BPI.L Regulatory News (BPI)

30 August 2011

BRITISH POLYTHENE INDUSTRIES PLC

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2011

Performance comfortably ahead

Highlights 

·; Sales increased to £293.0m (2010: £260.8m) reflecting sales price rises in response to higher input costs and a marginal increase in volumes

·; Operating profit before net restructuring gains increased by 23% to £15.0m (2010: £12.2m), a highly creditable performance given the trading conditions

·; Profit before net restructuring and pension financing up 22% to £13.7m (2010: £11.2m)

·; Profit before tax increased by over 15% to £15.1m (2010: £13.1m)

·; Diluted earnings per share before net restructuring increased by over 25% to 33.86p (2010: 27.00p). Diluted earnings per share increased to 41.39p (2010: 38.25p)

·; Interim dividend per share increased to 4.0p (2010: 3.65p)

·; Net borrowings reduced to £38.5m (June 2010: £49.5m)

Commenting on the results Cameron McLatchie, Chairman of BPI, said:

"We had previously indicated that our expectations for the half year results, at the operating level, were for a performance comfortably ahead of the similar period in 2010 and this has been achieved.

"Despite a challenging market background, we are confident that, as a result of measures taken in recent years in restructuring our UK operations, and the continuing excellent performance of our European business, we anticipate delivering satisfactory results for the remainder of 2011."

Enquiries

INTERIM MANAGEMENT REPORT

Chairman's Statement

We indicated in our trading update, published on 4 July, that our expectations for the half year results, at the operating level, were for a performance comfortably ahead of the similar period in 2010.

Sales increased to £293.0 million (2010: £260.8 million) reflecting sales price rises in response to higher input costs and a marginal increase in volumes of under 1%.

Operating profit, before net restructuring gains, increased by 23% to £15.0 million (2010: £12.2 million), a highly creditable performance in trading conditions which were far from benign.

After increased interest charges of £1.3 million (2010: £1.0 million), profit, before net restructuring and pension financing, increased by 22% to £13.7 million (2010: £11.2 million). The net restructuring item comprises a £1.9 million gain on the sale of our site in Essex, vacated during our UK restructuring programme in 2008 (2010: £2.8 million gain).

Pension financing costs reduced from the previous year resulting in a profit before tax of £15.1 million (2010: £13.1 million), an increase of over 15%. Diluted earnings per share increased to 41.39p (2010: 38.25p) and before net restructuring increased by over 25% to 33.86p (2010: 27.00p).

The Board has been encouraged by this progress and also by the cash generation achieved despite the further increases in raw material costs. It is the Board's current intention to re-balance the payment of the annual dividends with approximately one third paid as an interim and two thirds as a final dividend. Consequently, the Board is declaring an increased interim dividend of 4.0p per share (2010: 3.65p per share). This dividend will be paid on 17 November to shareholders on the register at the close of business on 21 October 2011.

The cash generated from this performance, together with the proceeds of the restructuring gain, have resulted in a further pleasing reduction in our borrowings to £38.5 million (June 2010: £49.5 million). With our current capital expenditure programme weighted into the second half, we do not anticipate much change in this level of borrowings by the end of 2011.

As we announced in our AGM Statement on 12 May, and as detailed in our Operating Statement, we have agreed a property backed cash payment plan with the trustees of the closed UK Defined Benefit Scheme. This has resulted in a reduction of some £20 million in the Group's pension fund deficit, which was calculated as £33 million at the end of June.

We announced on 3 August that the Office of Fair Trading had closed its enquiry into the agricultural films market. This does not affect the European Commission's enquiry into the agricultural films market, which remains ongoing.

As we indicated in our Trading Update on 4 July, we detected an easing in polymer prices. This continued through July and has given us some relief in sectors where we were under considerable pressure on margins. However, suppliers are now indicating that they are seeking increases for September, despite the apparent reduction in their input costs. This initiative is not being well received by the market and it is difficult to see clearly where pricing is going, particularly with the current global economic difficulties. What is clear is that our business has learned to adapt to raw material price fluctuations much better over the last few years.

