BPI.L Regulatory News (BPI)

28 August 2012

BRITISH POLYTHENE INDUSTRIES PLC

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

Solid Performance in Challenging Conditions

Highlights 

·; Operating profits broadly maintained at £14.8m (2011: £15.0m) despite challenging conditions

·; Profit before net restructuring and pensions finance of £13.7m (2011: £13.7m)

·; Profit before tax £13.3m (2011: £15.1m)

·; Diluted earnings per share before net restructuring of 32.38p (2011: 33.86p)

·; Interim dividend per share increased by 5% to 4.2p (2011: 4.0p)

·; Net borrowings reduced to £23.2m (June 2011: £38.5m)

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 broadly similar to the corresponding period in 2011 and we are pleased to report that this has been achieved.

"As always, the second half is difficult to call at this stage, as in this manufacturing-come-service industry the order visibility is never very long-term. We are, however, as well-placed as we were at this time last year, and we are confident that the business is capable of delivering a similar result."

Enquiries

INTERIM MANAGEMENT REPORT

Chairman's Statement

We indicated in our trading update, published on 29 June 2012, that our expectations for the half year results, at the operating level, were for a performance broadly similar to the corresponding period in 2011. Despite poor demand from certain sectors and challenging trading conditions, we are pleased to report that profit before pension financing, was unchanged at £13.7 million (2011: £13.7 million).

Sales were nearly 7% lower at £273.1 million, (2011: £293.0 million) reflecting a reduction in overall volumes of 5%, a less favourable translation of our European sales into sterling and contractual price reductions for certain products in response to lower input costs for polymer during the second quarter.

However, despite the fall in sales, operating profit only fell by 1% to £14.8 million (2011: £15.0 million) and this was offset by a reduction in group finance charges to £1.1 million (2011: £1.3 million). Both turnover and operating profit were affected by currency translation reducing turnover by £5.0 million and profits by £0.5 million.

Pension financing costs reduced to £0.4 million (2011: £0.5 million), resulting in a profit before tax of £13.3 million (2011: £15.1 million). 2012 did not have the benefit of any restructuring gains (2011: £1.9 million).Diluted earnings per share, before any net restructuring gains, fell by some 4% to 32.38p (2011: 33.86p).

The Board continues to be encouraged by the Group's consistent performance in these difficult times. Consequently the Board is declaring a 5% increase in the interim dividend to 4.2p per share (2011: 4.0p per share). This dividend will be paid on 16 November 2012 to shareholders on the register at the close of business on 19 October 2012.

The cash generated from the above performance, together with the translation of our euro denominated borrowings, has resulted in a further pleasing reduction in our borrowings to £23.2 million (June 2011: £38.5 million / December 2011: £31.0 million). This is despite an increase in capital expenditure on new plant during this period. We plan that this increased level of capital expenditure will continue in the medium term, but nonetheless target further reductions in our borrowings, unless there are dramatic increases in our input costs.

The pleasing reduction in our borrowings has not been matched by the calculation of the deficit in the Group Pension Scheme as at 30 June. Despite an increase in the fair value of the scheme assets to over £202 million, the continuing low yields on bonds combined with the perversely high rate of inflation has resulted in a calculated present value of the scheme liabilities of over £272 million, resulting in a gross deficit of just under £70 million. After set-off of the related tax asset the net deficit at 30 June was £54.4 million (June 2011: £25.4 million / December 2011: £46.1 million).

We indicated earlier in the year that we saw April as the peak of the polymer price cycle. The price eroded in May and we saw further falls in the following months. This downward trend has now stopped and the polymer suppliers have imposed dramatic increases for the month of August, and indicate that more are on their way. It is clear that they are being successful in August, but economic conditions may well prevail against much further upward movement. Western governments' embargo on Iranian polymer has meant that most of this new capacity has found its way to the Far East, thus effectively closing this export market to many traditional suppliers. It will be very difficult for many polymer suppliers to avoid discounting product to move it elsewhere. This comes at a time when there are also many concerns on sovereign debt and the economic stability of certain markets. There is no question that it is much more of a buyer's market today than it was a few years ago, particularly when the buyer has a relatively stable currency.

Volumes, with the exception of agriculture, continue to disappoint. The construction sector has been the hardest hit, but we are also seeing poorer demand from certain industrial customers, and cost pressure is affecting supplies to the public sector in the UK. However, weather patterns continue to favour our agricultural business, and the silage season has again continued into the summer.

As always, the second half is difficult to call at this stage, as in this manufacturing-come-service industry the order visibility is never very long-term. We are, however, as well-placed as we were at this time last year, and we are confident that the business is capable of delivering a similar result.

BUSINESS REVIEW

Summary

The Group profit from operations before any restructuring or property gains at £14.8 million was broadly in line with 2011 despite significant raw material price increases in the first four months and lower volumes from the industrial and construction sectors. The results benefitted from actions taken to improve the business including the closure of the Swansea plant in late 2011 and an improved operational performance from our wide agricultural line. 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.

