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Overview
I am pleased to report an operating profit before goodwill amortisation
and exceptionals on continuing operations for the first half of the year
of £14.5 million. While this is a long way below the level recorded
prior to the global economic downturn in 2001, it represents a big improvement
on the second half of last year and is similar to the results for the
first half of last year. The results have benefited from a determined
effort, led by the Chief Executive, to focus on the shortterm trading
position and tightly control costs. He has also taken firm measures to
conserve cash; as a consequence net borrowings were down to £37.1
million from £72.5 million a year earlier. Sales on continuing operations
decreased by 7 per cent on the first half of 2001 to £194.5 million,
reflecting the lower economic activity and the weakening of the US dollar.
The Group will continue its efforts at cost control. Fortunately, the
high energy costs which plagued us during 2001 have now reduced. Further,
our Six Sigma programme is yielding excellent benefits and there is more
to come from this source.
Strategy
The Annual Report 2001 outlined the strategy to put Elementis on a growth
footing. This has now been further refined and the direction for each
business clarified. Elementis Chromium will strengthen and leverage its
market leadership. Elementis Pigments will build on its globally competitive
cost base in Asia Pacific to drive growth. Elementis Specialties will
leverage technology, markets and acquisitions to drive significant growth,
and Specialty Rubber will streamline fabrication and use its low cost
base, product innovation and quality to accelerate performance improvement.
Implementation of the growth strategy will include acquisitions that
generate synergies with the existing portfolio, with an emphasis on Elementis
Specialties. Such acquisitions will meet the rigorous capital disciplines
set by management and be financed from available debt and cash resources.
A new corporate finance analysis and execution team has been appointed
to lead this effort. The team operates in conjunction with the existing,
business-specific, strategic development resources.
We need to improve our business processes across the Group and to this
end have authorised a £13.0 million investment in an Enterprise
Resource Planning (ERP) system. Approximately £4.5 million will
be spent in 2002 and at least £3.5 million of annual efficiency
savings are expected to result. There will be additional benefits, including
enhanced customer service.
Programmes addressing opportunities for step change financial performance
improvement are being implemented in Elementis Pigments and Specialty
Rubber. A strategic review of the facility at Birtley, near Durham, UK
was initiated in February and will be completed and actioned in the second
half of 2002. In Specialty Rubber, the ongoing programme to improve manufacturing
structure has resulted in a decision to close the Phoenix, US, service
centre, which will also be completed in the second half of 2002. In addition,
further streamlining of manufacturing is planned, with the fabrication
of high labour content products being moved from the US and Europe to
Malaysia.
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 28 October 2002, such that
they receive redeemable B shares with a total nominal value of 1.1 pence
for each ordinary share held. The Board believes that this is appropriate
for the business, taking into account the current trading environment
and the stated strategy to focus on growth. The nominal value of any further
issue of redeemable B shares is currently anticipated to increase as our
strategy delivers value, albeit at a rate that may not match the Group's
underlying growth rate.
The issue will be coupled with an offer to redeem the new shares for
cash at their nominal value on 4 November 2002. 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.
A circular providing full details of the issue and redemption of redeemable
B shares will be posted to all ordinary shareholders on 27 September 2002.
The Board
Brian Taylorson was appointed Finance Director on 2 April 2002, replacing
George Fairweather who left to take up a similar position at Alliance
UniChem Plc.
Chromated copper arsenate
On 12 February 2002, the US Environmental Protection Agency (EPA) announced
restrictions, from 2004, on the use of chromated copper arsenate (CCA)
as a wood preservative in the US, affecting CCA treated timber for consumer
use. Elementis Chromium supplies chromic acid which is used in the manufacture
of CCA and, in view of this ruling, and as previously announced, its global
sales of chromium chemicals could be adversely affected by around 15 per
cent by 2004.
Elementis did not experience any adverse impact on sales in the first
half of 2002 from this EPA ruling and does not expect its sales in 2002
as a whole to be materially affected. Following the public consultation
period, the EPA is now considering its final position.
Current trading and outlook
Market conditions are currently stable but no improvement in underlying
demand is expected in the near future. The outlook for the US economy,
and the resulting impact on the global economy, remains the most significant
factor in determining the short-term prospects for Elementis.
Favourable cost trends are expected to continue in the second half of
2002. While sales in the second half are typically lower than the first
half due to seasonal effects, a repeat of the extreme levels of customer
destocking that took place in the last quarter of 2001 is not anticipated.
Jonathan Fry
Chairman
31 July 2002
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