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Exchange Rates
The main impact of exchange rates on the group’s results comes from the translation of foreign subsidiaries’ profits into sterling. Around a quarter of the group’s profits are made in North America, mainly in the USA. The average rate for the US dollar for the six months to 30th September 2008 was $1.93/£ compared with $2.00/£ for the first half of last year which improved reported profits by £1.3 million. The euro was even stronger in the period averaging €1.26/£ compared with €1.47/£ in 2007 which improved the group’s results by £2.5 million. The South African rand weakened from R14.2/£ to R15.0/£. However, the catalysts manufactured by our South African business are ultimately for export and the benefit of a weaker rand on margins more than offsets the translation effect. Excluding the rand, exchange translation increased group operating profit by £5.3 million compared with the first half of last year.
Over the three years from 2005/06 to 2007/08 the average rate for the US dollar weakened from $1.78/£ to $2.01/£ which had an adverse effect on the group’s reported results. Each 1 cent change in the exchange rate for the US dollar affects our reported profits by approximately £0.4 million in a full year. In the second half of this calendar year the US dollar has strengthened significantly and at 24th November 2008 was $1.51/£. If it remains at this level for the remainder of the year the benefit from exchange translation will increase significantly in the second half of the year. |
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| US Dollar Exchange Rates |
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Interest
The group’s net finance costs for the six months to 30th September 2008 increased by £7.4 million to £19.9 million. The rise in the cost was mainly the result of higher average borrowings which increased by £245.6 million in 2007/08 mainly as a result of the acquisition of Argillon in February 2008 and the impact of earlier share buy-backs. Average interest rates also increased slightly but are expected to decrease in the second half of the year. Despite the increase in net finance costs the group’s interest cover (underlying operating profit / net finance costs) for the period was comfortable at 8.3 times.
Taxation
The group’s tax charge for the continuing businesses rose by £8.8 million to £41.3 million. The charge for the first half of last year included a one-off benefit of £1.8 million to deferred tax arising from the reduction in the rate of UK corporation tax from 30% to 28% on 1st April 2008 which we excluded from underlying earnings per share. The group’s underlying average tax rate for the current year is 29.4% which was unchanged from the rate for the full year in 2007/08 although higher than the rate for the first half.
Cash Flow
In the six months to 30th September 2008 the group generated a net cash inflow from operating activities of £145.0 million compared with £107.0 million for the first half of last year. Working capital increased by only £9.3 million in the first half despite the rise in sales, with the fall in platinum group metal prices towards the end of the period having a favourable impact on inventories and receivables. Tax paid, which is included in cash flow from operating activities, was quite high in the first half reflecting the timing of tax payments. The amount of tax to be paid in the second half will be lower than average which will benefit cash flow.
The cash outflow on capital expenditure in the half year was £68.6 million. We are currently constructing two major facilities, one in Western Pennsylvania, USA and the other in Macedonia, to supply the new HDD catalysts which will be needed to meet the tighter US and European legislation. Expenditure on these facilities will increase in the second half and we will also be completing our expansion at Clitheroe in the UK to manufacture the latest generation of syngas catalysts. All these new facilities are expected to contribute significantly to growth from 2010 onwards.
Cash inflow before dividends, acquisitions and divestments was £58.7 million. The cash cost of last year’s final dividend, paid in August, was £54.7 million. No major acquisitions or disposals were undertaken in the half year. After taking into account the impact of exchange translation on foreign currency borrowings (particularly US dollars) net debt rose by £9.4 million to £619.8 million. Gearing (net debt / total equity) fell by 1.4% compared with 31st March 2008 to 51.2%.
Capital Structure
On 31st July 2008 we drew down a five year fixed rate loan of €125 million from the European Investment Bank (EIB) under a facility arranged earlier in the year. The facility is provided to support the group’s increasing investment in research and development. At 30th September 2008, £514 million of the group’s debt was in the form of long term bonds issued in the US and loans from the EIB. Only £19 million of this debt is due to be repaid before 2011. In addition the group has £360 million of committed bank facilities which are individually negotiated and mostly have at least two years to run. The group has ample headroom to meet its funding requirements for the next few years. The high capital expenditure we are planning for the second half of the year will be entirely funded out of internally generated cash flow. |
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