Sales Volumes

Total sales volumes in tonnes fell by 5% with similar reductions in both the UK and Europe reflecting reduced demand from the industrial and construction sectors. North American volumes were up 4% as more silage stretchwrap was sold. Sales of silage related products have remained strong and are marginally ahead of 2011. Down gauging of our products continues and contributed to the tonnage volume reduction.

Sales and Margins

Sales for the six months are down by 7% reflecting the reduction in sales volumes, lower average input cost and a less favourable translation of our European sales. Margins have improved reflecting the benefit of actions taken in 2011, an improving sales mix and lower cost base. The Group operating profit per tonne increased from £95 to £99.

Raw Material Prices

In Europe, raw material prices increased every month until April before falling back in May and June. July saw another reduction but, following an increase in oil and naptha prices, polymer producers are seeking significant price increases in August. Prices in North America have followed a similar pattern. Prices in both Europe and North America have remained significantly higher than the Far East with prices in the Far East depressed by both a lack of demand and plentiful supply of Iranian material that can no longer be sold in Europe.

Energy Costs

Our total energy cost per tonne increased by over 10% with the UK cost per tonne remaining significantly higher than Europe. In the UK we appear to face an increasing number of energy taxes and endless consultations. While the government promises support to energy intensive industries, it seems unlikely that the plastic processing industry will qualify.

Borrowing Costs

Borrowing costs have reduced by 15% (£0.2 million) reflecting lower average borrowings in the period.

Capital Expenditure

Capital expenditure of £7.8 million (including intangibles) was higher than depreciation in the period. The main items of capital expenditure included the two major strategic projects comprising a 5 layer co extrusion line for silage stretchwrap in Zele and a recycling wash plant in Rhymney. Other expenditure included a printing press and extrusion equipment in Hardenberg and a co extrusion line in Sevenoaks.

Gross capital expenditure for 2012 is anticipated to be approximately £18 million as we complete our two major strategic projects.

Cash Flow and Borrowings

Net borrowings reduced from £31.0 million at 31 December 2011 to £23.2 million at 30 June 2012. The impact of currency translation on non sterling borrowings, which are maintained to hedge the net investment in our overseas subsidiaries, accounted for a reduction of £0.6 million.

Working capital increased by £0.8 million compared to £5.1 million during the first half of 2011. Reducing raw material costs and the timing of sales to agricultural customers contributed to this reduction in working capital when compared to the mid point of 2011.

The Company purchased 225,000 of the Company's shares at a cost of £0.8 million to be held in the Employee Share Ownership Trust.

Total available bank facilities of £97 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 £24 million and £3 million of hire purchase facilities.

Pension Fund

The deficit in the UK Pension Fund increased from £59.5 million (net of tax £46.1 million) to £69.9 million (net of tax £54.4 million).

The movement in the deficit is analysed below:-

Whilst the Scheme investments performed better than the actuarial assumption and the expected long term inflation rate reduced from 2.9% to 2.7%, the discount rate applied to the liabilities reduced to 4.25% from 4.75%.

Principal Risks & Uncertainties

The 2011 Annual Report (page 13) sets out the principal risks and uncertainties faced by the Group at December 2011, and details the process in place for managing those risks. There have been no significant changes to the risk management process in the interim period.

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 2011 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.

Liquidity Risk  

As highlighted in the risk factors referred to above, the continuing weak economic conditions remain challenging; however, the Directors believe the Group continues to perform well in these circumstances. The level of the Group's borrowings has continued to reduce.

Given the continued uncertainty in the euro zone, the risk remains of poor economic conditions reducing market demand. However, more than 70% of the Group's business is in sectors such as retail food chain, agriculture, healthcare and waste services which, so far, have shown to be relatively resilient in the face of the economic downturn. However, the possibility of further reductions in customer demand remains a risk. The main European markets are UK and Ireland, Benelux, Scandinavia, Germany and France with limited sales to the southern European nations.

That said an elevated risk of customer insolvency remains. However, 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.

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, the value of euro denominated borrowings is sensitive to the exchange rate when translated into sterling.

Steps have been taken to restructure parts of our UK business to reduce capacity in line with current demand. Banking facilities are in place which provide sufficient headroom to support the Group's trading and development plans. 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 factors outlined above, show that the Group should be able to operate comfortably 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 2011 Annual Report and, during the period, strategic investments in agriculture and recycling have been made to support this strategy.

Outlook

The second half looks challenging as our suppliers increase raw material prices and demand remains uncertain. However, with over 70% of the Group sales in more resilient sectors, actions to improve the business and progress with new products, the Group should deliver acceptable results.

OPERATING REVIEW

Mainland Europe

Another strong performance with the euro profits being close to 2011 with a less favourable exchange rate conversion being mainly responsible for the fall in reported sterling profits.

Sales volumes for the three sites in Europe fell 5% due to lower volumes from the industrial and construction sectors and weather conditions reducing volumes in animal feed and salt.