In the last few months, volumes have been disappointing. The final outcome for June was below expectation and this continued through July with August looking similar. This may, in part, be due to certain customers de-stocking in anticipation of decreasing prices, but some of this reduction is certainly not. We have some customers who are just quieter than they would like and some who are well down on the previous year's demand. Despite growth from new products and robust demand from the agricultural sector, we are budgeting for static or slightly reduced demand in the second half, and, if this is mirrored across Europe, trading conditions could become even more challenging. In these circumstances, it seems unlikely that polymer suppliers will achieve the increased prices that they are currently seeking.

Despite this challenging market background, we are confident that, as a result of measures taken in recent years in restructuring our UK operations, and the continuing excellent performance of our European business, we anticipate delivering satisfactory results for the remainder of 2011.

BUSINESS REVIEW

Summary

The Group profit from operations before any restructuring costs or property gains increased from £12.2 million to £15.0 million reflecting a very strong performance from our European operations. The UK and North America were both close to maintaining profits despite the significant increases in raw material prices. The contribution from our agricultural sales is normally weighted to the first half and we expect this again to be the case in the current year.

Raw Material Prices

In Europe, raw material prices increased every month until April when Platts LD reached a record high sterling price due to a very tight supply position. Prices then eased but producers are looking for increases in August and September. In North America, prices increased until May before easing back in June but increases are being indicated for August and September. As trading conditions become more challenging, August increases are now looking unlikely.

Sales and Margins

Sales for the six months are up by 12% to £293 million mainly as a result of increased selling prices to recover raw material input costs. The business has managed to maintain margins despite these higher raw material costs due to an improved sales mix and a reduced cost base. The Group operating profit per tonne increased from £78 to £95.

Energy Costs

Our total energy costs increased by 11% with the majority of the increase arising in the UK. The current plans for increasing taxes on energy is causing concern for future UK prices especially for energy intensive users.

Sales Volumes

Total volume sales increased marginally with Europe and North America both up 5% but the UK down 2% as demand softened towards the end of the second quarter with June below expectations.

Restructuring/Property Sales

No restructuring costs were incurred and we completed the installation of our new wide line for agricultural and horticultural products at Ardeer.

In January 2011 we sold our vacant site at Buckhurst Hill in Essex for a cash consideration of £2.5m generating a gain of £1.9 million.

Borrowing Costs

Borrowing costs have increased from £1.0 million to £1.3 million despite average borrowings having reduced. This represents the cost of the longer term credit facilities which were agreed in December 2010 combined with increased interest rates for Euro denominated borrowings.

Capital Expenditure

Capital expenditure of £5.7 million was lower than depreciation and the main items of spend were a three layer co-extrusion line in Roeselare and an initial deposit on a new five layer co-extrusion line for stretchfilm at Zele, both in our European business, and the initial costs of a new washing plant in our UK Recycling business.

Gross capital expenditure for 2011 is anticipated to be in line with the £15.0 million spent in 2010 as we continue to invest for the future of the business.

Cash Flow and Borrowings

Net borrowings reduced from £45.6 million at 31 December 2010 to £38.5 million at 30 June 2011. The impact of currency translation on non sterling borrowings, which are maintained to hedge the net investment in our overseas subsidiaries, accounted for an increase of £1.0 million.

Working capital increased by £5.1 million due primarily to increased raw material prices. Capital expenditure, including computer software, was £5.5 million (2010: £7.7 million). The sale of the Essex site realised proceeds of £2.5 million.

A special pension contribution of £19.6 million was paid to enable the pension scheme to invest £19.6 million in the Pension Funding Partnership.

The Company purchased 480,000 of the Company's shares at a cost of £1.3 million to be held in the Employee Share Ownership Trust.

Total available bank facilities of £107 million are in place, comprising revolving credit facilities of £70 million of which £15 million is repayable in 2014, with the balance of £55 million repayable in 2015. There are also short term facilities of £32 million and £5 million of hire purchase facilities.

