IMI plc Interim results 2001 - 10 September 2001

IMI plc presents its Strategy and First Half Results.

Gary Allen, Chairman commented:

"The Board has completed its strategy review and formulated plans to reshape the Group. This will involve concentrating on operations representing around 65% of current sales. We are repositioning these businesses, with target markets more closely defined, a heavy emphasis on the development of large global customers, and a major redistribution in assets and resources away from high cost manufacturing into high value, knowledge-based, systems engineering and service provision."

		2001	2000
Sales		£847m	£813m
Results before restructuring & rationalisation *
	Operating Profit	£82.6m	£91.1m
	Profit after interest	£68.6m	£77.7m
	Adjusted earnings per share	14.5p	15.0p
Profit before tax		£68.4m	£66.4m
Earnings per share		15.2p	12.2p
Operating cashflow		£49.3m	£18.0m
Dividend per share		6.0p	6.0p
* Before goodwill amortisation and exceptional items

Chairman's Statement

In my first statement as Chairman I am pleased to report that the new management structure put into effect at the beginning of the year has enabled sound progress to be made in tackling the operational and strategic challenges facing the Group.

OVERVIEW

The strategy review announced earlier in the year has been completed and the repositioning of IMI is now well underway.

The financial results for the six months to 30 June 2001 are in line with our expectations at the time of issuing the trading update on 3 July.

A strong cash performance produced operating cash flow of £49m (2000: £18m) which helped improve free cash flow by £ 36m over the first half of last year.

The interim dividend will be unchanged at 6.0p.

STRATEGY

The Board has completed its strategy review and formulated plans to reshape the Group. This will involve concentrating on operations representing around 65% of current sales. We are repositioning these businesses, with target markets more closely defined, a heavy emphasis on the development of large global customers, and a major redistribution in assets and resources away from high cost manufacturing into high value, knowledge-based, systems engineering and service provision.

These businesses will be grouped as follows:

Fluid Controls

The provision of advanced flow control systems serving the following industry segments:

• Pneumatics systems, with a special emphasis on large global customers in niche, high growth industry segments.
  
• Control valves and related systems in the management of fluids in severe service applications for the power generation, oil & gas, and petrochemical industries.
  
• Control systems for the regulation of climatic conditions in large commercial buildings.

Current businesses comprise Fluid Power (Norgren), Severe Service (CCI) and Indoor Climate (TA/Heimeier), with combined sales of approximately £700m.

Retail Dispense

The provision of innovative merchandising, dispense, and data management systems for the world's leading consumer brands companies.

Current businesses are Beverage Dispense (Cornelius) and Point of Purchase (Cannon) with combined sales of approximately £400m.

These businesses share the same characteristics, enjoying leadership positions in niche, but global, markets and benefit from strong fundamentals in terms of market growth, added value and the potential for differentiation through technology or service. Opportunities for further growth through acquisition are considerable.

The £60m restructuring charge announced in March will be primarily directed at delivering improvements in these businesses. In the first half of the year £10.2m of the £11.8m expenditure on restructuring and rationalisation costs was in these areas.

The remaining parts of the Group comprise sound businesses. Current market positions will be robustly managed, with selective investment and cost reduction measures where value can be enhanced. Disposals will be made over time consistent with realising maximum shareholder value.

The acquisitions of BTG (Severe Service Valves) and Display Technologies (Point of Purchase) and the disposal of most of the smaller Energy Controls businesses, together with the restructuring to date, are the first steps in implementing this strategy.

We believe that the combination of niche, market-leading businesses, sharing a distinctive competence in the development of large global customers, will deliver both the growth and consistency required to maximise shareholder value.

RESULTS SUMMARY

Reported sales at £847m were 4% higher than last year but after adjusting for acquisitions, disposals and exchange rates, sales were 1.5% lower. Operating profit before restructuring and rationalisation costs and goodwill amortisation was around 9% lower at £82.6m (2000: £91.1m).

Restructuring and rationalisation costs charged against profit in the first half were £11.8m (2000: £5.0m).

The effective rate of tax for 2001 on profit before goodwill amortisation and exceptional items, is expected to be 25%. The underlying rate of tax is around 32%.

Adjusted earnings per share (before restructuring and rationalisation costs, goodwill amortisation and exceptional items), were 14.5p (2000: 15.0p revised to exclude rationalisation costs). Basic earnings per share were 15.2p (2000: 12.2p).

Borrowings at the end of June were £414m with gearing at 81% (June 2000: 100%; December 2000: 84%). Interest cover for the six months based on operating profit before exceptional items and goodwill amortisation was 5 times.

OPERATIONAL REVIEW

The first half of 2001 proved to be every bit as challenging as expected as the economic climate in the US deteriorated. Towards the end of the second quarter European confidence began to wane. Faced with these difficult conditions we responded with early cost reduction measures and tight expenditure controls. Nevertheless, reduced volumes and pricing pressures meant lower profits than last year.

Those of our businesses with exposure to the German construction market, principally Heimeier thermostatic radiator valves and copper tube & fittings, were faced with a further 20% reduction in demand during the first half.

Polypipe Building Products succeeded in holding on to volume and started to rebuild margins through a combination of price increases and raw material cost reductions. The other Polypipe businesses experienced difficult trading conditions and work continues to improve profitability.

Cornelius, our Beverage Dispense business, successfully countered the slowdown in the US food service market with market share gains and a strong contribution from recently introduced new products. This together with European volumes ahead of last year, excellent progress in UK beer business and a lower cost base enabled Cornelius to produce a solid first half performance.

Cannon sales were ahead of last year with a strong performance from the mainstream POP (Point of Purchase) business. The integration of Display Technologies purchased in June is going well.

The US slowdown had its biggest impact in Fluid Power where sales to the automotive and commercial vehicle sectors were lower by up to 40% and general industrial sales fell by around 15%. Despite these market conditions, strong operational improvements at Norgren Automotive (ISI) produced better results. UK demand continued to be subdued. Mainland Europe was ahead of last year but there are signs that the second half will be weaker.

Strong demand continues in the power generation, oil and gas markets providing good opportunities for our Severe Service business. We continued to invest in sales and engineering resource to provide the platform for future growth and although first half margins as a result are a little lower, we are confident this business will have a good second half.

OUTLOOK

In the short term, the challenging trading environment in North America and, more recently, Europe is likely to continue. A strong performance in Beverage Dispense and Severe Service, together with management actions already taken, will lessen the impact of a deteriorating position in the European construction and fluid power markets.

In the longer term, the fundamentals surrounding our chosen segments look very encouraging, and we are confident that the strategic actions we are taking will deliver attractive returns.

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