HIGHLIGHTS					2001		2000		% Change
Turnover			£m		1,587.1		1,426.8		11
EBITDA			£m		268.0		313.5		-15
Underlying operating profit*			£m		185.0		233.7		-21
Profit before tax
	Underlying*		£m		163.4		227.4		-28
	Before exceptional items		£m		156.2		224.1		-30
	Reported		£m		137.9		225.6		-39
Underlying earnings per share*			p		22.4		32.2		-30
Final dividend per share			p		8.4		8.25		2
* before goodwill amortisation and exceptional items

• Turnover up 11% to £1.59 billion, driven by acquisitions in core and complementary businesses and by further growth in European demand
  
• Group sales margin down from 16.4% to 11.7% due to:
  • a faster than expected second-half decline in US wallboard selling prices, now over 50% below their peak in late 1999
    
  • plasterboard volumes down 3% on a like-for-like basis, as sales into the US market more than halved from last year’s exceptionally high level
    
  • £67 million of cost inflation only partly offset by £32 million from better European selling prices
• European plasterboard volumes up 3% but sales margin of 13.7% (15.0%) affected by the impact of poor winter weather, a severe German construction recession, and significant cost inflation
  
• Group-wide cost savings of £21 million
  
• Underlying operating profit down 21% to £185.0 million (£233.7 million) after redundancy costs of £12.4 million (£8.8 million). Underlying earnings per share down 30% to 22.4 p (32.2p)
  
• Reported profit before tax down 39% to £137.9 million (£225.6 million) after goodwill amortisation of £7.2 million (£3.3 million) and exceptional items: an asset impairment charge of £18 million (£nil) arising from the reorganisation of German operations, and a net non-operating charge of £0.3 million (gain £1.5 million)
  
• Cash generation remained strong with EBITDA of £268.0 million and free cash flow of £62.1 million
  
• Additional cost reduction initiatives underway:
  • at least US$50 million annualised savings in North America by 2003, with some US$15 million already in place at the year end
    
  • major restructuring programme in Germany to reduce annual costs by over £5 million

Following the previous year’s record profits, BPB achieved a robust first-half performance but faced much more challenging than anticipated trading conditions in the second half, resulting in disappointingly lower profits for the year as a whole.

BPB’s markets for building systems and complementary products remained highly competitive, no more so than in North America where US wallboard selling price erosion - unexpectedly dramatic in the second half - led to a marked deterioration in regional profitability. The group’s reduced earnings for the year also reflect lower growth in European demand, following a prolonged wet winter in key markets and a severe German construction recession, together with an imbalance between efficiency savings and substantial cost inflation which was only partly recovered through selling price increases.

Actions in the first half delivered increased sales, an improvement in underlying operating profit and further substantial cost savings. However, full-year underlying operating profit before goodwill amortisation and exceptional items was down 21% at £185.0 million, affected by the following significant second-half factors:

• severe input cost pressures
  
• lower volume growth in BPB’s core European market, affected by poor weather conditions in much of the region and a severe German market downturn
  
• intensified capacity and pricing issues in North America, to which BPB was more exposed following its US acquisition of Celotex

Cost increases for energy, recycled paper, steel accessories and insulation raw materials accelerated rapidly through the year, with a significant impact in the second half from higher gas prices, particularly in North America and the UK.

The effect of this on the group’s return on sales was mitigated through further operating cost efficiencies and increases in European selling prices, in total equal to more than three percentage points of margin.

BPB’s cost reduction programme continues, with key actions targeting better overhead ratios, the group-wide application of manufacturing best practices, and significant procurement savings for key commodities such as energy, steel and freight.

German market

A severe slow down in construction activity, increased competitive pressures and lower volumes, combined with a high capital base, resulted in unsatisfactory returns.

A major restructuring programme is under way involving the closure of the Gulstein plant, asset write-down at Bodenwerder and a 15% reduction in numbers employed, with the aim of reducing the annualised cost base by over £5 million. At the same time, market-facing operations are being revised to significantly improve customer service levels.

North American markets

Trading conditions in the region were the predominant cause of the reduction in the group’s operating profit, with the non-repetition of the prior year’s opportunistic sales to the US and the second-half impact of sharply lower selling prices and significantly higher energy costs.

