Operating review
Operating profit on continuing businesses, before goodwill amortisation and exceptionals, increased by 63 per cent to £20.5 million in the year on sales that were £28.0 million lower at £364.9 million. A reduction in energy costs of £6.2 million and Six Sigma savings of £3.0 million contributed to the increase in operating profit.

Sales from continuing businesses were 7 per cent lower than last year. After adjusting for the strategic exit from non-core businesses and for currency effects which together caused a 4 per cent reduction, like for like turnover was 3 per cent down. A decline in prices of chromium chemicals and reduced demand in Specialty Rubber was partly offset by organic growth of 3 per cent in the Pigments & Specialties division.

Profit before taxation, goodwill amortisation and exceptionals, was 36 per cent higher than last year at £19.7 million. Further details of operating performance are set out in the Business review.

First half : Second half review

Sales (£million)           2002   2001             1st half* 194.5   209.4   2nd half 170.4   183.5   Total 364.9   392.9

The seasonal trend of sales was unchanged on 2001 with 53 per cent occurring in the first half and 47 per cent in the second. As in the first half, second half sales were 7 per cent lower than the comparable period primarily due to lower chromium chemicals prices and a weakening of exchange rates in the second half of 2002.

Operating profit† (£million)     2002   2001 restated             1st half* 14.5   13.8   2nd half 6.0   (1.2 ) Total 20.5   12.6

In the second half of 2001, operating profit was reduced by approximately £1.9 million following temporary plant closures in the Pigments & Specialties division which reduced inventories by £3.0 million. After adjusting for this, operating profit in the second half of 2002 was £5.3 million better than the previous year reflecting progress made in reducing fixed and variable costs. Energy costs in the second half were £2.9 million lower than in 2001 and currency changes had little impact on the operating result.

Accounting policies
The Group has fully adopted FRS17 'Retirement Benefits' and FRS19 'Deferred Taxation' for the year ended 31 December 2002. Comparatives have been restated accordingly and the effect of the changes in accounting policy are set out in note 29.

Exceptionals
Operating exceptionals of £44.7 million included the costs of restructuring the chromium business following the acquisition from OxyChem in December 2002. As a result of the acquisition, the chromic acid plant at Corpus Christi, Texas, was closed and the dichromate unit was mothballed with US production being consolidated into Castle Hayne, North Carolina. The total cost of the restructuring was £40.5 million of which £35.4 million represented an impairment charge against the assets at Corpus Christi. Other operating exceptionals were the closure of the zinc business at Birtley at a cost of £4.5 million and restructuring the Specialty Rubber business in the US and Europe.

Non operating exceptionals comprised a profit of £4.3 million in relation to business and property disposals.

Interest

Interest (£million)     2002   2001             On net borrowings (1.9 ) (4.2 ) FRS17 pension 0.1   3.7   Discount on provisions (1.0 ) -   UK tax refunds 2.0   -   Total (0.8 ) (0.5 )

Interest payable on net borrowings fell by £2.3 million in the year to £1.9 million due to lower average borrowings and lower interest rates. Increased pension liabilities reduced the amount that is recognised under FRS17 by £3.6 million and a charge of £1.0 million was incurred to unwind the discount implicit in environmental provisions. Interest of £2.0 million (2001: £nil) was received following the resolution of historical UK taxation issues. Interest cover, based on total net interest payable and before goodwill amortisation and exceptionals, was 25.6 times (2001: 25.2 times) and 10.8 times (2001: 3.6 times) if based solely on interest in respect of net borrowings.

Taxation

Tax (change)/credit (£million)     Effective rate             Before goodwill amortisation and exceptionals (4.9 ) 25%   Goodwill amortisation 4.8   36%   Exceptionals 3.6   9%   Total 3.5   10%

The effective rate of tax on profit before goodwill amortisation and exceptionals was 25 per cent (2001: 10 per cent). This rate is lower than the standard UK corporate tax rate due primarily to the utilisation of surplus advance corporation tax. Given the current difficult trading conditions and the general uncertainty surrounding the future economic environment, potential deferred tax assets arising mostly from the restructuring at Corpus Christi, Texas, US in 2002 of £12.7 million have not been recognised.

Earnings per share
Basic earnings per share before goodwill amortisation and exceptionals increased by 17 per cent in 2002 to 3.4 pence. Basic earnings per share, after goodwill amortisation and exceptionals in 2002 was a loss of 7.1 pence (2001: earnings of 1.0 pence).

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 2002 was 2.1 pence per ordinary share.

The Board intends to issue further redeemable B shares to ordinary shareholders on the register on 28 April 2003, such that they receive redeemable B shares with a total nominal value of 1.1 pence for each ordinary share held. This compares with 1.0 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 2003. 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 2003.

By not paying dividends on ordinary shares in 2002, Elementis has recovered £1.5 million of advance corporation tax previously paid.