Pension Fund

The deficit in the UK pension fund reduced from £55 million (net of tax £40 million) to £33 million (net of tax £24 million). The movement in the deficit is analysed below :

Whilst the scheme investments performed better than the actuarial assumptions and the discount rate applied to the liabilities of the scheme increased from 5.4% to 5.5%, the expected long term inflation rate increased to 3.45% from 3.35%.

The Company has agreed with the trustees of the UK defined benefit pension scheme a property backed cash payment plan (the Pension Funding Partnership) under which the Company will provide £1.8 million per annum to the scheme for a period of 20 years starting in January 2012. The present value of this additional funding stream has been recognised as an asset of the scheme at a current value of approximately £20 million. This reduction in the deficit as it appears on the Group's balance sheet will be offset by a matching non-controlling interest in equity (formerly known as a minority interest). Further explanation of this is given in note 11 to the Condensed Consolidated Financial Statements.

Principal Risks & Uncertainties

The 2010 Annual Report sets out the principal risks and uncertainties faced by the Group at December 2010, and details the process in place for managing those risks.

We do not consider these risk factors to have changed significantly, and therefore the principal risks and uncertainties facing the Group for the remaining six months of the year are consistent with those set out in the 2010 Annual Report. However, there may be additional factors which are not currently known to the Group, or which we currently deem immaterial, which may also have an adverse effect on our business.

There have been no significant changes to the risk management process in the interim period.

Liquidity Risk  

As highlighted in the risk factors referred to above, the continuing weak economic conditions remain challenging; however, the Directors believe the Group is performing well in these circumstances.

More than two thirds of the Group's business is in sectors such as retail food chain, agriculture, healthcare and waste services which have shown to be more resilient to the economic downturn. However, the possibility of further reductions in customer demand remains a risk.

An elevated risk of customer insolvency remains. That said, our customers are spread across a wide range of market sectors and geographical regions and no single customer represents more than 3% of Group turnover. We continue to carry some credit insurance in Mainland Europe and in the agricultural sector in Europe.

Movements in exchange rates can also be a risk. Weakness of sterling, particularly against the euro, tends to be positive for Group performance. UK exports become more competitive and UK domestic sales are better protected against mainland European competition. In addition, profits from the Mainland European operations are worth more in sterling terms. However, euro denominated borrowings become higher in sterling terms.

Steps have been taken to restructure parts of our UK business to reduce capacity in line with current demand. New banking facilities were agreed in December 2010 which provides sufficient headroom to support the Group's trading. The revolving credit element of the facilities is repayable in 2014 and 2015. Short-term overdraft facilities are renewable on an annual basis. Where this renewal period falls within 12 months, no matters have been drawn to the attention of the Directors to suggest that renewal may not be forthcoming on acceptable terms.

Going Concern

The Group's projections, taking account of the risks outlined above, show that the Group should be able to operate within its current banking facilities. As a result, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Strategy

Our current strategy is set out in our 2010 Annual Report and, during the period, strategic investments in agricultural and recycling have been approved in support of this strategy.

Outlook

The second half continues to look challenging as our suppliers seek raw material price increases and demand looks uncertain particularly in consumer facing markets. However, around 70% of the Group sales are to more resilient sectors of agricultural, retail food chain, health care and waste services. The actions taken to restructure our UK business and develop new products should enable the business to deliver acceptable results.

OPERATING REVIEW

Mainland Europe

Returns from investment and product development, combined with some recovery in margins, an improved sales mix and good control over costs enabled the business to produce a strong performance.

Volumes increased by 5% to 42,800 tonnes with good growth in silage products including our next generation SilotitePro® and a strong recovery in industrial products.

We continue to invest in Europe and a replacement coextrusion line at Roeselare was installed at the end of the first half. A further 5 layer co-extrusion line has been authorised for Zele to meet our growing demand for advanced stretchwrap products.