Following the purchase last July of Celotex, the only independent and asbestos-free manufacturer in the key Eastern US market, a new regional management team began the demanding task of integrating the acquired wallboard and ceiling tile businesses with BPB’s existing Canadian operations, with the objective of creating a sound basis for future growth in North America’s substantial internal lining markets.

However, the speed and severity with which US selling prices, and hence earnings, deteriorated in the second half was far worse than expected, necessitating revised actions to generate synergies, with the original cost savings target doubled to US$30 million. Trading conditions in the US remain tough and, in order to reduce our regional cost base even further, several underperforming operations are being closed and additional overhead savings are being made - increasing the group’s targeted rate of annual savings to at least US$50 million by March 2003.

The business combination of BPB’s market-leading operations in Canada with the Celotex acquisition has secured an 8 to 9% share of the North American plasterboard market, a region generating over 50% of global demand and characterised by long-term growth averaging between 3 and 5% per annum.

Europe and other developing markets
While group acquisition activity was dominated by the purchase and integration of Celotex with Westroc, the pace of business developments in the year also reflected management’s continuing drive to increase European sales and returns from core and complementary products and to invest in emerging markets offering good growth potential. Key actions included:

• building on BPB’s strong position in the French market for expanded polystyrene insulation materials by acquiring one of Europe’s largest eps manufacturers, Heidelberger Dammsysteme, and successfully integrating their German, Czech and Austrian businesses under the Rigips Dammsysteme brand. BPB’s new leadership of the European eps insulation market was subsequently enhanced with the acquisitions of Cospan in Belgium and Novopol in the Czech Republic
  
• strengthening BPB’s offering of internal lining systems by acquiring Rawlplug, a brand leader of specialist fixing systems, and commencing the integration of their UK, Irish and French operations into the group’s sales operations
  
• disposing of the group’s Dutch recycling and solid case businesses, UK packaging interests, and UK tubes operation, leaving a core of paperboard activities focused on the production of low-cost supplies of high-quality liner for BPB’s global spread of plasterboard businesses
  
• developing product markets: investing in additional capacity for the ceiling tiles plant in Denmark to meet European demand for BPB’s fast-growing Gyptone range; upgrading the Spanish manufacture of modern plasters; constructing a combined plasterboard and plasters plant at Termoli in Italy
  
• acquiring a controlling interest in a Swiss blocks and ceiling tiles business
  
• acquiring the joint venturer’s share in India’s fast-growing plasterboard manufacturer, and subsequently successfully introducing new capacity at Chennai

BPB’s 11% increase in group turnover to £1.59 billion was driven by acquisitions of core and complementary businesses and by further growth in European building materials demand. Underlying operating profit, however, was £48.7 million lower at £185.0 million, with group sales margin down from 16.4% to 11.7%, as a faster than expected decline in US selling prices, lower like-for-like volumes and substantial cost inflation led to a £37.3 million reversal in North American profits to record a £1.9 million regional trading loss.

European underlying operating profits of £182.4 million, before exceptional German reorganisation charges, were down 6% on last year’s very strong performance, with sales margin of 13.7% (15.0%) affected by weaker second half sales volumes and by significant commodity cost inflation (equal to 4.5% of regional turnover). However, this was mostly offset by the regional benefits of progressively better selling prices and further operating cost savings.

Underlying operating profit from the rest of the world increased by over 18% to £4.5 million, despite a general increase in cost inflation, benefiting from continuing strong volume growth in the emerging markets of South America and Asia together with better operating efficiencies in Thailand and South Africa.

Worldwide plasterboard volumes, including acquisitions, grew 11% to nearly 725 million square metres, but were down 3% on a like-for-like basis as sales into the US market more than halved. European sales growth of 3%, just below the long term average of 5 to 6% per annum, was restricted by wet winter weather and a recession-led decline of over 10% in German volumes. Group sales of building plasters were up almost 4% with good growth in Spain and Ireland.

Cost inflation of £67 million was mostly recovered from better European selling prices, which yielded £32 million, and from further operating savings of £21 million equal to nearly 1.5% of group turnover.

