Specialties and Pigments
At Elementis Specialties an improvement in market demand has been experienced across all product and geographic areas in the first half of 2004. Market prices generally are showing an upward trend, progressively mitigating increased energy, raw material and freight costs. In the critical North American coatings market, indications are that seasonal demand will exceed that experienced in 2003. The construction sector is showing signs of accelerating growth rates. The consumer products market continues to experience solid growth. Elementis Specialties has achieved market share gains in its key product markets and sales in both Europe and the Far East continue to exceed expectations.

Elementis Specialties' strategy is targeted on the achievement of leadership in the high margin and growth sectors of rheology and surface chemistry. Key to the achievement of this strategy is the need to gain technology leadership in targeted sectors. Elementis Specialties has developed a number of new product and technology concepts. It has established a solid pipeline of projects and is on schedule to deliver further new products to the market in 2004.

The Elementis Specialties 'Customer Intimacy' programme, which seeks to constantly improve and develop the quality of the customer interface, has continued to deliver benefits during the first half of 2004. New product-related orders were generated from existing customers and new customers were added to the customer base.

In addition to innovation and customer development activities, which are expected to generate sustainable double digit organic sales growth, Specialties delivered the first major acquisition in line with its stated strategy. The purchase of Sasol Servo B.V. was announced in April 2004 and the transaction completed on 30 June 2004. Servo's turnover in the year to 30 June 2004 was £70.9 million (2003: £73.9 million).

The Servo business is now being integrated into the Elementis Specialties organisation where it is expected to contribute to accelerated future revenue and earnings growth. The acquisition brings with it complementary rheology and surface chemistry additive products, which will broaden the range and performance characteristics of the Elementis Specialties product portfolio. Servo also brings with it an important new product and knowledge base in the area of surfactant development and manufacture. This knowledge base is expected to significantly expand the Elementis Specialties innovation platform.

The Servo site at Delden, The Netherlands, is a well-invested and versatile manufacturing facility that will augment the capacity and flexibility of Elementis Specialties.

At this early stage of the integration process, it is estimated that operating efficiencies will improve annual operating profit by approximately £2.5 million by the end of the second year of combined operations. One time implementation costs will be of a similar amount.

Elementis Specialties went live with the Elementis ERP system in late 2003 and it is now fully operational. Benefits are expected to begin to accrue during the latter part of 2004.

At Elementis Pigments, global demand has been strong throughout the first half of 2004, and sales have continued to grow in the premium sector of the market, particularly in North America. On a like for like basis, allowing for businesses disposed in the previous year, sales were significantly ahead of the same period in 2003.

During the period the cost of raw materials, in particular the cost of steel scrap, a key input to the Pigments production process, significantly increased. The steel scrap supply situation eased however during the latter part of the period and prices have stabilised. An aggressive cost containment programme remains in place.

A series of phased price increases was successfully introduced from April onwards.

Construction of the new iron oxide manufacturing plant at Taicang, China, continues on schedule and commissioning will begin during the second half of 2004. Production at the existing Elementis Pigments manufacturing facility at Shenzhen, China is at record levels.

Preparation for the implementation of the Elementis ERP system continues, with Pigments scheduled to 'go live' early in 2005.

Chief Executive's strategic and operating review continues on the next page >
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