Performance Review

Review of 2010 Group trading and results

Continuing operations

* before amortisation and non-recurring items.

The Group’s revenues increased by 13% to £344.6m (2009: £304.8m). Underlying like for like sales, at constant currency rates, increased by 15% compared to last year, with double digit growth in civil engineering, carpet, transport and leisure markets. Operating margins improved to 7.5% despite inflationary raw material markets creating headwinds throughout the year. The improvement in sales and margin has led to a very pleasing 22% increase in underlying profit before tax, amortisation, and non-recurring items.

Basic earnings per share before the amortisation of intangibles and non-recurring items increased from 4.35 pence to 4.41 pence, an increase of 1%; the overall increase being impacted by a 15% increase in the weighted average number of shares following the placing and open offer in March 2009. Basic earnings per share on a statutory basis was 2.19 pence compared with a loss from continuing operations of 0.41 pence last year.

Non-recurring costs of £1.6m were incurred during the year (2009: £7.8m), being non-recurring costs of £7.0m relating to the Yarns business restructuring, less non-recurring income of £5.4m relating to the release of the provision for pension equalisation. The restructuring of the Yarns business is progressing well, in line with the plan that we set out in October 2010.

Significant growth in sales

There have been a number of factors which have contributed to the 15% increase in underlying sales. The Group has benefited from a partial recovery in most of its markets, particularly those which were most affected during last year’s economic downturn. Transport, carpet manufacturing and leisure markets have recovered strongly, albeit still below their 2008 peak. Our activities in civil engineering, our most robust market last year, have grown strongly in both emerging markets and in our core European business. Building product sales edged higher but remained adversely affected by weak residential and commercial building markets.

The investments which the Group is making in innovation to deliver market share gains and in developing its presence in high growth emerging markets have also made important contributions to this year’s sales performance. The returns from innovation are improving and sales outside our heartland of Western Europe and North America grew by 17% this year and now represent more than 21% of Group sales. China and Eastern Europe have been particularly strong.

Operating margins moving forward

Operating margins increased to 7.5% (2009: 7.3%). The positive operational gearing effect of higher sales volumes was lower than anticipated as a result of challenging raw material markets where prices rose throughout the year. Operating margins were adversely affected by the lag effect of implementing price adjustments and in some markets, which have yet to fully recover, adjustments have remained challenging. In 2009 this lag effect benefited margins as raw material prices trended downwards.

The full year benefits from cost saving measures taken last year also contributed to margin growth, however some re-investment has been required during the year to enable the Group to successfully respond to the recovery in demand and to put in place the building blocks for medium-term sales growth and margin expansion.

Strong cash generation and successful refinancing

During the year the Group generated £36.6m (2009: £46.0m) of cash from operations, a cash conversion ratio to underlying operating profits of 142%. Despite increased trading activity, the Group further improved its working capital management, reducing net trade working capital to 22% of sales from 28% last year. This, together with another modest year of capital expenditure, reduced net bank borrowings by £5.4m to £62.0m and improved underlying gearing (Net debt/EBITDA) to 1.6 times (2009: 1.9 times), well within borrowing covenants. During the year the Group also settled £9.3m of cross-currency swap liabilities to de-risk and simplify its debt profile.

As a result of an improved trading performance and a clear strategic focus, the Group completed a €45m private placement with Pricoa Capital Group, in September 2010, for a term of six years. This contributed to a successful re-financing of committed banking facilities shortly after the year-end for a term of four and a quarter years at competitive rates. The Group’s debt structure is now much stronger and more balanced, providing a solid and flexible platform to support the Group’s growth agenda.

Good progress towards our targets

At the start of the year the Group set out a clear objective to deliver profitable, cash generative growth and highlighted a number of specific targets which we believed to be achievable in the medium-term. The Group has made a good start in 2010, delivering significant growth in both sales and profits, achieving further reductions in net debt despite a sharp increase in activity levels, and making progress towards all medium-term growth, margin, and asset efficiency targets.

Actions in place to make further progress

During the year the Group has taken actions which we are confident will restore to profitability our loss-making Yarns business. We successfully commissioned a new manufacturing facility for artificial grass yarns in Abu Dhabi and, in December 2010, this enabled the Group to confirm the closure of its Ostend site and the transfer of business to the newly constructed Abu Dhabi plant. The closure and relocation project is progressing to plan. The restructuring of the business will regrettably result in redundancy for the majority of employees at the Ostend site. A social plan was agreed with their representatives in December 2010.

We have also accelerated efforts to access higher growth, emerging markets. In January 2011, the Group signed a 50:50 joint venture in Saudi Arabia with National Petrochemical Industrial Company (NATPET). The joint venture will design, manufacture, and sell geotextile products for the fast growing civil engineering markets in the Middle East and the Indian subcontinent. A new manufacturing plant will be constructed at a site near NATPET’s polypropylene production facility in Yanbu, and will benefit from a long-term supply agreement with NATPET. The joint venture is well positioned to take full advantage of the forthcoming infrastructure investment in these regions given its unparalleled technological, marketing and raw material strengths.

The Group has continued to invest in innovation to drive growth in its core Western European and North American markets. Innovation is focused on providing our customers with products which improve sustainability, increase functionality, and maximise efficiency. The Group’s development pipeline continues to improve. Products made from recycled materials and raw materials from renewable sources have been launched in the carpet tile backing and agrotextile markets. Architectural membranes which last longer and have self cleaning properties have recently been developed. Construction fibres continue to grow strongly in the construction market.

We are in a strong position to push ahead with our initiatives to deliver margin improvement and growth and are confident about making further progress in 2011. This progress is not reliant on a further recovery in markets.