UK & Ireland

UK and Ireland operating profits fell slightly due to a reduction in volumes towards the end of the second quarter and some margin erosion as raw material, scrap and energy prices increased.

Despite the inflationary environment, our total operating costs fell by nearly £1 million reflecting the final cost reductions from our restructuring in previous years.

Most of our volume reduction occurred in the second quarter as we suffered a general slowdown in activity levels.

Volume sales of converter and shrink film were ahead of 2010 as we achieved growth with a number of customers.

As a result of improved exports, sales of silage stretch were ahead of 2010 but behind in the UK due to adverse weather conditions while margins suffered from the higher raw material prices.

Sales of refuse sacks remained just ahead of 2010 but margins were squeezed as we failed to recover the higher scrap prices. Construction volumes were slightly behind last year for film sales to the builders' merchants but our specification range showed strong growth in a flat market.

Sales volumes from our Visqueen sector were behind 2010 with lower sales to the agricultural, animal feed and fertiliser markets. Construction volumes, however, showed some recovery although aggregate customers have indicated a slow down in the second half.

Delays in completing the installation of the new wide line at Ardeer caused us to struggle to meet customer demand with the silage sheet season starting early. The line is now running well and we will be well prepared to meet demand next season.

Sales to our Consumer markets were sluggish and running behind 2010 with lower demand from the food sector and margins squeezed by the higher raw material prices. Volumes in the mail order sector, while ahead of last year, are running behind our expectations.

Orders have now been placed for our new washing plant at Rhymney to recycle contaminated agricultural waste and it is planned to be operational in the first quarter of 2012. A new recycling unit has been ordered for Ardeer to cope with the increased volumes from this much larger site.

North America

A disappointing first half as operating profit fell back on volumes that were 4% ahead of 2010. Horticultural volumes were 20% ahead as we recovered some market share and penetrated new markets. Sales, however, fell back by 12% in our agricultural markets with all products behind 2010. This is mainly due to the adverse weather conditions throughout North America with cool wet weather preventing the seeding of crops which are now some 6 to 8 weeks behind schedule.

A co-extrusion line for the manufacture of silage stretchwrap became operational and enabled us to supply silage stretchwrap to the North American market.

Subject to weather conditions, we would expect higher volumes and an improved performance in the second half.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The interim report is the responsibility of, and has been approved by, the directors of British Polythene Industries PLC.

The directors confirm that to the best of their knowledge:

·; the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

·; the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the board

John Langlands David Harris

Chief Executive Finance Director

British Polythene Industries PLC

Condensed Consolidated Income Statement

For the six months ended 30 June 2011

British Polythene Industries PLC

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2011

British Polythene Industries PLC

Condensed Consolidated Balance Sheet

At 30 June 2011

British Polythene Industries PLC

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2011

British Polythene Industries PLC

Condensed Consolidated Statement of Changes in Equity

For the period ended 30 June 2011

British Polythene Industries PLC

Condensed Consolidated Statement of Changes in Equity (continued)

For the period ended 30 June 2011

1 Refer to note 13 for breakdown of other reserves.

2 As at 31 December 2010 the holding company retained earnings under UK GAAP amounted to £34.6m (2009: £17.8m) and are not affected by movements in retirement benefit obligations.

3 Refer to note 14 for breakdown of non-controlling interest

British Polythene Industries PLC

Notes to the Condensed Consolidated Financial Statements

1. Basis of preparation and accounting policies

British Polythene Industries PLC (the "Company") is a company domiciled and incorporated in the United Kingdom. These interim financial statements ("interim statements") represent the condensed consolidated financial information of the company and its subsidiaries (together referred to as the "Group") for the six months ended 30 June 2011. They have been prepared in accordance with the Disclosure and Transparency rules of the UK's Financial Services Authority and the requirements of IAS 34 'Interim Financial Reporting' as adopted by the EU.

The interim report was authorised for issue by the Directors on 26 August 2011.

