Chairman Statement
Extract from 2005 Annual ReportSummary
This year has shown a marked contrast in the performance of our
two divisions. The Zirconia Division continues to grow both revenue
and profits successfully but the Magnesia Division was seriously hit
by unprecedented cost increases, almost all of which were beyond
our control. Action was taken to reduce costs but the setback within
the Magnesia Division stalled the Group’s recovery which had started
in 2004, leaving profit before tax at £806,000 before taking into
account exceptional costs, principally being non cash impairment
charges relating to the assets of the Magnesia Division.
Nevertheless, the actions we have taken should enable the Group
to resume progress in 2006.
Financial results
The Group’s results for the year ended 31 December 2005 are the
first annual results to be prepared under International Financial
Reporting Standards as adopted for use in the EU (“Adopted IFRS”).
All financial data contained in this Chairman’s statement, including
comparisons against the previous year, reflect the conversion to
Adopted IFRS, with reconciliations from UK GAAP to Adopted IFRS
forming part of these financial statements. The Group’s revenue
for the year increased from £32.8 million in 2004 to £33.3 million in
2005. Within this total, the turnover of the Zirconia Division increased
from £14.1 million to £15.4 million and the turnover of the Magnesia
Division fell from £18.7 million to £17.9 million. Prior to charging certain
exceptional costs, operating profits of the Zirconia Division increased
from £2.1 million in 2004 to £2.4 million in 2005; operating profits of
the Magnesia Division fell from £1.7 million to a loss of £9,000.
The Board has carried out a review of the carrying value of the Group’s
assets and has decided that it is prudent to provide for an impairment
of magnesia assets amounting to £735,000. The largest single item
impaired is the carrying value of a licence agreement held by UCM China
Inc., which has been written down by £462,000. Before all exceptional
costs, the Group profit before taxation for the year ended 31st December
2005 amounted to £806,000 (2004: £2.1 million). After exceptional costs,
the loss before taxation amounted to £9,000 for the year.
The taxation charge for the year was £362,000 leaving a loss after tax
of £371,000, which results in a loss per share of 1.6p for the year ended
31 December 2005 against earnings per share of 6.0p for 2004.
Dividend
The Directors are not recommending a final dividend in respect of the year
ended 31 December 2005 leaving the maintained 2.0p interim dividend as
the total for the year.
Trading
Zirconia Division
Sales of advanced ceramic materials continued to improve and resulted in
an increased profit contribution compared to the preceding year. Sales of
standard zirconia products increase marginally during the year but cost
increase particularly of raw materials, resulted in a reduced contribution to
Group profits compared with 2004.
Magnesia Division
Electro Furnace Products Limited, which produces electrical grade
magnesia in the United Kingdom at Hull, experienced during late 2004
and again in 2005 increases in power costs exceeding 65%. At the same
time, competition in the market saw a reduction in selling prices.
Muscle Shoals Minerals Inc., which produces electrical grade magnesia
in the United States, suffere an increase in raw material costs of 16%,
although power costs did not increase as dramatically as in the United
Kingdom. Action has been taken to reduce those costs which are in the
Company’s control and some assets of the division have been subject to
an impairment charge to reflect their diminution in value in current market
conditions. UCM China Inc., which has an exclusive supply arrangement
in China, increased its revenue compared to 2004 but it is still not
profitable and the Board has decided that, in the magnesia market’s
current condition, it is appropriate to write off the value of the licence
agreement as mentioned above.
Staff
2005 has been a demanding year for the Group and the thanks of
shareholders and Directors go to all staff, who have had to contend
with a particularly difficult environment during the year.
Outlook
Prospects for the Zirconia Division remain encouraging and further
progress in 2006 is anticipated. Every effort is being made to restore
the profitability of the Magnesia Division, both by reducing those costs
within the Company’s control and seeking appropriate price increases.
There are indications that the exceptionally difficult market conditions
which prevailed in the second half of 2005 are now improving and price
increases are being achieved. However, it is not realistic to expect an
early return to the levels of profitability earned by the Division in previous
years.
John Gordon
Chairman
11 April 2006