Key Features

Market Conditions

The Quarter Three market demand for S-PVC in Western Europe and Asia followed seasonal patterns which, together with a number of planned and unplanned production shutdowns, led to a further tightening in the supply chain. West European market prices for Suspension PVC (S-PVC) continued to increase through the third quarter of 2004 such that the average headline prices for the first three quarters of 2004 were approximately 160 Euro per tonne (24 %) higher than in the same period of 2003. S-PVC market prices in Quarter Three were 8.7 % higher than in Quarter Two.

The positive sales price effect was partially offset by higher prices for the key raw materials however unitary PVC margins continued to increase in Quarter Three. Ethylene prices were 4.6 % higher in Quarter Three than in Quarter Two. Chlorine prices have been fairly static in a continued tight market.

EVC operational issues Quarter Three 2004

Major problems were encountered on the recommissioning of EVC's VCM plant at Runcorn, UK, following the extensive six week planned shutdown in June and July. In addition at Porto Marghera, Italy, a failure on an HCl (Hydrochloric acid) condenser in August resulted in the plant being shutdown for two weeks. The two events caused a combined production loss of some 47 kte of PVC. Both plants have been fully operational since the second week of September.

Financial Review

Result of operations

Quarter Three

Group Turnover for the third quarter 2004 was EUR 287.0 million, up 46.2 million on the equivalent quarter last year. The increase was driven by higher sales prices (S-PVC market prices were some 44% higher) and higher turnover in the Compounds and Film segment offset by the volume losses described above.

Cost of turnover at EUR 279.0 million was 45.2 million higher than Quarter Three in 2003 due primarily to higher raw material prices, lower plant efficiencies and high maintenance costs due to shutdowns. Operating expenses were EUR 11.7 million, up 2.8 million year on year. Quarter Three 2003 included EUR 1.6 million of exceptional gains on customer and supplier settlements within operating expenses. Operating loss before taxation for the Quarter was EUR 3.7 million compared with EUR 1.9 million in the previous year. The Operating loss in the third quarter for Polymers and the Compounds and Film segment were EUR 3.3 million and EUR 0.4 million respectively. Polymers operating loss in Quarter Three 2004 was an improvement of EUR 7.2 million over the corresponding period in 2003 due to improved unitary margins and offset by lower volumes due to the extended plant shutdowns. The Compounds and Films business performance was EUR 9.0 million worse than in 2003 because of the continued increase in PVC input prices which it has not been possible to recover from customers in a highly competitive market. The strength of the Euro also continues to impact returns from overseas sales. Net financial expenses, at EUR 5.3 million were EUR 0.8 million higher than 2003 as a direct result of the higher borrowing and interest rates due to the refinancing in November 2003. Taxation at EUR 3.3 million was comparable to the equivalent period in 2003 despite the higher loss; this is a result of the new tax legislation which came into effect in Germany on 1 January 2004. The Group net result was a loss of EUR 12.7 million in the quarter, a EUR 2.8 million increased loss versus the previous year.

Nine months results

Group turnover for the first nine months increased by EUR 111.1 million, or 14.0%, to EUR 902.2 million due to higher PVC resin prices and higher turnover in the Compounds and Film division. S-PVC sales volumes were reduced because of the production losses referred to above. Overall, base raw material costs were higher in the first nine months of 2004 compared to 2003. The European quarterly contract price for ethylene was some 24% higher in 2004. For the first nine months the Group returned a gross margin of EUR 50.5 million, a EUR 24.5 million increase versus 2003. The 2003 results were impacted by a major shortfall in the supply of chlorine under one of its long term supply contracts. EVC estimated that the total costs of the supply disruption (reported as exceptional costs within Cost of turnover) for the first nine months of 2003 were EUR 10.4 million. In Quarter Two 2004 EVC received an initial payment of EUR 8.0 million from its insurers in relation to the chlorine supply disruption and discussions continue with the insurers on the total claim quantum. Operating expenses at EUR 40.3 million were EUR 14.2 million higher than the equivalent period of 2003, this being primarily due to a EUR 16.7 million exceptional credit received in 2003 following conclusion of a product liability claim process. Excluding exceptional items operating expenses reduced by EUR 4.2 million year on year.

The Group delivered an operating profit of EUR 10.2 million compared to an operating loss of EUR 0.1 million last year. For the first nine month period the Polymers segment recorded an operating profit of EUR 0.8 million which was EUR 35.3 million better than the equivalent period of 2003. This improvement is due to the higher average unitary margins available in the market place and the negative impact on the 2003 results of the chlorine supply problems. Compounds and Film delivered an operating profit of EUR 9.4 million (2003: EUR 34.4 million), a net reduction of some EUR 8.3 million excluding the EUR 16.7 million exceptional gain from customer and supplier settlements in 2003. Taxation was EUR 7.6 million for the first nine months of 2004 compared to a charge of EUR 4.0 million in 2003. The increase is driven both by the improved results and the effect of the change in German tax legislation. Net financial expense increased by EUR 2.7 million to EUR 16.1 million as a result of higher borrowings and interest rates. The net result for the first nine months was a loss of EUR 14.1 million compared to a loss of EUR 17.9 million in 2003.

Cash flow

Group net cash flow before financing activities was an outflow of EUR 16.1 million for the nine months compared with a EUR 2.0 million outflow in the previous year. The negative movement on working capital is mainly due to the increase in trade debtors caused by significantly higher prices, partially offset by reductions in stock.

Financial position

As at the end of September 2004, the Group had gross borrowings of EUR 272.6 million, down EUR 6.2 million from December 2003. After deducting cash balances of EUR 34.4 million the net debt position at the end of September was 238.2 million, up EUR 15.2 million compared to the EUR 223.0 million as at the end of 2003.

Covenant compliance

As a result of the production difficulties referred to above the Group has been unable to meet one of its covenant tests as at 30 September 2004. A request for a waiver of this covenant test has been submitted to the banking syndicate and approval has been given.

Acquisition of compounding entity

EVC acquired a small compounds facility (Dub Plastiques and Sebuca S.A.) in France on 1 September 2004. The acquisition will deliver additional geographic presence and production capacity in the French market. The acquisition has been financed out of existing cash funds.

Outlook

The underlying trends seen in the first half of 2004 have continued into Quarter Three with improving Polymer margins being offset by continued margin pressure in the downstream businesses. This underlying market trend is expected to continue for the remainder of 2004.

Share Offer

On 14 October 2004 a press release was issued announcing that Hawklease Finance Company Limited (HFCL), a company controlled by INEOS, intends to make a firm public offer for all ordinary shares in the capital of EVC with a nominal value of EUR 1 listed on the Official Market of Euronext Amsterdam. The proposed offer price amounts to EUR 3.50 in cash for each ordinary EVC Share. The Management Board and Supervisory Board of EVC have decided to unanimously and unconditionally recommend the proposed offer. It is expected that within 30 days of the share offer announcement an offer document will be published in the Netherlands which will include the further terms and conditions of the proposed offer.