Performance Review

Low & Bonar PLC is an international performance materials group using proprietary technologies to engineer polymers for a wide range of applications in niche industrial markets.

Significant growth in sales

Revenues from external customers

2011

£m

2010

£m

Performance Technical Textiles

269.3

239.2

+13%

Technical Coated Fabrics

119.4

105.4

+13%

388.7

344.6

+13%

It is pleasing to report a second consecutive year of strong sales growth despite a weaker macro-economic climate and a lower contribution from recovering markets within Europe. The impact of changes in foreign exchange rates was minimal. In the first half of the year, against undemanding comparatives, sales grew by 17%. In the second half of the year sales were 9% ahead of a tougher comparative which had been 14% higher than our 2009 performance. Trading momentum in the fourth quarter was good although the third quarter was impacted by a much weaker than usual peak season for artificial grass yarns and margin optimisation actions within the Technical Coated Fabrics division. Volumes for the year increased by 6% and average prices were 7% higher as increasing raw material costs were gradually passed on to our customers and the quality of our sales mix continued to improve.

Strong fundamental growth drivers in our key markets were supported by a growing contribution from our internal growth initiatives. Sales in our civil engineering and flooring markets improved by 20% and 18% respectively. Our geographic focus and product leadership continues to enable us to increase market share and benefit from the growth of carpet tiles within the flooring market and the significant infrastructure investment taking place in newly industrialising regions. There was an equally strong performance in our transport segment which benefited from a partial recovery in the trailer market in the first half of the year and the growth of premium car brands in Asia. Sales in our building product and industrial sectors experienced solid growth in lacklustre markets which have not materially improved following the effects of the global financial crisis. In our leisure segment, a weak artificial grass yarn market was responsible for a 6% decline in sales.

The continued focus on product innovation to drive market share gain and increase margins has yielded record returns this year. Sales from recently developed products climbed to 15.8% (2010: 14.3%), close to our medium-term target of 16.0%. We remain committed to creating excellence in innovation and delivering components which add real value to our customers’ businesses. Sales growth was augmented by another strong performance in geographies outside of our heartland Western European and North American markets. Sales in the Middle East grew by almost a third with Eastern Europe up 18% and Asia up 14%. The weakness in the artificial grass market adversely impacted the overall proportion of non-heartland sales, nevertheless this ratio improved again to 21.8% from 21.1% last year.

Operating margins continue to improve

Operating margins increased to 7.9% (2010: 7.5%). The first stage in the restructuring of our underperforming Yarns business was successfully completed following the closure of our Ostend manufacturing site and the transfer of assets to our new facility in Abu Dhabi. This step was instrumental in restoring profitability to the business and made an important contribution to the improvement in the Group's operating margin. We expect additional benefits from the restructuring during 2012.

The biggest challenge throughout the year has been managing margins in extremely challenging raw material polymer markets. Cost inflation was very high throughout the first half of the year. This abated during the third quarter as polyolefin prices began to soften which helped mitigate the ongoing increases in other key polymers. During the course of the final quarter, and for the first time in two and a half years, aggregate raw material costs declined. In the year as a whole raw material polymer inflation amounted to some £22m. Sales prices were regularly increased during the year with over £21m being recovered from our customers. The successful pass through of higher input costs has enabled the Group to grow operating margins again and demonstrates the overall strength of our market positions and product propositions.

During the year we continued to reinvest part of our margin growth in initiatives to help secure medium-term sales growth and margin expansion. A new Group-wide procurement function has been established to secure the benefits of scale and to share our expertise across all businesses. The quality and reach of our sales and marketing organisation has also been improved following a number of new appointments.

On track to achieve targets

At the start of 2010 the Group set out a number of explicit growth and efficiency targets which we believed to be achievable in the medium term. The targets are set out below.

Target

%

2011
%

2010

%

2009

%

Sales outside heartland markets

25.0

21.8

21.1

20.4

New product sales

16.0

15.8

14.3

13.8

Operating margin

10.0

7.9

7.5

7.3

Return on capital

17.0

16.8

15.2

11.4

The Group made a good start in 2010 and has accelerated progress in 2011. Over the last two years sales and profit before tax have grown by 28% and 48% respectively with operating margins growing by 60bps. The commitment to improve innovation and increase the Group's exposure to emerging markets is bearing fruit although much remains to be done to excel in both areas. Strong operating cash conversion during this period of significant growth has allowed the Group to fund investments in key growth initiatives, reinstate dividends, and reduce total net debt by some £18m. We continue to operate within our target total debt to EBITDA range of 1.5 to 2.0 times ending the current year at 1.9 times with a much simplified, flexible and longer-term debt structure. Return on capital employed has also improved to reach 16.8% at the end of this year.

Confident of further progress

During the year the Group has taken actions and made investments to drive profitable growth. The level of capital expenditure was increased this year to support anticipated growth in our key markets. Capacity was added to our flooring business in Europe and China with investments approved to upgrade and extend capacity in the USA during 2012. In civil engineering our Saudi Arabian geotextile joint venture is expected to be operational in the fourth quarter of 2012 and will provide much needed capacity to service a fast growing market in the Middle East region. The investments made in people and structure, particularly in procurement, operations, sales and marketing functions, will further support progress. In addition we have committed significant resources to assess market entry options in Latin America and Asia where we are currently under-represented. This will continue to be a focus for 2012 as the Group seeks to develop and establish solid foundations from which to build a global business.

The Group is well positioned to push ahead with its growth initiatives and is confident about making further progress in 2012. We have the opportunity, ambition, and the resolve to develop a truly global, innovative performance materials business.

Building a global business

Joint Venture in the Middle East

Building a global business

Our new joint venture with NATPET is currently building a new manufacturing plant to design, manufacture and sell geotextile products for the fast-growing civil engineering markets in the Middle East and the Indian subcontinent. The plant will benefit from a long-term supply agreement with NATPET and be located at a site near their polypropylene production facility in Yanbu, western Saudi Arabia.

We have a 50% equity interest and shared operational control of the venture with NATPET, and we expect it to be operational in the fourth quarter of 2012.

The Group is well positioned to push ahead with its growth initiatives and is confident about making further progress in 2012.

Steve Good

Steve Good
Group Chief Executive

Mike Holt

Mike Holt
Group Finance Director

Efficiency

Colbonddrain accelerates land reclamation

Efficiency

Colbond supplied over one million metres of Colbonddrain CX1000 to build a vertical drain at a major land reclamation project in Rostock on Germany’s Baltic coast. Water must be drained thoroughly from the underground soil in a reclamation area in order for the reclaimed land to support buildings. It can take up to five years for the water to drain away naturally, but Colbonddrain reduced this to five months, saving time and money.

Designed and developed by Emperor Design