Chief Executive's review

Overview
All four Elementis businesses delivered good sales growth in the first half of 2005 compared to the same period last year, with most of the 26 per cent improvement coming from the Servo acquisition and recovery in the chromium chemicals business.

A 45 per cent improvement in operating profit before exceptional items was largely driven by continued progress in the restoration of chromium chemicals pricing. Inflationary cost pressure has continued, but the effects have been offset by improved pricing in all businesses. The demand for pigments and specialty additives in decorative paints was estimated to be 5–6 per cent below prior year due to weaker consumer demand in the US and Europe, and the effects of Chinese government action to halt speculation in the construction sector. There was good growth in sales of Servo products and to other targeted Specialties markets. Specialty Rubber has continued to show good top line growth and further improvement in operating profit.

Specialties
Sales net of the Servo acquisition declined by 6 per cent due to soft demand in the coatings sector. The Servo acquisition, which is now fully integrated, added £33.0 million of sales and £1.3 million of operating profit, and related cost rationalisation measures previously announced will begin to take effect in the second half of 2005.Overall operating profit before exceptional items declined by 10 per cent due to the coatings volume shortfall and an increased overhead cost allocation. Growth was good in the oilfield and personal care markets, and progress in the introduction of new technologies and product platforms continues in line with expectations.

Pigments
The soft coatings market caused Elementis Pigments sales in this sector to decline by 5 per cent compared to the prior year. However, improved pricing and the benefits of the additional sales of driers from the Servo acquisition offset the downside, so that overall sales rose by 17 per cent, and operating profit for the period improved. Sales to the construction industry have been flat, while production of a new range of pigments for the plastics sector has commenced. Start-up of the new world scale plant at TaiCang, China, has proceeded as expected, and a full range of pigments is now being manufactured there in accordance with specifications. Production at the Elementis Pigments East St Louis plant will be scaled down in the second half of the year, as production increases at other facilities, including TaiCang.

Chief Executive's review continues on the next page >
[Page 1 of 2]