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Industrial Minerals

Vegetation thrives on formerly mined land at Tarmac’s Tunstead quarry in Derbyshire, England. The quarry, which has an output of 5.5 Mt of limestone annually, is the largest producer of high-purity industrial limestone in Europe and the UK’s biggest producer of lime

Financial overview

Tarmac's operating profit fell by 52% to $228 million compared with 2007, mainly due to the impact of significant cost increases as well as a decline in UK volumes of around 20% in the second half of the year. Tarmac accelerated cost reductions and generated operating savings of $101 million, while maintaining its market share. As a result, Tarmac continued to make a positive cash flow contribution with net cash inflow from operating activities of $398 million.

In the UK, operating profits fell by 65% on a like for like basis, with sales falling in line with the overall market. At Tarmac International, operating profits (excluding the positive impact of exchange rates and on a like for like basis) were broadly in line with 2007, benefiting from previous expansionary investment and relative resilience in certain markets such as Poland.

$ million
(unless otherwise stated)
2008 2007
Operating profit 228 474
EBITDA 487 732
Net operating assets 3,335 4,509
Capital expenditure 301 274
Share of Group operating profit 2% 5%
Share of Group net operating assets 10% 17%

Markets

The construction industry in the UK experienced challenging market conditions during 2008, particularly in the second half of the year with the rapid deterioration in UK house-building activity. The volatility of energy prices and the impact on cement and distribution costs also continued to affect the industry. Overall in continental Europe, the decline in construction activity has been less severe to date than in the UK.

Operating performance

Volumes in the UK aggregates and concrete products were 15-20% lower than the prior year, with significantly reduced demand from the housing and commercial sectors, while asphalt volumes showed more resilience, with similar volumes to 2007. Tarmac showed declines in line with the market as it maintained its leadership positions in key areas.

The significant decline in volumes from UK Aggregate Products in the second half prompted a portfolio right-sizing exercise. 45 operating sites have been mothballed and further cost savings of $63 million were achieved through an increased focus on capacity and cost reduction. Underlying operating profit for this business fell by 42% compared with 2007 (after adjusting for the UMA acquisition and the impact of exchange rates). During 2008, the remaining 50% of the UMA business was acquired from Hanson.

Within Tarmac, the UK Building Products business was affected by the economic downturn to the greatest extent and saw underlying operating profits fall by 69% (before the impact of exchange rates). Mothballing six operating sites and further cost savings of $21 million reduced the effect of weakening demand on the business's operating profit.

Tarmac International's underlying operating profit (on a like for like basis) was in line with 2007, with favourable market conditions in Poland and cost savings of $17 million offsetting emerging weakness in France. Tarmac Iberia was sold in August 2008 to Holcim for $186 million.

Following a structural review of the Industrial Minerals business by management, as a result of trading conditions in the construction sector, restructuring and impairment charges totalling $91 million have been recorded.

Outlook

The outlook in the short to medium term is for continued demand weakness in UK and international markets. Tarmac will continue to take steps to adapt to market changes through capacity reductions. Additional cost saving and a continued focus on cash generation, while maintaining existing market leadership, will ensure that the business remains both resilient and well positioned for the future.

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