceptionals was 4.0 pence, compared to 11.6 pence in 2000.

Net exceptional charges before tax were £3.7 million (2000: £3.0 million), including £4.6 million of costs incurred in preparing the Company for sale and a £1.4 million profit on the disposal of Harcros Chemicals.

Cash conservation
The cash position was strengthened in a number of ways. The US chemical distribution business, classified as non core to the Group’s future, was sold for £21.4 million. Working capital levels received particular attention with the result that there was a £9.8 million inflow during the year from this area, £6.6 million resulting from inventory reductions. As a result net borrowings at year end were £40.0 million, a £1.7 million reduction. Net year end gearing (the ratio of net borrowings to shareholders’ funds plus net borrowings) was 9.1 per cent (2000: 9.2 per cent).

Short-term focus
Managers throughout the Group were closely focused on short-term trading. In addition to increased efforts to maximise revenue from all sources, additional cost controls have been put in place throughout the Group. Headcount on continuing operations was cut by 152, or 6 per cent, taking the total reduction over two years to 17 per cent.

New Chief Executive
A new Chief Executive, Geoff Gaywood,was appointed in October 2001. Geoff joined from Ernst & Young LLP where he was a Director of Chemicals. Previously he ran the European division of International Specialty Products, Inc and before that was with the Dow Chemical Company for 24 years. Geoff’s wide experience of the chemical industry internationally and leadership skills will benefit Elementis substantially over the coming years.

Since the year end, the Board has announced that Brian Taylorson, currently Director of Corporate Finance, is to join the Board at the beginning of April as Finance Director. He will replace George Fairweather who is leaving to take up a similar position at Alliance UniChem Plc. I would like to thank George for his significant contribution to Elementis over the last five years.

New heads of functions have also been appointed in human resources and information technology.

Dividends and issue of redeemable B shares
The Board did not declare an interim dividend and, similarly, is not proposing a final dividend. Instead, it will continue with the programme, started in 2000, of issuing and redeeming redeemable B shares. The total nominal value of redeemable B shares issued to shareholders during 2001 was 5.4 pence per ordinary share (2000: 5.2 pence). The Board intends to issue further redeemable B shares to ordinary shareholders on the register on 26 April 2002, such that they receive redeemable B shares with a total nominal value of 1.0 pence for each ordinary share held. This compares with 3.3 pence for the comparable issue last year. This will be coupled with an offer to redeem these new shares for cash at their nominal value on 2 May 2002. A further offer will also be made to existing holders of redeemable B shares to redeem these shares for cash at their nominal value on 2 May 2002.

By not paying dividends on ordinary shares during 2001, Elementis will recover £5.8 million of advance corporation tax previously paid. Elementis estimates that it will be able to recover a further £1.1 million of advance corporation tax by not paying a final dividend for 2001.

A circular providing full details of the issue and redemption of redeemable B shares will be posted to all ordinary shareholders on 19 March 2002.

Health, safety and the environment
Compared to 2000, lost time accident frequency for continuing operations reduced by 53 per cent. This is due to increased focus on safety and the introduction of a new incident investigation reporting system that identifies the root causes of reportable incidents and ‘near misses’ and enables processes to be put in place to prevent reoccurrence. Non-compliance with environmental consents for continuing operations rose from 16 to 28 in the year. A similar investigation reporting system has now been implemented for all environmental incidents and the Board is committed to reversing this trend.

Employees
I would like to thank everyone in Elementis for their commitment and support during a particularly challenging year.

Strategy
In addition to the short-term focus referred to above, we are taking steps to enable the Group to grow. The strategy is to grow in high margin businesses, particularly Elementis Specialties, with a continuing Group-wide focus on operational excellence and leveraging the market and brand leadership positions of the other businesses.

Programmes addressing opportunities for step change financial performance improvements have been initiated in each of the businesses. Elementis Chromium has a competitive and well invested manufacturing base in the UK and US and has scope to strengthen its market position. At Elementis Specialties, additional management resource is now in place to develop and deliver a high growth strategy based on accelerated organic growth and including the inward licensing of technology, market alliances and acquisitions. Elementis Pigments has a strong market position, but reduced volumes, driven by the North American downturn, have challenged the business’s ability to cover fixed costs. This is being addressed on several fronts including a strategic review of the Birtley, UK facility. To enhance profitability in Linatex, further step change improvements in manufacturing structure are being evaluated.

A programme is under way to evaluate the potential of a Groupwide Enterprise Resource Planning (ERP) system. The decision whether to proceed will depend on the strength of the business case demonstrated and is also dependent on trading conditions and future outlook.

A review of incentives for senior management is also under way.

Chromated copper arsenate
On 12 February 2002, the US Environmental Protection Agency (EPA) announced restrictions, from 2004, on the use of chromated copper arsenate (CCA) as a wood preservative in the US, affecting CCA treated timber for consumer use. Elementis Chromium supplies chromic acid which is used in the manufacture of CCA and acts primarily as a binding agent. As previously indicated, Elementis estimates that as a result of the EPA’s decision, the global and US demand for chromium chemicals would reduce by around 5 and 30 per cent respectively.

Elementis Chromium’s sales for industrial applications of CCA, such as utility poles, rail sleepers and marine pilings are relatively strong and are not affected by the EPA ruling. Nevertheless, Elementis Chromium’s global sales of chromium chemicals could be adversely affected by around 15 per cent by 2004.

Elementis does not now expect its sales in 2002 to be materially affected by the EPA ruling.

Current trading and outlook
Although market conditions continue to be tough, there are some indications that the customer destocking down the chain experienced in the last quarter of 2001 has come to an end.

In the first half of 2002 Elementis will benefit from lower energy costs and the rigorous measures taken to reduce inventory levels. All areas of cost and capital expenditure continue to be tightly controlled.

Benefits from ongoing business improvement projects, including Six Sigma, which is targeted at further reducing costs, should increase as the year progresses.