Overview and financial results
The half year results reflect the tough global economic climate emanating from the US. As previously indicated, these conditions, combined with substantially higher energy costs, have resulted in a sharp fall in operating profit.

Sales increased in sterling terms by 3 per cent on the first half of 2000, reflecting the strengthening of the US dollar. On a constant currency basis, sales declined by a similar amount. Excluding Chemical Distribution, sales on a constant currency basis in North America declined by 9 per cent.

Operating profit before goodwill amortisation and exceptionals was £17.5 million, compared to £32.2 million in the first half and £31.2 million in the second half of 2000. On a constant currency basis, the impact on operating profit of the sales decline in North America, excluding Chemical Distribution, was approximately £5 million. Higher energy costs adversely impacted operating profit by £7.3 million versus the first half of 2000 on a comparable basis. Currency transaction and translation effects favourably impacted operating profit before goodwill amortisation and exceptionals by approximately £1.6 million compared to the first half of 2000.

Profit before goodwill amortisation, exceptionals and tax was £15.1 million compared to £29.5 million in the first half of 2000 and £28.9 million in the second half. Basic earnings per share before goodwill amortisation and exceptionals was 3.0 pence (2000: 5.6 pence).

Net exceptional charges before tax were £5.1 million (2000: £2.8 million) of which £4.6 million comprised costs incurred in preparing and marketing the Company for sale. Net cash inflow from operating activities was £0.4 million (2000: £18.1 million). Net borrowings at the end of June were £72.5 million (2000: £57.7 million).

Dividends and issue of redeemable B shares
The Board has not declared an interim ordinary dividend. Instead, it will continue with the programme, started in 2000, of issuing and redeeming redeemable B shares. The Board intends to issue further redeemable B shares to ordinary shareholders on the register on 29 October 2001, such that they receive redeemable B shares with a total nominal value of 2.1 pence for each ordinary share held; this is the same as the comparable issue last year. The issue will be coupled with an offer to redeem the new shares for cash at their nominal value on 2 November 2001. 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 the same date.

By not paying an interim dividend on ordinary shares, Elementis estimates that it will be able to recover £2.3 million of advance corporation tax previously paid.

A circular providing full details of the issue and redemption of redeemable B shares will be posted to all ordinary shareholders on 28 September 2001.

The Board
In July, Lyndon Cole resigned, by mutual consent, as Group Chief Executive. The process to seek a new Chief Executive is underway but it is too early to give a timescale for the appointment. I have temporarily become Executive Chairman until the new appointment is made.

Strategy
Following the announcement in May that Elementis had terminated discussions with potential purchasers, the Board continues to explore options to maximise shareholder value.

The current difficult economic conditions, particularly weak demand and high energy costs in the US, necessitate our immediate focus on managing the short-term trading position. Nevertheless,we continue to seek and evaluate acquisition opportunities against the Group's strict criteria of price and fit with our major businesses.

Shareholder information
Since the start of the year, the Elementis website www.elementis.com has been significantly upgraded to provide more comprehensive information for shareholders including share price information, press releases and brokers' forecasts.

Following a number of shareholder requests, information relating to capital gains tax is given in the Shareholder Information section of this report and on the Elementis website.

Current trading and outlook
Market conditions continue to be in line with those in the first half. The outlook for the US economy, and the resulting impact on the global economy, is the most significant factor in determining short-term prospects for the Group.

Energy costs in the second half remain an issue although the impact is expected to be less severe than in the first half of 2001. We currently estimate the Group's energy costs in the second half will increase by around £2.5 million versus the second half of 2000 on a comparable basis.

Benefits from ongoing business improvement projects should be increasingly apparent as the year progresses, particularly when the first phase of Six Sigma projects are completed.

Jonathan Fry
Chairman
1 August 2001