Good growth continued in our silage products with our advanced silage products up by over 40%. Low opening stocks combined with good growing conditions in our main markets contributed to growth in our standard products. Our new large co extrusion line for silage products is nearing completion and should commence production in Q3.

Demand for our new insulation overwrap products is starting to grow and further extrusion and conversion equipment has been authorised to increase capacity from 2013 onwards.

Sales of industrial products from our plant in Holland were nearly 10% down reflecting the lower levels of economic activity and unfavourable weather conditions. Demand from the polymer industry was however ahead of 2011. The new printing press was commissioned in the period.

Our strategy of investment and development of new products will enable the business to deliver acceptable returns.

UK & Ireland

UK & Ireland operating profits increased by £0.7 million to £6.2 million despite a reduction in sales volumes of 5.5% due to poor demand from the industrial and construction sectors. This improvement arose as operating costs including the closure of Swansea reduced by over £1.5 million and the operational performance of the new wide line installed at Ardeer in 2011 improved. This improvement arose despite higher energy costs increasing the cost of production per tonne by 10%.

Volume sales of shrink film were steady despite poor weather conditions for the UK soft drinks industry but demand from the converter sector was subdued. A new co extrusion line is currently being installed at Sevenoaks.

Demand for industrial stretchwrap products was down on 2011 with quarter 2 particularly poor. Sales of WrapsmartUltra®, however, continued to grow.

Sales of silage stretchwrap were in line with 2011 and current weather conditions should ensure that demand continues into the second half.

The construction industry continues to have a difficult time and sales of building film and packaging to the sector were down 10%.

While refuse sack volumes were in line with 2011, the number of bags produced was 10% ahead of last year with growth in the janitorial and retail sectors as we continue to win new customers. The local authority market, however, remains challenging.

The new washing plant at Rhymney was commissioned in the first half and will become fully operational in quarter 3.

Sales into the peat/compost market were well down reflecting the poor weather from April onwards. Progress continues in the sale of plastic packaging to the cement market.

Our new wide line at Ardeer for silage sheet and horticultural products continues to run well and this year we had sufficient levels of stocks to provide supply at the start of the season.

Volumes in our consumer packaging market increased as we secured additional business at current customers and won new customers.

A paper removal plant has been authorised for Heanor to enable the recycling of paper contaminated scrap.

North America

A disappointing first half as, despite a 4% increase in sales volumes, operating profits were slightly behind 2011.

Operating profits were behind 2011 due to a combination of lower production caused by power outages, low priced offshore competition and a lack of demand for horticultural products.

Total volumes sales at 5,500 tonnes were 200 tonnes ahead of 2011 due to higher sales of silage stretchwrap from the line installed in 2011. In total, agricultural sales were 12% ahead of 2011 mainly due to the additional silage stretchwrap sales. Horticultural sales were over 20% down due to poor demand from the growers.

Margins suffered due to low price competition particularly from the Far East where polymer prices were significantly lower throughout most of the period.

The second half performance will be impacted by the severe drought in mid western USA but we should see improved demand from the horticulture and western Canada grain markets.

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

Condensed Consolidated Income Statement

For the six months ended 30 June 2012

Condensed Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2012

Condensed Consolidated Balance Sheet

At 30 June 2012

Condensed Consolidated Cash Flow Statement

For the six months ended 30 June 2012

Condensed Consolidated Statement of Changes in Equity

For the period ended 30 June 2012

1 Refer to note 13 for breakdown of other reserves.

2 As at 31 December 2011 the holding company retained earnings under UK GAAP amounted to £39.5m (2010: £34.6m) and are not affected by movements in retirement benefit obligations.

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

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 2012. 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 24 August 2012.

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 2011 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 2011 are not the Company's statutory accounts for that financial year. The statutory accounts for the year ended 31 December 2011, 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 auditor 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 auditor.

The financial statements are prepared on the historical cost basis except for derivative financial instruments and the assets of the defined benefit pension scheme which are stated at their fair value and the liabilities of the defined benefit pension scheme which are measures by the projected unit credit method.

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 2011. 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 material change in the estimates and judgements applied in the 2011 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 27% (June 2011: 28%), representing the estimated annual effective tax rate for the full financial year.

The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22% by 2014. A reduction in the rate from 25% to 24% (effective from 1 April 2012) was substantively enacted on 26 March 2012 and substantive enactment of the rate of 23% with effect from 1 April 2013 took place on 3 July 2012, subsequent to the half year end.

The deferred tax liability at 30 June 2012 has therefore been calculated based on the rate of 24% substantively enacted at the balance sheet date.

It has not yet been possible to quantify the full anticipated effect of the announced further 2% rate reduction, although this will further reduce the company's future current tax charge and reduce the company'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 4.2p (2011: 4.00p) per share will be paid on 16 November 2012 to shareholders on the register at close of business on 19 October 2012.

The interim dividend was approved by the Board on 24 August 2012 and has not been included as a liability as at 30 June 2012.

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: