Compared to the first half of 2001, sales in Asia Pacific showed strong gains, helped by greater focus and the allocation of additional resource, while trading in North America and Europe was relatively stable.

Operating profit before goodwill amortisation at Elementis Specialties improved over the first half of 2001. Tight control on costs, savings from Six Sigma programmes and lower energy costs contributed to this improvement.

A new colourant system, TINTAYD ® NV, was launched. This new product line satisfies a leading global coating manufacturer's requirement for a low volatile, low heavy metal content colourant and meets demanding performance needs for use in the oil and transport sectors.

A new structure to support accelerated innovation and drive a sustainable, high rate of growth within Elementis Specialties has been approved by the Board. This new structure is based on a stage gate process, a widely used model emanating from the pharmaceutical industry. New capabilities to expedite internal research and development and to identify and import new technologies and commercial opportunities from external sources are being put in place. Opportunities to expand operations in China are also being pursued.

Elementis Specialties launched a new website in May which enables customers to make sample requests and place orders on-line. Over 1,000 customers have registered so far and internal productivity has increased significantly as the system replaces manual processes.

In July, the Elementis Specialties' portfolio was refined by the sale of its small, non-core paint business in the Netherlands. As a result, a provision for loss on sale of £0.8 million has been taken as an exceptional item in the first half of 2002 (including an adjustment related to goodwill previously written off to reserves).

Specialty Rubber
Linatex is a leading brand of abrasion resistant rubber for materials handling.

Operating loss before exceptionals was £0.9 million, compared to a profit of £0.7 million (restated) in the first half of 2001, on sales down 22 per cent to £19.7 million. Excluding sales for the engineering systems business, which was exited during 2001, sales fell by 12 per cent.

Sales declined in North America primarily as a result of the continued downturn in the mining sector, which is experiencing weak metal prices and high levels of metal stocks. In Europe, sales into the sand and gravel market fell as a result of weakness in the construction market. Sales to Australia, China and South Africa continued to show good growth offset by currency devaluations in South Africa.

The operating loss before exceptionals was principally driven by the fall in sales. This was partially mitigated by cost improvements from headcount reductions in the US, lower raw material costs, benefits from Six Sigma projects and the positive impact of the exit from the engineering systems business in 2001.

A decision has been taken to close the Phoenix, US, service centre, which will be completed in the second half of 2002, and an exceptional charge of £0.5 million has been taken in respect of this in the first half of 2002. In addition, further streamlining of manufacturing is planned, with fabrication of high labour content products being moved from the US and Europe to Malaysia.

Commissioning of the £4.0 million continuous rubber sheet press in Malaysia will be completed in August.This will further reduce operating costs and enable Linatex sheet to be produced within tighter thickness tolerances for new applications and with enhanced bonding capabilities.

In July, the Linatex management team was strengthened by the appointment of a new Managing Director.

Six Sigma
Six Sigma is an integral part of the manufacturing process in Elementis and is being extended to commercial and supply chain processes. In total, over 50 Six Sigma projects have been either completed or are still in progress and have generated savings in the first half of 2002 of £1.8 million. Programme momentum continues with 14 blackbelts' and 25 'greenbelts' in place and a further 20 'greenbelts' commence training in the Autumn.

Health, safety and the environment
Compared to the first half of 2001, lost time accident frequency for continuing operations reduced by 47 per cent, further reflecting the increased focus in this area. Noncompliance with environmental consents declined substantially from 18 to three incidents.

Interest
The Group net interest charge was £1.2 million (2001: £0.6 million restated). In the current period, as a result of the adoption of FRS17 'Retirement Benefits', other finance charges of £0.2 million (2001: income of £1.8 million restated) have been recognised; this represents the expected return on defined benefit pension scheme assets less the expected increase in the present value of defined benefit pension and other post-retirement liabilities.

Exceptionals
Net exceptional charges before tax were £1.7 million (2001: £5.1 million) comprising:

	£1.0 million insurance recovery in Chromium in respect of an historic legal settlement previously taken through exceptionals
	£0.5 million of costs in respect of the Linatex restructuring in the US
	£1.4 million profit in respect of property disposals
	£2.9 million provision for loss on the sale of two Pigments & Specialties businesses in the second half of 2002 including the write back of goodwill previously written off to reserves
	£0.7 million additional costs incurred in respect of historic business disposals.

In July, agreements were signed for the sale of two surplus properties in the UK. Proceeds will amount to £8.5 million and an exceptional profit on sale of approximately £5.9 million will be recorded in the second half.

Cash flow and balance sheet
Net cash inflow from operating activities was £13.3 million, compared to £0.4 million in the first half of 2001, the increase largely reflecting the continued strong control over the working capital position.

Working capital outflow was £11.3 million, compared to £21.0 million in the first half of 2001 as a result of the continued management drive to reduce working capital levels despite normal seasonal effects. Inventories increased by £1.1 million over the half year. Debtors increased by £9.2 million, with trade debtor days increasing by three days. Creditors decreased by £1.0 million.

Cash expenditure on fixed assets totalled £5.0 million (2001: £7.5 million) net of grants received of £0.7 million (2001: nil), compared with depreciation of £9.6 million (2001 : £9.4 million). Major projects included infrastructure to access steam and electricity from a cogeneration plant being constructed at an oil refinery adjacent to Elementis Chromium's Corpus Christi plant and the Linatex continuous sheet press in Malaysia, which will be fully commissioned by August 2002. Capital expenditure for the full year, excluding the ERP programme, is still expected to be below depreciation.

Elementis has adopted early the new accounting standard FRS17 'Retirement Benefits', under which the net pension liability, now reflected in the balance sheet, was £58.0 million at the end of June compared to £25.3 million at the end of December 2001. The movement in the liability is principally accounted for by an actuarial loss arising from the downturn in equity markets and a revision of actuarial assumptions, partially offset by deferred tax thereon. The total charge against operating profit before goodwill amortisation and exceptionals for pensions and post-retirement medical benefits in the first half of 2002 was £2.9 million (2001: £3.4 million restated).

FRS19 'Deferred Tax' has also been adopted, under which deferred tax is now provided in full for the future tax effect of past transactions. As a result, the Group's tax charge takes full account of the impact of accounting losses arising in the US.

Net borrowings at the end of June were £37.1 million compared to £72.5 million at June 2001 and £40.0 million at the end of December 2001. Shareholders' funds at the half year were £338.3 million compared to £420.3 million (restated) at June 2001 and £378.5 million (restated) at the end of December 2001. Net gearing (the ratio of net borrowings to shareholders' funds plus net borrowings) was 9.9 per cent compared to 14.7 per cent (restated) at June 2001 and 9.6 per cent (restated) at the end of December 2001.

Geoff Gaywood
Chief Executive
31 July 2002