All Elementis businesses made significant progress towards achieving their targeted step change improvements in financial performance.

All Elementis businesses made significant progress towards achieving their targeted step change improvements in financial performance. Cost control and cash conservation disciplines were maintained, while significant investments in future growth and efficiency drivers were made. Industrial markets however showed little overall sign of recovery and energy and raw materials price increases caused pressure on margins. Nevertheless, Elementis sales rose and operating profit performance continued to improve.

Elementis Specialties showed a modest sales improvement, when measured in US dollars, as strong growth in the personal care and oilfield sectors was partially offset by weak demand in the US coatings market. The business restructured its R&D resources and increased expenditure on R&D and Innovation by 26 per cent compared to 2002. A pipeline of new product and technology platforms targeted to deliver accelerated sales growth is now emerging, with four new product platforms introduced late in 2003 and more planned for 2004. Assessment of acquisition opportunities continued throughout 2003. Acquisition remains a key element of our strategy for accelerated growth in Elementis Specialties.

Elementis Pigments improved its operating profit in 2003 on modest underlying sales growth in US dollars, by lowering its overall manufacturing cost and maintaining its premium market position. Construction of the new plant at Taicang, China, is progressing as planned and it is anticipated that commissioning will be completed towards the end of 2004. After absorption of start-up costs, migration towards a lower aggregate cost base is expected to continue, providing a strong platform for further growth in the fast-growing Asian markets.

At Elementis Chromium, the integration of the OxyChem chromium chemicals acquisition proceeded well, with savings exceeding our original expectations in both scale and timing. Our aggregate cost base was significantly reduced, enabling Elementis Chromium to improve operating profit in difficult conditions. The Chromium chemicals market in 2003 was characterised by ongoing overcapacity and a continuing decline in prices. Towards the end of the year capacity rationalisation in Asia gathered momentum and rising costs and environmental pressures began to influence the market. In late 2003, Elementis Chromium announced a phased 10-15 per cent price increase, to take effect at the beginning of 2004. Going forward, pricing strategy will be a key focus for this business.

By focusing firmly on driving sales in market sectors where Linatex has proven product performance superiority, Specialty Rubber has eliminated its 2002 losses. Progress was made in all geographic areas, supported by an improved performance from the recently commissioned plant in Malaysia.The emphasis on sales growth initiatives to leverage the installed manufacturing base will continue throughout 2004.

The strategic importance of China to Elementis, both as a dynamic growth market and as a manufacturing base,was recognised in 2003 with the promotion of Godwin Lee to the newly created post of General Manager, China Region. He has leadership responsibility for expanding the Elementis presence in this region and is a member of the Management Team.

The Elementis global ERP system successfully went live in Elementis Specialties in late 2003. This programme is designed to provide a platform for operational excellence, best practice business processes and knowledge transfer across all Elementis businesses. Implementation will proceed in Chromium, Pigments and Specialty Rubber during the course of 2004. The total costs of the programme are estimated at approximately £13.0 million, with cost saving benefits estimated at approximately £3.0 million per annum once implementation is complete. The full benefits will be realised from 2005 onwards.

Geoff Gaywood and the China Management Team, Elementis Pigments site, Taicang,China.

December 2003 – MEP Dr Gordon Adam visited Elementis Chromium, Eaglescliffe,UK.

Sales increased to £368.2 million (2002: £364.9 million) Operating profit (before goodwill and exceptionals) increased to £24.5 million (2002: £20.5 million)

Since its introduction in 2001, the total accumulated benefits from the Elementis Six Sigma programme have passed £8.2 million, with total associated costs estimated at £2.3 million. During 2003, a number of Six Sigma senior practitioners (Black Belts) were temporarily assigned to the ERP programme, reducing the savings directly attributable to Six Sigma in the year. Many new Six Sigma opportunities have however been identified for exploitation when renewed emphasis is applied during 2004. Six Sigma is a methodology widely used in process industries to increase quality and efficiency by reducing process variability.

Senior management at Elementis has worked alongside the European and UK chemical industry associations during 2003 to press for improvements to the workability of the proposed European REACH (registration, evaluation and authorisation of chemicals) regulation.We welcome regulation that addresses potential risks and enforces identical high ethical operating standards upon all market participants.The currently proposed regulation is however still highly bureaucratic and of particular concern is the disproportionate cost burden which would be placed on specialty chemical companies and smaller companies. These organisations produce modest volumes of a wide range of highly specific end-use products, each of which potentially carries the same regulatory cost as high volume products. REACH also carries a further cost impact on innovation and investment, both for chemical and downstream industries,which is likely to curb the development of new products and technologies and could accelerate the migration of manufacturing industry and innovation away from the European Union.

Health, safety and the environment are key issues for Elementis. This year's Annual Report includes a report on sustainable development, setting out for the first time our performance and policies, and indicating our future goals. The sustainable development report reflects our own, deeply held corporate values.

With low growth rates generally predicted for most of the world's major economies, we do not expect significant demand improvement in 2004. At the same time, we anticipate that some key raw material and energy costs will remain high.

Geoff Gaywood
Chief Executive
26 February 2004