The interim statements do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 and do not include all of the information and disclosures required for full annual financial statements. They should be read in conjunction with the Annual Report 2010 which is available on request from the Company's registered office, or from the Company website; www.bpipoly.com.

The comparative figures for the financial year ended 31 December 2010 are not the Company's statutory accounts for that financial year. The statutory accounts for the year ended 31 December 2010, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the EU, have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The interim financial statements for the current and previous period are unaudited. This statement has not been reviewed by the Company's auditors.

The interim statements are prepared on the historical cost basis except for derivative financial instruments, intangible assets acquired through business combinations and the assets and liabilities of the defined benefit pension scheme. These are stated at their fair value.

The interim statements have been prepared on a going concern basis. The reasons for this are outlined in the Operating Review.

The accounting policies applied by the Group in these condensed consolidated financial statements are the same as those applied in the preparation of the Company's published consolidated financial statements for the year ended 31 December 2010. Although the Group has adopted a number of new interpretations and amendments to existing standards in the period, the application of these has not had any impact on the net assets or results of the Group.

The preparation of the interim statements requires the directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There has been no change in the estimates and judgements applied in the 2010 Annual Report.

2. Seasonality of operations

Management do not consider the business to be highly seasonal. However, revenues in some sectors are subject to seasonal fluctuations. Sales to the agricultural sector generally peak in the first half of the year due to seasonal weather conditions.

3. Segment reporting

The Group has three reportable segments; UK and Ireland, Mainland Europe and North America.

UK & Ireland includes all of the UK manufacturing and merchanting activities along with the Irish sales office which distributes predominantly UK manufactured products. It also includes the manufacturing operation in China from which most of the output is exported for sale by the Group in the UK. Mainland Europe comprises the manufacturing and merchanting activities located in Belgium, the Netherlands and France. North America comprises the manufacturing business in Canada with sales throughout North America.

The accounting policies of the reporting segments are the same as those described in Note 1. Inter-segment pricing is determined on an arms length basis.

Segment profit

An analysis of the Group's revenue and results by operating segment for the periods is presented below.

Segment assets

The Group's assets are analysed by operating segment as follows:

* The measure of non-current asset used for segmental reporting comprises goodwill, other intangible assets, investments and property, plant and equipment. It excludes deferred tax assets and retirement benefit assets.

4. Net restructuring

5. Net retirement benefit financing

6. Tax

Corporation tax for the interim period is charged at 28% (June 2010: 30%), representing the estimated annual effective tax rate for the full financial year.

The Emergency Budget on 22 June 2010 announced that the UK corporation tax rate would reduce from 28% to 24% over a period of 4 years from 2011. The first reduction in the UK corporation tax rate from 28% to 27% was reflected in the 2010 closing deferred tax balances as the rate change was substantially enacted prior to the year end. Following the Budget of 23 March 2011, a further reduction in the main rate of UK corporation tax was substantively enacted on 29 March 2011. This reduced the effective rate applicable from April 2011 to 26%. Since the reduction was substantially enacted at the balance sheet date, the deferred tax balances have been adjusted to reflect the 26% rate. The further reductions to the main rate of UK corporation tax to reduce the rate by 1% per annum to 23% by April 2014 have not yet been substantively enacted. It has not yet been possible to quantify the full anticipated effect of the announced further 3% reduction, although this will further reduce the group's future current tax charge and reduce the group's deferred tax asset accordingly.

Tax on items taken directly to equity relates to tax on the defined benefit pension schemes.

7. Dividend

The proposed interim dividend of 4.00p (2010: 3.65p) per share will be paid on 17 November 2011 to shareholders on the register at close of business on 21 October 2011.

The interim dividend was approved by the Board on 26 August 2011 and has not been included as a liability as at 30 June 2011.

8. Earnings per ordinary share

9. Property, Plant and Equipment

Capital commitments were as follows:

10. Bank and other borrowings

11. Retirement and employee benefit obligations

The movements in the British Polythene defined benefit pension scheme during the period are as follows: