Imperial Chemical Industries (ICI)

Net finance expense
Net finance expense of £109m for the year was £9m lower than last year (2004 £118m), with lower net interest costs of £72m (2004 £85m) partly as a result of lower levels of debt, offsetting higher post-retirement benefit finance costs of £37m (2004 £33m). Foreign exchange differences on intergroup financing resulted in a £4m benefit, compared with a £1m benefit in 2004.

Profit before tax
Group adjusted profit before tax was £444m, 5% ahead of last year (2004 £422m). After special items, Group profit before tax was £500m, 18% below last year (2004 £606m).

Taxation
Taxation on adjusted profit before tax was £92m for the year, £4m above last year, reflecting the higher trading profit. The effective tax rate for the Group at 21% was in line with 2004. The effective tax rate is calculated as taxation (excluding tax on special items) divided by profit before tax and special items. Including tax on special items, taxation was £80m (2004 £98m).

Special items
After taxation, special items amounted to a profit of £68m.

Gains on special items in operating profit of £34m related to a £40m benefit associated with changes to the terms of the Noblesse pension and post-retirement healthcare schemes in the Netherlands, and £7m profit on disposal of fixed assets, partly offset by £13m of costs associated with restructuring programmes. Delivery of cost savings from the restructuring initiatives first announced in 2003 remained on track, and at the half year, it was announced that the full benefit delivery was expected with cash expenditure of £11m less than previously indicated. Consequently, the £11m will be used to extend the restructuring programme further, to deliver total expected benefits of £140m in 2007, £13m higher than for the original programme.

The cumulative charge to the income statement for the programme to the end of 2005 was £222m; further charges of £9m are expected in 2006. The cumulative cash expenditure on the programme at the end of 2005 was £142m. The remaining cash spend is also expected to be incurred primarily in 2006. The extended programme delivered £106m of cost benefit in 2005; headcount across the Group was around 2,100 lower than at the start of the programme.

The £20m profit on sale of operations for the year included gains arising on the disposal of the Zweihorn wood finish business in Germany and the Vinamul Polymers business and a loss on the disposal of 51% of the Regional and Industrial rubber chemicals business in India. Other items related to divested businesses, including increases in provisions relating to environmental and pension administration costs, the release

of provisions following a land transaction in the north of England and changes to post-retirement healthcare plans in the US.

In 2004, the profit on sale of operations (£175m) related mainly to the gain on the sale of the Quest Food Ingredients business.

Net profit
Net profit before special items attributable to equity holders of the parent was £321m, £15m ahead of 2004. Net profit after special items was £420m compared with £508m last year.

Earnings per share
Adjusted earnings per share (before special items) for the year were 27.1p, compared with 25.8p for 2004, a 5% increase. Earnings per share after special items were 32.9p, compared with 40.1p for 2004.

Dividend and dividend policy
The Company’s dividend policy links growth in profit with growth in dividends and, at the same time, seeks to ensure that sufficient funds are available to the Group for investment in future profitable growth.

The Board continues to believe that this approach is appropriate, and therefore confirms that, following the introduction of IFRS, ICI’s continued intent will be to grow dividends at about the same rate as the growth in net profit before special items attributable to equity holders of the parent. Consequently, the Board has declared a second interim dividend per £1 Ordinary Share of 3.95p (2004 3.90p), to bring the total dividend for 2005 to 7.70p (2004 7.30p), reflecting the 5% growth in net profit before special items attributable to the equity holders of the parent.

Cash flow
The following analysis of cash flow, which relates to the table alongside, distinguishes between cash flows which relate to operating activities and those which relate to investing activities. Included within operating activities are the top-up payments to the ICI UK Pension Fund, net finance payments, tax paid (excluding tax on disposals) and dividends paid. Included within investing activities are sales and purchases of property, plant and equipment, net proceeds from disposals of businesses, payments against disposal provisions which, in some cases, will continue for a number of years, and acquisition expenditure.

Operating activities
Profit before special items, net finance expense, taxation, depreciation and amortisation (“EBITDA”) for the year was £721m, £12m higher than last year (2004 £709m), primarily as a result of higher trading profit.

After a relatively poor start to the year, working capital management improved in the second half and a significant element of the cash inflow was delivered through improved inventory management and effective control of debtors and creditors.

Cash outflows in relation to special items of £53m were £28m lower than in 2004 as elements of the restructuring programme reached completion. Despite higher cash outflows in relation to tax and dividend payments, net cash from operating activities for the year was an inflow of £359m, £32m higher than last year.

Investing activities
The completion of the sale of the Vinamul Polymers business, with proceeds of £111m, was the major contributor to net disposal proceeds of £108m. Capital expenditure of £159m was in line with last year (2004 £158m). After payments of £47m in respect of disposals prior to 2004 (2004 £95m) and acquisitions of £23m (2004 £4m), net cash used in investing activities was an outflow of £106m, compared with an inflow of £29m in 2004 which included the proceeds from the sale of the Quest Food Ingredients business.

Cash flow before acquisitions and divestments
The Group generated a cash inflow before acquisitions and divestments of £170m, compared with £82m for 2004.

Movement in net debt
Net debt at the end of 2005 was £745m, £244m lower than at the beginning of the year. Net debt at the start of the year was increased by £69m for restatement due to IFRS transition adjustments (explained further in note 28 relating to the Group accounts). The non-cash impact of £9m included the result of foreign currency translation and fair value adjustments.