Strategic Progress Report
Throughout the first half of 2003, Elementis has continued to implement the growth strategy for each of its businesses first outlined in the 2001 Annual Report.

Elementis Specialties is introducing programmes to leverage technology, markets and acquisitions in order to accelerate growth. A new approach to innovation, including the introduction during the first half of 2003 of an external Innovation Board, is a key element of this strategy.

Elementis Pigments is expanding its highly competitive cost base in Asia Pacific in order to drive growth, and construction of a new plant in Taicang, China, is proceeding according to plan.

Elementis Chromium continues to strengthen its market leadership, with the integration of the OxyChem acquisition delivering an improved global cost structure.

Specialty Rubber has streamlined its fabrication operations and stabilised its new manufacturing platform, and is now delivering sales growth.

It is anticipated that implementation of the Group's growth strategy will include acquisitions that generate synergies within the existing portfolio, with an emphasis on Elementis Specialties. Such acquisitions will have to meet the rigorous capital hurdle rates set by management. The corporate finance analysis and execution team is operating in conjunction with the existing, business-specific, strategic development resources in order to review and action potential acquisition opportunities.

The implementation process for the Elementis Enterprise Resource Planning (ERP) system has begun, with the first stage of the programme expected to go live in late 2003. The system will reduce costs and improve business processes across the Group. The anticipated investment is £13.0 million, of which around £6.0 million will be spent in 2003. Annualised cost savings of approximately £3.5 million are expected to result once implementation is completed in mid 2004, together with additional benefits, including enhanced customer service and optimised supply chain management.

Following the acquisition of the OxyChem Chromium Chemicals business in December 2002, rationalisation of the Elementis Chromium production facilities was undertaken. It is anticipated that this rationalisation will achieve annualised savings in excess of £15 million, over half of which will be achieved in 2003.

Specialties & Pigments
Elementis Specialties is a world leading producer of rheological additives.
Elementis Pigments is a world leading producer of synthetic iron oxide pigments.

Sales on continuing businesses in US dollars increased by 4 per cent. In sterling terms, however, sales on the same basis declined by 7 per cent to £108.1 million.

Operating profit before goodwill amortisation and exceptionals was £9.7 million compared to £10.2 million in the first half of 2002.

Sales in US dollars at Elementis Specialties in the first half of 2003 increased by around 4 per cent when compared to the prior year, but on conversion to sterling showed a decline of approximately 7 per cent. Sales to the construction, personal care and oilfield markets increased significantly. Sales to the global coatings market grew modestly. Europe and Asia Pacific showed good growth, helped by greater focus and the allocation of additional resource, while the US market declined. Trading in North America was below prior year, reflecting the overall low level of consumer confidence and demand in this region.

Operating profit before goodwill amortisation and exceptionals at Elementis Specialties was lower than in the first half of 2002. Tight control on costs and savings from Six Sigma programmes partially offset higher energy and raw material costs and increased research and development costs.

The stage gate process, introduced to support accelerated innovation and drive a sustainable, high rate of growth within Elementis Specialties is now fully operational. A number of products identified since the inception of this programme are currently undergoing commercialisation while further product opportunities are being progressed through the development process. A new, external Innovation Board has also been formed to identify developing technologies outside, but complementary to, the current organic growth programmes, and to accelerate the Specialties innovation process.

At Elementis Pigments, despite the difficult North American economic environment, sales in US dollars were up 4 per cent versus the first half of 2002, after adjustment for businesses sold last year. In sterling terms, however, sales on the same basis were down 7 per cent.

Sales to the coatings and chemicals markets were ahead of the first half of 2002, with higher volumes reported in Europe and Asia, offsetting poor seasonal demand in the North American market.

Sales into the construction market marginally increased over 2002 levels despite weak demand. Volumes supplied to global markets from the Shenzhen manufacturing facility in China have continued at record levels, following its recent expansion. A world class iron oxide plant is currently under construction at Taicang, near Shanghai, China, which will support growth in the European and Asian markets. Restructuring of the site at Birtley, UK, is complete and the site returned to profitability in the first half of 2003.

Operating profit for Elementis Pigments improved significantly over the same period last year.