Underlying pre-tax profit of £163.4 million represented a 28% decline on last year’s £227.4 million which had benefited from an exceptionally buoyant US market. Underlying earnings per share declined 30% to 22.4p, exacerbated by a higher group tax rate. Reported pre-tax profit was £137.9 million (£225.6 million), after goodwill amortisation of £7.2 million and a net exceptional charge of £18.3 million arising mainly from the reorganisation of operations in Germany.

Cash generation remained strong with EBITDA of £268.0 million and free cash flow of £62.1 million, after working capital improvements and disposal proceeds totalling £19.5 million, capital investment in line with depreciation at £90.6 million, tax and financing charges of £105.2 million, and dividends paid to shareholders of £57.7 million

FUTURE

The Board expects market conditions in the US and Germany to remain difficult; there are also growing concerns of a more general weakening in the worldwide economic environment. Although the group will benefit from its continuing programme to improve operating efficiency, it is clear that BPB faces a challenging year.
Accordingly, the Board now considers it prudent to take a more cautious position this year on the rate of dividend increase. It therefore recommends a final dividend of 8.4p per share, giving a full year’s dividend of 12.8p and a year-on-year increase of 2.4%.

Despite these current year concerns the Board is confident about its strategy and that the actions being taken by management, in combination with the underlying strength of the group's positioning in its key markets, will deliver improving returns to shareholders.

DETAILED OPERATING REVIEW

EUROPE
Turnover £1.33 billion (up 3%); underlying operating profit £182.4 million (down 6%)

Regional first-half profit advanced by 7% but results suffered in the second half due to high cost inflation, poor weather, and a deepening recession in German construction activity. Full year profits of £182.4 million were down 6% before an exceptional charge of £18 million arising from the reorganisation of German operations. European plasterboard volumes increased by 3%, with the UK, France and especially Germany experiencing weaker second half years. Rising prices for energy and recycled paper led a sharp increase in commodity input costs. Oil-based materials, including polystyrene beads, and commodity and wage inflation added over £60 million to the region’s cost base but this was recovered through higher selling prices across the product range and further cost savings.

North & Western Europe
Turnover £547.6 million (up 1%); underlying operating profit £95.9 million (down 5%)

Plasterboard volumes grew 5% with building plasters advancing by 4%, but underlying operating profit fell by 5% to £95.9 million mostly due to lower sales of plasterboard liner and the loss of exports to North America. Results were also affected by increased cost inflation and poor weather which held back second-half construction activity. The region benefited from continuing cost reduction programmes, which led to a reduction of 5% in the like-for-like number employed.

Construction activity in the UK was affected by prolonged rainfall throughout the autumn and winter, with housing starts markedly down on the corresponding period. Gas prices doubled in the second-half following the expiry of long-term contracts, contributing to cost inflation which was not fully recovered through selling price increases. Industrial action disrupted production across British Gypsum’s operations in October and November but customer service levels subsequently returned to their normal high standards.

Paperboard operations were affected by a reduction in sales of plasterboard liner destined for the North American market, reduced liner demand in Germany, and by increased costs of recycled paper which were only partly offset by further operating efficiencies. Following the disposal of non-core businesses in the year, BPB’s low-cost operations are now concentrating on meeting group needs for plasterboard liner.

The Artex-Blue Hawk decorative products and distribution business almost doubled in size to £60 million of annualised sales following the acquisition of Rawlplug, a brand leader of specialist fixing systems. The merger of the two businesses, which have a strong operational fit and complementary routes to market, is progressing well.

In Ireland the continuing buoyant economy fuelled strong demand for new housing, with plasterboard volumes and building plasters showing a healthy advance and setting new sales records. A reorganisation programme was completed in the year, significantly reducing the operating cost base.

Nordic sales of plasterboard were higher overall, with strong growth in the developing Baltic and Russian markets, and sales in Scandinavia maintained despite intensified competition following the cessation of exports to the US. Local management was strengthened with the appointment of a regional director. BPB invested in further Danish manufacturing capacity for the complementary range of Gyptone ceiling tiles, sales of which grew 9%, with 12% growth from group companies outside the Nordic area.

