Financial review (continued)

Capital expenditure Capital expenditure in the year was 143 per cent of depreciation (2003: 134 per cent) as the Group continued to invest in the ERP project and largely completed the construction of a new Pigments plant in TaiCang, China. Total spend in the year included £2.6 million (2003: £7.7 million) in relation to the ERP project and £7.3 million (2003: £1.9 million) for the Pigments plant in China.

The majority of the Group's assets are stated in US Dollars The weakening of the US Dollar in 2004 reduced shareholders' funds by a net £11.8 million

	2004		2003
	£million		£million
Intangible fixed assets	144.4		159.3
Other net assets	155.7		139.9
	300.1		299.2
Shareholders' funds	209.9		252.3
Net borrowings	90.2		46.9
	300.1		299.2
Gearing1	30%		16%

¹ the ratio of net borrowings to shareholders' funds plus net borrowings

Currency fluctuations had a significant impact on shareholders' funds. The main currency exchange rates relevant to Elementis are set out below:

	2004		2003
	Year end	Avge	Year end	Avge
US dollar	1.92	1.83	1.79	1.64
Euro	1.41	1.47	1.42	1.45

The majority of the Group's assets are stated in US Dollars and the weakening of the US Dollar in 2004 reduced shareholders' funds by a net £11.8 million. The balance of the reduction was due to the current year trading result, the issue and redemption of B shares, and actuarial adjustments to the pension fund valuation and associated deferred taxation.

Pensions and other post-retirement benefits
The Group provides retirement benefits for the majority of its employees mainly through defined benefit schemes. A small number of defined contribution schemes are also provided and an unfunded post-retirement medical benefit scheme is provided in the US.

The net pension liability, which is calculated by the Group's actuaries and based upon market values of the schemes' assets and liabilities, increased by £11.7 million to £64.5 million. The increase was primarily due to a change in the rate of deferred tax related to the UK pension scheme from 30 per cent to 10 per cent to reflect surplus ACT. This increased the net pension liability by £9.8 million and the balance was due to the acquisition of Sasol Servo B.V.

The total cost of pensions and post-retirement health care in the year was £7.2 million (2003: £8.5 million). The charge in 2003 included a credit in respect of past service of £1.3 million. Costs were lower in 2004 principally due to a £3.1 million reduction in finance charges to £1.1 million (2003: £4.2 million). Total contributions to pension and post-retirement schemes in the year amounted to £10.7 million (2003: £14.4 million). The estimated contribution in 2005 is approximately £12.0 million.

Treasury
Treasury activities are governed by policies and procedures approved and monitored by the Board. The Group operates a central treasury service centre, the principal function of which is to manage and monitor the Group's external and internal funding requirements and treasury risks, including interest rate and currency management.

The Group's financial instruments, other than derivatives, comprise borrowings, cash and liquid resources. Certain derivative financial instruments (principally forward foreign currency contracts) are entered into in order to manage currency risks efficiently.

The Group does not hold or issue derivative financial instruments for speculative trading purposes.

Interest rate risk
The Group's policy is to borrow at both fixed and floating interest rates and to use interest rate swaps to generate the required interest rate profile. The policy does not require that a specific proportion of the Group's borrowings are at fixed rates of interest. Due to the current low interest rate environment all borrowings are currently at floating interest rates, with no borrowings at fixed rates (2003: £nil).

Currency risk
Businesses use forward foreign currency contracts to hedge transaction exposures where deemed appropriate in consultation with Group Treasury. Elementis manages its global businesses on a US Dollar basis and does not seek to fully mitigate the effect of US Dollar translation exposure to its Sterling reported asset base through US Dollar borrowings.

Liquidity risk
Group funding policy is to have committed borrowings in place to cover at least 125 per cent of peak forecast net borrowings for at least a 12 month forward period. At the year end, the Group had £65.6 million (2003: £109.2 million) of undrawn committed facilities.

Counterparty credit risk
The Group controls counterparty credit risk by entering into cash deposits and financial instruments with authorised counterparties. Credit risk is managed by limiting the aggregate amount and duration of exposure to any one counterparty depending upon their credit rating and by regular review of these ratings. Counterparty positions are monitored on a regular basis.

International Accounting Standards
All listed companies are required to present consolidated financial information that fully complies with International Financing Reporting Standards (IFRS) for accounting periods starting on or after 1 January 2005.

The project to assess the impact of this change of accounting standards is almost complete and a separate announcement will be made in March 2005. The current indications are that the comparative for earnings per share before goodwill amortisation and exceptionals under UK GAAP will not be materially different under IFRS.

Brian Taylorson

Finance Director

17 February 2005