Southern Europe
Turnover £504.7 million (down 2%); underlying operating profit £75.9 million (down 1%)

Results were similar to last year, with underlying operating profit of £75.9 million. The region was hit hard by energy-led cost inflation but the adverse effect on margins was bought off by selling price improvements, a strong volume performance and further cost savings.

The internal linings market in France continued to grow, despite a decline in new housing, fuelled by good demand in the commercial and renovation sectors. Plasterboard volumes increased by over 5% in the first half, but adverse weather conditions and construction skill shortages throughout the second half restricted full year volume growth to less than 1%. Plaster volumes declined modestly but market leadership was maintained. Plasterboard prices overall increased by 2.5% year-on-year and, together with a rigorous cost reduction programme, mostly offset the impact of some £20 million of cost inflation. Intense competition resulted in marginally lower sales of expanded polystyrene insulation materials, although the product cost base benefited from raw material synergies following the acquisition of Heidelberger Dammsysteme. Sales volumes of the Casoprano ceiling tile range continued to grow well.

Improved commercial and renovation demand in the Benelux countries resulted in good sales growth of building plasters and plasterboard systems.

Demand in the Iberian market continued to grow, albeit at a reduced rate after five exceptional years, with building plaster volumes increasing by a robust 5%. Capital investment was directed at improving manufacturing capacity of higher value modern plasters. Plasterboard systems continued to gain acceptance for internal linings in commercial developments, with volumes again growing substantially. Selling price increases across all products, together with strong volume growth and better cost efficiencies, resulted in improved profits.

Lower public investment in Italy affected demand in the non-residential sector, reducing the rate of plasterboard volume growth. Despite this the Casola plant operated at full capacity. When commissioned in 8 months’ time, the combined plaster and plasterboard facility at Termoli will provide headroom for growth and facilitate the rationalisation of BPB’s plaster business in southern Italy.

Central & Eastern Europe
Turnover £281.7 million (up 17%); underlying operating profit £10.6 million (down 36%)

The region experienced mixed results with the good performance in most countries offset by increasingly difficult trading conditions in Germany. As a result underlying profits, before exceptional German reorganisation charges, were down 36% to £10.6 million.

Construction activity in Germany moved into decline and plasterboard volumes fell by more than 10% with second-half sales down almost 15%. The loss of exports to the US added to an increasing over-capacity problem in the region, necessitating the closure of the Gulstein plasterboard plant. A major restructuring of operations is now in progress with the goal of creating a substantially lower cost base and a more flexible customer-focused business. However, Germany’s difficult trading conditions are expected to persist throughout the current year.

Heidelberger Dammsysteme’s expanded polystyrene business, acquired in May 2000 and re-branded Rigips Dammsysteme, was swiftly integrated into the German business and delivered synergies equal to 5% of its turnover. The acquisition has given the group a market leadership position in eps insulation materials, which now represents a major complementary business segment with a turnover in excess of £75 million.

Plasterboard prices in Poland were the lowest in Europe but a price increase was implemented mid-year to give an annual average price increase of 4%. The Stawiany plant, now one of the most efficient in the group, exported plasterboard to the Ukraine and increasingly to Belarus and Russia, helping to increase country profits.

Economic development in the Czech Republic facilitated good plasterboard volume growth and firm selling prices. The new Rigips Dammsysteme business provided opportunities for expanding BPB’s product range and customer base. The low cost plasterboard plant at Melnik near Prague made an important contribution to improved Czech profitability.

In Austria, the loss of North American exports resulted in lower volumes and an adverse impact on profitability. New plaster capacity was added at Vienna’s Puchberg plant which supplied product into Hungary and further east, generating substantial volume growth and offering further development potential.

Strong growth was maintained in Hungary, Greece and Romania with plasterboard volumes up by an average of 40%, improving profitability sharply.

NORTH AMERICA
Turnover £231.3 million (up 47%); underlying operating loss £1.9 million (profit £35.4 million)

Regional turnover increased almost 50% after including eight months post-acquisition trading of Celotex in the USA. However, first-half profit (down 38%, primarily because of lower volumes sold into the US) moved into a trading loss of £1.9 million for the full year, as higher gas costs combined with a severe decline in US selling prices during the latter six months.

As expected the abnormally buoyant trading conditions experienced in the US market throughout calendar 1999 were not repeated, as newly installed capacity exceeded demand. Consequently Westroc did not achieve the same level of exports, either directly to US customers or via Canadian merchants. An industrial dispute at the Montreal plant also reduced Westroc’s sales. The loss of US business resulted in a 25% reduction in Canadian wallboard volumes, but domestic construction activity remained stable. Second-half selling prices were 7% below the corresponding period and 6% below the first half. Canadian profits for the full year represented only one-quarter of their prior year record.

Wallboard selling prices in the US peaked in late 1999 with the industry completely oversold. They are now over 50% below that level. This decline initially restricted profits in Celotex but with selling prices falling sharply the business moved into a second-half loss. Results were also impacted by a sharp increase in the price of gas which peaked in the third quarter at 250% above the first-half level, adding £5 million to the region’s costs. Gas prices have since fallen but are still double the first-half level. However, US market conditions show no prospect of improving with average wallboard prices remaining below $75 per thousand square feet.

US customer reaction to the Celotex acquisition has been positive, with the market recognising BPB as a major regional player with a sound reputation for quality and service. Market share, which had been lost before completion of the transaction, was quickly recovered to give an overall North American presence of 8 to 9%. Following the appointment of new senior management for the Celotex tiles division, actions are being taken to turn around the complementary business which has a US ceilings market share of around 10%. All the US wallboard plants are now included in BPB’s benchmarking system, which has identified significant opportunities to enhance performance and reduce costs. The acquisition also included a part-completed, low cost, high capacity wallboard plant at Kentucky, which is now being progressively loaded.

Some US$15 million of cost reductions were already in place at the year-end and work is now progressing to achieve regional savings of at least US$50 million per annum within the next two years.

REST OF THE WORLD
Turnover £88.9 million (up 54%); underlying operating profit £4.5 million (up 18%)

BPB’s portfolio of developing businesses in South Africa, South America and Asia achieved strong plasterboard volume growth, producing an 18% increase in underlying operating profit to £4.5 million on turnover up over 50%.

Lower interest rates in South Africa prompted a recovery in residential activity and with it a modest increase in plasterboard volumes after the previous year’s decline. Profitability improved as cost savings offset the impact of higher prices for imported energy and key commodities. However, further development in Zimbabwe during the year was severely restricted by a tense political environment.

In Asia, the first full year of BPB operations in Thailand saw strong growth in plasterboard volumes, better selling prices and cost savings lift the business into profit. Complementary products are being introduced to the domestic market and a new product training centre has been established to promote BPB’s internal lining systems. In China plasterboard volumes grew quickly but continuing intense competition from local manufacturers led to poor selling prices and a small trading loss. However, the market is already large, continues to grow fast and our plant in Shanghai provides the potential for an excellent base from which to establish a long-term profitable business. Sales volumes and profits increased in India, and a new plasterboard plant at Chennai was successfully commissioned. Majority control was acquired in the first half, giving BPB leadership of the subcontinent’s growing market.

Penetration of plasterboard systems in South America continued to be strong, with drywall technology in key urban markets being extended from the commercial to the housing sector. After a period of austerity the Argentine economy showed signs of recovery and plasterboard volumes, down in the first half, improved in the second half. Brazilian volumes increased by almost 40%, improving the efficiency of the Sao Paulo plant. In Chile BPB’s associate, El Volcan, suffered from the cessation of plasterboard exports to the US but good growth in domestic volumes and strong demand for plasters, insulation products and Casoprano ceiling tiles led to an overall increase in profit.

EUROPEAN COMMISSION UPDATE

In November 1998 the Commission of the European Communities commenced an industry-wide investigation into alleged infringement of Article 81 of the Treaty of Rome within the European gypsum industry. As announced on 23 April 2001, BPB received a Statement of Objections from the Commission, which was also addressed to other industry participants, and intends to respond fully to those objections. Following the Commission’s review of responses from all relevant parties it will issue a Decision, which is unlikely to be published much before the end of this calendar year.

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